Leasehold Improvements conditions or Better, Restore or Adapt condition

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  • #1650637
    cul-de-sac-
    Participant

    Hey guys,

    I have a start-up company and am currently debating myself whether to capitalize or expense outright the repairs and maintenance I incurred to improve the unit I’m leasing at. I visited the standard and I ended up with two options.

    (1) Leasehold improvement as capital lease – here none of the 4 conditions are met.

    (2) Capitalizing Repairs and maintenance – Better, Restore and Adapt condition – pretty much applied to the three conditions. We renovated the whole unit’s interior that meets our needs to make the business running.

    I am doing a pitch with investors next month and some investors are accounting and finance geeks that a slight misinterpretation of the accounting standards would mean that you flunk your business proposal.

    Any thoughts? thanks in advance.

    AUD - NINJA in Training
    BEC - 80
    FAR - 82
    REG - NINJA in Training
    If ain't broke, don't fix it
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  • #1650646
    Ana
    Participant

    couple of things to consider – are books going to be kept on GAAP accrual basis or tax basis? that will answer how you should treat the R&M. Also, depending on how much you spent, 2,500 vs 10,000, you can refer to your capitalization policy and either expense it all or treat as a leasehold improvement and depreciate over shorter of life or lease. it also all depends on whether you want to show a large expense in yr 1 vs small through the next x years. in reality you can defend any of these choices.

    let me know which you choose, it's interesting to me

    BEC - 78
    AUD - 75
    REG - 64, 77
    FAR - 73, 73, 73, 82
    Ethics: 74, 84, 98
    Finally done after 23 months.
    #1650656
    cul-de-sac-
    Participant

    I am using accrual basis to maximize sales recognition ASAP. The business is running for 2 months now. So far everything is running smooth.

    I have spent 50 grand for the improvements since we have to renovate the whole interior.

    Based on my experience in doing business pitch, investors are always impressed when you generate high net income. So the best option is to capitalize the R&M for lower expense through monthly amortization.

    Thank you for your advice. I just needed someone to verify whether I could use either of the two to prepare my pitch in the upcoming month.

    AUD - NINJA in Training
    BEC - 80
    FAR - 82
    REG - NINJA in Training
    If ain't broke, don't fix it
    #1650659
    Ana
    Participant

    your plans sounds fine. personally I wouldn't call it R&M as that leads to questions why it was capitalized and may give off the wrong impression to accountants, instead call it leasehold improvement and capitalize all the costs as one item. it makes total sense considering the price you've paid for it. good luck! if you're in LA and need more great advice from a controller I'm looking to switch jobs : )

    BEC - 78
    AUD - 75
    REG - 64, 77
    FAR - 73, 73, 73, 82
    Ethics: 74, 84, 98
    Finally done after 23 months.
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