USA Accounting for free rent

[DEW]

Hi

I'm hoping someone can help me with this question.

My company rents office space and we have 3 months left in our 60 month lease (Jan 2025 - Mar 2025). We have just signed a 65 month lease for the same space that starts Apr 2025. The new lease agreement provides money for leasehold improvements and we are allowed to use some of this money to offset rent for Q1 2025. I'm not sure how to account for this rent free period. Do I somehow fold this rent free period into this new lease agreement or do I simply not record any rent expense for the first 3 months of 2025 and then start accounting for the new lease.

Thank you in advance.

 

[kirby]

How to Account for Rent Free Periods: 10 Steps (with Pictures)

Read this

 

[vpryce]

Hi Drew,
I am going to attempt to answer your question under the ASC842 rules, with a simplified example, no present value was done to the lease payment.

Example:
Lease term 65 months commencing Apr 2025
Monthly PMT $1,000
Leasehold Improvement Incentives $15,000
*Lessor allows for a portion of the Incentive to cover Jan - Mar rents $900 per month.

Therefore, I would make the following entries for Jan-mar 2025

Dr. Rent Expense $900 x 3
Cr. Rent Payable $900 x 3

On April 1, 2025, I would make a subsequent entry for the new lease as follows:

Dr. Rent Payable $2,700
Dr. Leasehold Improvements $12,300
Dr. ROU Asset $52,700
Cr. L/T Lease Liab. $67,700

Remember monthly lease payment need to be present value at the prescribe rate to determine L/T Lease Liab. The total Lease Incentives provided are reduced by Jan - Mar rent (Not Free). The residual amount reduces L/T Lease Liab to determine L/T ROU Asset.

Also, on April 1, 2025, I would make the following entry to record rent expense of the new lease, given that payments are usually due on the 1st.

Dr. Rent Exp. $811 (Monthly rent - incentives ($12,300/65)
Dr. Lease Liab. $1,042
Cr. ROU Asset Accum. Amort. $853
Cr. AP/Cash $1,000

I hope this example helps. However, just a reminder again, all monthly payments must be PV to determine Lease Liab, which is not present in the above example. Thank you.

 

[anan.clippingtimes@gmail.]

Hi

I'm hoping someone can help me with this question.

My company rents office space and we have 3 months left in our 60 month lease (Jan 2025 - Mar 2025). We have just signed a 65 month lease for the same space that starts Apr 2025. The new lease agreement provides money for leasehold improvements and we are allowed to use some of this money to offset rent for Q1 2025. I'm not sure how to account for this rent free period. Do I somehow fold this rent free period into this new lease agreement or do I simply not record any rent expense for the first 3 months of 2025 and then start accounting for the new lease.

Thank you in advance.

You should account for the rent-free period in line with the applicable accounting standards (e.g., IFRS 16 or ASC 842). Here's how to approach it:

1. Separate the Lease Periods: Treat the current lease (Jan–Mar 2025) and the new lease (starting Apr 2025) as two distinct agreements, even though they cover the same space.
2. Rent-Free Period Allocation: If the rent-free period is part of the new lease (e.g., explicitly provided as an incentive in the new lease agreement), you should allocate the benefit over the entire 65-month lease term. This will effectively reduce the monthly rent expense over the new lease’s duration.
3. Current Lease Accounting: For Q1 2025, if the lease-free period is covered by the new lease’s provisions, no rent expense would be recognized for this period. However, this must align with the documentation and terms of the new agreement.
4. Lease Incentive Treatment: Ensure the incentive is clearly disclosed in your financials as part of the new lease agreement, and amortize it systematically across the lease term.

Consult with your accountant or auditor to confirm treatment based on your company’s reporting framework and ensure compliance with local accounting rules.