Lease and Leasehold Improvements

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Timon Lo
Group #9
Acct 495

Case 09-4 NeedsSpace

NeedsSpace is renting space for its corporate offices from WeHaveIt through leasing. The lease entered between NeedsSpace and WeHaveIt is for a 10-year term where NeedsSpace agreed to no option to renew or the ability to negotiate a renewal of the lease term. This lease has been classified as an operating lease. WeHaveIt included two provisions in the lease agreement that NeedsSpace had to follow during the lease term. The first provision required was for NeedsSpace to perform general repairs and maintenance on the leased property. The second provision required was for NeedsSpace to restore the leased property to its original condition at the end of the lease term by removing all leasehold improvements. NeedsSpace had placed onto the leased property various leasehold improvements such as temporary walls, HVAC, and carpeting. These leasehold improvements had an economic useful life of 10 years. In this case of NeedsSpace, the requirement is to use the appropriate accounting treatment for the two provisions that were included in the lease agreement. Provision 1

According to ASC 840-10-05-9(a), the lessee have certain obligations for the repair and maintenance of leased property. Provision 1 creates a contractual obligation requiring NeedsSpace to perform general repairs and maintenance on the leased property. In some repairs and maintenance obligations, the lessee is required to make maintenance deposits to the lessor to protect the leased property and is reimbursed later when the required repairs and maintenance is completed by the lessee according to ASC 840-10-05-9(a) through 840-10-05-9(c). Provision 1 does not require NeedsSpace to make maintenance deposits but does require NeedsSpace to perform the repairs and maintenance on the leased property. The maintenance deposits do not effect NeedsSpace’s obligation to perform the repairs and maintenance, but does assure NeedsSpace’s performance under the...
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