[martinlee718]

Green Co. incurred leasehold improvement costs for its leased property. The estimated useful life of the improvements was 15 years.
The remaining term of the nonrenewable lease was 20 years. These costs should be:

The answer is Capitalized and depreciated over 15 years.

1. Does anyone know where this rule came from? somewhere in GAAP?
2. How is this Capitalized and depreciated?

Thanks ninjas

[Silent]

Yes you use 15 years. Had the lease been non nonrenewable 14 years, you would use 14 years instead of 15. It's GAAP rule.

[Nbmorty]

Well its a gaap and ifrs allowed rule to let the lessees take full advantage of the additional costs they spend on things they lease against earnings. (with minor differences between gaap and ifrs)

Lets talk gaap:
Like for example you leased an office space and bought an air conditioner to install it there, so you would capitalize its inital costs (like a normal asset) and then depriciate them over the term of the lease (for it to be fully depriciated by the end) and by that you would be reducing your net income by increasing dep. Exp.

But if there are a written purchase agreement between you and the lessor or the lease ends by transferring the office to you in that scenario you would be depreciating that conditioner over its life not the lease term. (by pretending you already the owner of the office).

If the lease does not transfer ownership or its an operating lease (only allowed under gaap) you would have to depreciate the conditioner over the lessor of (life or lease term) to take advantage by having bigger dep. Exp (they in the codification call it better matching i call it smaller net income per books) its easier that way.

Hope this helps.
P.s. don't bother too much with leases if you are to be tested in this window, focus on asset capitalizations rather.. Heavily tested!
P. S. 2
In your example if he spent the monies on improvements at the beg. Of the year ( as soon as the lease starts) it's 15y, if at the end of first year its 14. Coz one year is passed already.

[Author]

Replies