Managing Lease Accounting for Real Estate Portfolios: Best Practices and Compliance Strategies

Lease Liability – The lessee’s obligation to make the lease payments arising from a lease measured on a discounted basis. Lease Concessions – Per SFFAS 54, are rent discounts made by the lessor to entice the lessee to sign a lease. Lease concessions include rent holidays/free rent periods or reduced rents. Holdover Tenancy – A tenancy that is created when the tenant continues to occupy the premises beyond the termination date or expiration date of the lease term. As of May 31, 2025 the remaining lease liability and right-of-use asset were $6,201,663.09 and $6,043,626.29 respectively.

Landlord’s Right to Terminate:

The regulations under Sec. 167 provide that an intangible asset may be depreciated if it is known to be of use in the business or production of income for a limited period and that period can be estimated with reasonable accuracy. When the intangible asset does not have a useful life that may be estimated with reasonable accuracy, the regulations provide for a safe-harbor amortization period of 15 years, with certain exceptions. Putting these pieces together, the practitioner can conclude that, while amortization is available for certain capitalized intangibles, a determination of the appropriate recovery period must be made based on all the facts and circumstances.

• Now consider the same office building, but instead, the lessee decides to downsize and no longer needs any of the building space.
• This can be taken at face value whereby the lessee would simply calculate the change in the number of floors they have access to or the lessee can determine the square footage of each floor and then calculate the change.
• The standstill agreement does not extend the lease term, imply a new lease, extension, or that a succeeding lease will be offered to the incumbent lessor.
• More commonly used, functional equivalent to “average annual rent” which is the term used in 38 U.S.C § 8104.
• The Journal Entries provide the linkage to feed these details to your ERP system.Please note, though, that the Description given here is NOT the GL account where the value will be posted, it is merely a system description.

Impact of Lease Accounting on Real Estate Portfolios

• To account for the partial termination of their headquarters lease XYZ Shipping first calculated the net change in their lease liability.
• The operating lease expense is the sum of the lease payments divided by the useful life of the ROU asset (which is generally the same as the lease term).
• Specialized, customizable software solutions, designed by CPAs from top accounting firms, come in handy when you want to increase the efficiency of your lease accounting process while not sacrificing accuracy.
• Create your free account to get started with journal entries, amortization schedules and more.
• Effective lease accounting requires careful handling of payments and rent terms.

Depending on the facts and circumstances of the lease agreement, the lessee may be required to make a termination payment. Operating lease expense calculations are unchanged from the previous standard. These calculations are a straight-line expense calculation that equals the sum of the lease payments divided by the ROU asset’s useful life (which is generally trial balance the same as the lease term). Because this is a straight-line expense calculation, it might not equal the lease payments.

Calculation of RTU Leases

IFRS 16 governs lease accounting under International Financial Reporting Standards. Companies must recognize most leases as right-of-use assets and lease liabilities on the balance sheet. The difference between the proportionate reduction of the lease liability ($10,835,992) and the proportionate reduction of the ROU asset ($9,852,190) is recognized as a gain on termination. This concludes our course on the basics behind building a lease accounting remeasurement calculation. We’ve reviewed the data which are required to create your schedules, and how to create a termination recalculation within the lease accounting module. The lease schedule created will contain all the necessary detail including the lease payments, Liability Accounts straight line rent, right of use asset, amortization, interest and liabilities.

For real estate, IFRS 16 requires detailed records of lease terms, rent adjustments, and options like renewals. Effective lease accounting requires careful handling of payments and rent terms. Tracking payment schedules and understanding rent-free periods and accrued rent helps maintain accurate records and compliance. The lessee records a right-of-use asset and lease liability to reflect future payments. Lease accounting follows specific rules for recording and reporting real estate leases. Accountants recognize accounting for lease termination lessor lease rights and obligations, classify leases, and define the roles of lessors and lessees under current standards.

• Common breaches could include non-payment of rent, late rent, unauthorized subletting, or failure to maintain the property.
• The IRC provides relief for a landlord from recognizing any income from such property acquisition.
• The subsequent recognition entry for the first month of the lease will resemble something like this and includes the adjustment to reclass short term lease liabilities.
• By identifying whether a lease modification results in a separate lease or not and accounting for lease terminations based on the type of termination, businesses can confidently manage their lease accounting under ASC 842.
• However, at the start of year three, Wigwam no longer requires the machine and immediately terminates the lease due to a new way of manufacturing.
• Liability – A probable future outflow or other sacrifice of resources as a result of past transactions or events.

Any difference between the right of use asset and lease liability value should be recorded in the income statement as a gain or loss. A lease modification occurs when there is a change in the lease terms, such as an extension or reduction of the lease term, a change in the leased asset, or a change in lease payments. Under ASC 842, lease modifications are accounted for in one of two ways, depending on whether the modification results in a separate lease.