How Should Valuators Retire Asset Obligations in Lease Agreements?—Grant Thornton

More Detail on Obligations Included in Minimum Lease Payments Required Under ASC 840

 Grant Thornton’s On the Horizon web publication  explains that leasing agreements vary in their specific accounting requirements when it comes to assessing — and retiring the value of  — leases.    Here’s more: 

Some leases impose requirements on a lessee to restore a facility to its original condition at the end of a lease or to uninstall and remove leasehold improvements. The accounting for those obligations varies on their exact  nature. Sometimes the obligation is considered to be part of minimum lease payments and is accounted for under FASB Accounting Standards Codification® (ASC) 840, Leases. When the obligation is not considered part of minimum lease payments, it may be an asset retirement obligation under ASC 410-20, Asset Retirement and Environmental Obligations: Asset Retirement Obligations.

Obligations included in minimum lease payments under ASC 840 

Generally, an asset retirement obligation to remove or restore an asset of  the landlord could be a part of minimum lease payments accounted for  under ASC 840. Like a residual value guarantee, the entire estimated amount is included within minimum lease payments without regard to the probability that the lessor will require removal when classifying the lease. The estimated removal costs are included in the determination of straight-line rent and therefore are accrued over the term of the operating lease.  Estimated removal costs are included in the capital lease obligation for capital leases. The liability is derecognized when removal costs are incurred or if the lessor waives removal. 

Example: CompanyCo agrees to lease a building and wishes to retain some of the existing leasehold improvements from a previous tenant. The lessor agrees but requires the lessee to remove the improvements on conclusion of the lease. The obligating event is the signing of the lease. The requirement to remove the improvements would be considered part of minimum lease payments.  Obligations that require creation of an asset retirement obligation under ASC  410-20.

Read the whole piece here. 

Grant Thornton explains the details of retiring asset value in lease obligations