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Leasehold Improvements Accounting and Amortization Under US GAAP

Leasehold improvements under US GAAP are capitalized and amortized over their useful life or lease term if they exceed capitalization limits, and while they can overlap with lease incentives—such as landlord-funded improvements to encourage lease renewal—they are accounted for separately, with lease incentives reducing right-of-use assets and leasehold improvements recorded as distinct assets when paid for by the lessee.

Leasehold improvements and lease incentives may seem similar in lease accounting, but they are distinct concepts. There can be overlap between the two: leasehold improvements can sometimes be considered lease incentives, and vice versa, depending on the specific circumstances. Determining when to apply accounting for leasehold improvements versus lease incentives depends on the details of the arrangement.

Are Leasehold Improvements Considered Lease Incentives?

Capitalization and Amortization

If leasehold improvements exceed the corporate capitalization limit, they should be capitalized. If the total amount spent is lower, they are charged as an expense in the period in which they were incurred.

When leasehold improvements are capitalized, they should be amortized over either the course of their useful life or the remaining term of the lease, whichever is shorter.

Examples of Leasehold Improvements

Here are some examples of how and why leasehold improvements come about:

  • Example 1: Sometimes, landlords pay for leasehold improvements to encourage tenants to rent for longer. For example, a business owner leases a building to run an outdoor gear store. The landlord may build a custom wall for hiking shoes to encourage the lessee to remain in the space.

  • Example 2: When contracts come up for renewal, lessees can negotiate contract terms using leasehold improvements. For example, a landlord renting out an open office space to a company may agree to add conference rooms, a front desk, and a kitchen area for the lessee to encourage them to stay.

In some circumstances, the lessee pays for leasehold improvements. When this happens, these improvements should be capitalized separately from the lease itself. In other cases, the lessee might receive funds from a landlord to be used for leasehold improvements. These funds are considered lease incentives and reduce the right-of-use assets recorded on a lessee’s balance sheet.

Overall, a leasehold improvement is any improvement that benefits a tenant.

What Happens to Leasehold Improvements When a Lease Expires?

Once a lease ends, improvements made by the lessee belong to the landlord, unless otherwise specified in the agreement. If the tenant can take the improvements with them, they are required to do so unless the contract states otherwise.

What is the Difference Between Tenant Improvements and Leasehold Improvements?

There is no difference between tenant improvements and leasehold improvements; "tenant improvements" is just another term for leasehold improvements.

Working With Crunchafi (formerly LeaseCrunch)

Leasehold improvements can sometimes complicate the lease accounting process, making lease accounting software a valuable tool. Crunchafi's Lease Accounting (formerly LeaseCrunch) software helps entities save time and reduce errors in lease accounting. Even for a single lease, the software can save organizations significant time.