Question

In: Accounting

What are other costs to consider as they relate to exit and disposal of leases? Should...

What are other costs to consider as they relate to exit and disposal of leases?

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

what are some examples from SEC filers of their accounting and disclosures for these costs?

Solutions

Expert Solution

ASC 420 establishes an accounting model for costs associated with exit or disposal activities based on the FASB’s conceptual framework for recognition of liabilities and fair value measurements. Under this model, a liability for costs associated with an exit or disposal activity should be recognized and initially measured at fair value only when it is incurred.

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

Costs to terminate the lease before the end of its term

A liability for costs to terminate a lease before the end of its term should be recognized when the bank terminates the lease in accordance with the lease terms (for example, upon giving written notice) or has otherwise negotiated a termination. This liability should be measured at its fair value upon the termination of the lease. Calculating the fair value of the liability is essentially an exercise in discounting the cash flow at an appropriate discount rate. As a practical matter, the amount of time between the termination of the lease and any termination payment will be short and the amount of the payment will approximate fair value.

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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