policy

Topics: Lease, Want, Deferral Pages: 1 (332 words) Published: September 24, 2014

Good morning,
In regards to the current lease of your office building expiring and potential plans for a lease extension, I have done research using the FASB Codification to answer your questions below. 1. If you take the approach to make an up-front payment to the lessor of $2.3 million and extend the lease at current terms for another ten years, you will in effect have a new lease. Under the guidance of ASC 840-10-35, the extension of the lease is viewed as a new agreement and the classification of the extension will need to be evaluated. The lease extension will be evaluated with the classification criteria in ASC 840-10-25-1 and ASC 840-10-25-42. The current lease of the building will not be modified or be reevaluated and will still be considered an operating lease. 2. In evaluating the classification, you will need to look at the aggregate of minimum lease payments (MLPs) over the term of the lease. The $2.3 million will be included in the calculation of MLPs. Other lease classification criteria include transfer of ownership, bargain purchase option, and lease term. Please see ASC 840-10-25 for more guidance on lease classification and MLPs. 3. Should you still get to account for the lease as an operating lease under ASC 840, you will account for the $2.3 million in your books as a deferred expense (most likely as a prepaid lease) under the guidance of ASC 840-20-25. You would recognize the lease expense of $2.3 million evenly over time (straight-line basis) as the lease passes. While you work through this extension, I would also advise you to think of the office building’s remaining useful life as it could affect the extension’s classification as well as other business factors to extending the lease, such as tax implications. If you have any further questions or want to discuss other alternatives with the lease, please contact me. Regards,

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