Deferred Rent calculation with Lease Amendment

Discussion in 'Technical Queries' started by dbtolley, Dec 19, 2016.

  1. dbtolley


    Dec 19, 2016
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    I have a technical question on accounting for a change in a lease (and how that would effect monthly rent expense and amortization of deferred rent):
    Facts of the situation:
    • We signed a new amendment (in May 2016) to our building lease which extended the term of our lease out to 2022 (new lease amendment dictates terms for 2018-2022)
    • The previous lease contract had our lease ending in December 2017
    • We have been using the same deferred rent schedule since Jan. 2013 (we received the first 6 months of rent for free). This schedule shows how to account for the lease 2013 – 2017.
    • Updating the schedule with the new amendment terms (2018-2022) will cause the calculated monthly rent expense to increase and alter the amortization of the deferred rent
    I’m wondering how to deal with this and what accounting guidance there is on this subject. We are an international company, so IFRS would be our guidance, but I can’t find anything that speaks to this.
    • So, my first question – is there any guidance that speaks to this?
    • Second question – I have a hunch on how this should be dealt with, but wondering if I can get any feedback on which way would be correct:
      • Option 1: Take the data from the current deferred rent schedule for Jan 2017 – Dec 2017 and merge that data with the terms of the new contract (2018 – 2022) creating a new deferred rent schedule showing how the lease should be accounted for from 2017 -2022.
      • Option 2: Do the same as above, but start the new schedule in May 2016 (when the new lease contract was signed and finalized). Since, the extension on the lease was finalized at this point maybe we should have been booking a higher rent expense…
      • Option 3: Let first rent schedule finish in Dec 2017 and then start fresh with a new schedule in Jan 2018. I think this would be correct treatment if a separate and new lease was being created, but this is an extension/amendment to an already existing lease.
    Thanks in advance for any technical advice!
    dbtolley, Dec 19, 2016
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  2. dbtolley

    Radek Výtisk

    Dec 19, 2016
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    One thing I would try to think about is the new IFRS 16 becoming applicable soon and dealing with leasings, as it is probable that you will have to capitalize the rented premises into the PPE, so I would check that standard as it will have also some retrospective implications that you might want to be prepared for.

    As for your situation, I would say that what happened there is a change in estimate (prolongation of lease term) which should only have prospective implications, so I would take what is left in the deferred rent, merge it with any new things coming from the amendment and start releasing it over the remaining prolonged lease period.
    Radek Výtisk, Dec 20, 2016
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