Case 9-4
Trueblood Case 09-4 Solution
Case 9-4
How should NeedsSpace account for the two obligations noted as provisions in the lease agreement?
● Provision 1: “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.”
By entering the lease agreement, NeedsSpace (the lessee) becomes legally and contractually responsible for performing general repair and maintenance on the leased premises. Assuming that the lessee is required to make deposits to financially protect the lessor concerning the maintenance obligation by setting up a reserve, the guidance in ASC 840-10-05-9A through 840-10-05-9C states that the maintenance reserve shall be recognized as a deposit asset and reimbursed later when the required repair and maintenance is completed by the lessee. However, the provision in the lease agreement does not call upon the lessee to make deposits but simply requires the lessee to perform repair and maintenance on the leased premises.
Alternative 1: Accrual Method
Since there is a contractual liability for the lessee to perform general repair and maintenance, the maintenance requirement provision may be assumed as a present economic obligation, not just a future commitment. If the fair value estimate of future maintenance expense can be measured with sufficient reliability, the provision may lead to recognition of an accrued liability for the repair and maintenance performance obligation at the inception of the lease. The accrued liability for the repair and maintenance can be reversed when payment is made or liability is created through the performance of the required repair and maintenance.
Alternative 2: Direct expense method
Another way to treat this provision would be not to recognize at the inception of the lease but directly expense the costs when the required maintenance is performed. Regarding the accrual method in Alternative 1, ASC 360-15-25-5 prescribes that “the use of accrue-in-advance (accrual) method of



Cited: Financial Accounting Standard Board. “Accounting Standard Codification Topic 410 Asset Retirement and Environmental Obligations.” Financial Accounting Standard Board. “Accounting Standard Codification Topic 450 Contingencies.” Financial Accounting Standard Board. “Accounting Standard Codification Topic 840 Leases.” Financial Accounting Standard Board. “FASB Staff Position No. AUG AIR-1.” Financial Accounting Standard Board. “Statement of Financial Accounting Concept No.5 Recognition and Measurement in Financial Statements of Business Enterprises.” International Accounting Standard Board. “IFRIC Interpretation 1. Changes in Existing Decommissioning, Restoration and Similar Liabilities.” International Accounting Standard Board. “International Accounting Standard 16 Property, Plant and Equipment.” International Accounting Standard Board. “International Accounting Standard 37 Provisions, Contingent Liabilities, and Contingent Assets.”

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