NeedsSpace’s Actions Regarding Lease Provisions Term Paper

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The current memo was composed based on the need to determine the accounting actions that the NeedsSpace should implement in relation to the two lease agreement provisions that can also be considered specific lease obligations:

  1. “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.”
  2. “Lessor may require the lessee to remove all leasehold improvements such that the premise is reinstated to original condition.”

Basic ideas regarding the obligations of the NeedsSpace as a lessee in this lease agreement are defined by FASB in its set of codes jointly titled as the Accounting Standards Codification (FASB, 2010). The general idea about the two lease agreement provisions is that NeedsSpace should account for them as for ordinary rental expenses incurred by the nature of the lease agreement (FASB, 2010).

In more detail, the first provision listed above stipulates the possibility for the lessor to request repair and maintenance of leased premises. As far as this provision is part of the lease agreement, it should be accounted for similar to any other expenses that the lessee faces:

There is no distinction between the right to use a leased asset during the construction period and the right to use that asset after the construction period. Therefore, rental costs associated with ground or building operating leases that are incurred during a construction period shall be recognized by the lessee as rental expense (FASB, 2010; ASC 840-20-25-11).

Accordingly, the above-quoted point of Accounting Standards Codification stipulates clearly that any costs that a lessee faces during the construction or building of any facilities in the leased premises or has in relation to the lease agreement should be accounted for as a rental expense. Thus, the procedure of cost recognition as rental expense should take place (FASB, 2010).

At the same time, the actions that the NeedsSpace should take regarding the second provision in question are two-fold. First of all, the expenses that are incurred by the need to bring the leased premises to their original conditions should be recognized as a rental expense by the lessee on the basis of already quoted ASC 840-20-25-11 (FASB, 2010), as far as the process of equipment deinstallation also involves considerable costs.

However, when these costs are no longer being faced, the lessee, i. e. the NeedsSpace in the discussed case, has two ways of accounting for them. On the one hand, the lessee can derecognize the rental expense because “the entity would derecognize an asset because it no longer has rights to the asset or it would derecognize a liability because it no longer has any obligation” (FASB, 2010; ASC 840-20-40 General Note). Such a step would mark the end of the lease agreement, and NeedsSpace will have to derecognize the expenses it no longer faces.

On the other hand, the NeedsSpace might resort to another practice of recognition and account for the costs involved by the second lease agreement provided as either a liability or an asset it has acquired during the lease agreement effective period:

If a supply arrangement (or a portion of a supply arrangement) ceases to be a lease due to a modification to the arrangement or other change…, any recognized prepaid rent or rent payable shall be initially recognized by the lessee as an asset or liability associated with the purchase contract (FASB, 2010; ASC 840-20-40-2).

Thus, the two lease agreement provisions listed above should be properly accounted for by the NeedsSpace as a lessee in the discussed case. The Accounting Standards Codification guide by FASB presents recognition and derecognition as two basic ways for NeedsSpace to handle the accounting for lease.

Works Cited

FASB. Accounting Standards Codification. American Accounting Association, 2010. Web.

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IvyPanda. (2022, March 18). NeedsSpace's Actions Regarding Lease Provisions. https://ivypanda.com/essays/needsspaces-actions-regarding-lease-provisions/

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"NeedsSpace's Actions Regarding Lease Provisions." IvyPanda, 18 Mar. 2022, ivypanda.com/essays/needsspaces-actions-regarding-lease-provisions/.

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IvyPanda. (2022) 'NeedsSpace's Actions Regarding Lease Provisions'. 18 March.

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IvyPanda. 2022. "NeedsSpace's Actions Regarding Lease Provisions." March 18, 2022. https://ivypanda.com/essays/needsspaces-actions-regarding-lease-provisions/.

1. IvyPanda. "NeedsSpace's Actions Regarding Lease Provisions." March 18, 2022. https://ivypanda.com/essays/needsspaces-actions-regarding-lease-provisions/.


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IvyPanda. "NeedsSpace's Actions Regarding Lease Provisions." March 18, 2022. https://ivypanda.com/essays/needsspaces-actions-regarding-lease-provisions/.

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