Question

In: Accounting

Should the other costs be accrued as of Dec 31? If not, how does a company...

Should the other costs be accrued as of Dec 31? If not, how does a company recognize those costs? Can you find examples from SEC filers of their accounting and disclosures for these costs? Please remember to quote relevant GAAP Standards to answer the questions.

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Expert Solution

ASC 420 sets up a bookkeeping model for expenses related with exit or transfer exercises dependent on the FASB's calculated system for acknowledgment of liabilities and reasonable esteem estimations. Under this model, a risk for expenses related with an exit or transfer movement ought to be perceived and at first estimated at reasonable esteem just when it is brought about.

This guidance applies only to operating leases, not to capital leases

Costs to terminate the lease before the end of its term

An obligation for expenses to end a rent before the finish of its term ought to be perceived when the bank ends the rent as per the rent terms (for instance, after giving composed notice) or has generally arranged an end. This obligation ought to be estimated at its reasonable incentive upon the end of the rent. Ascertaining the reasonable estimation of the risk is basically an activity in limiting the income at a suitable markdown rate. As a commonsense issue, the measure of time between the end of the rent and any end installment will be short and the measure of the installment will surmised reasonable esteem.

Generally, payments made to terminate a lease as described above will be deductible for tax purpose when paid.

Costs that will continue to be incurred under the lease for its remaining term without economic benefit to the lessee

This scenario might come into play if the lessor is not interested in negotiating a lease termination and insists that the lessee perform as agreed. In this case, the fair value of the liability at the “cease-use date” should be recorded. This liability will be based on the remaining lease payments, reduced by estimated sublease rentals (if allowed) that could be reasonably obtained for the property-even if the lessee does not intend to enter into a sublease. The assumed sublease payments cannot reduce the remaining lease payments below zero. The cease-use date occurs when the lessee stops using the leased property.


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