8.8 Other Lessee-Related Matters
8.8.1 Master Lease Agreements
A master lease agreement may specify that the lessee will obtain control over multiple underlying
assets (e.g., equipment) at various points during the term of the agreement. In these cases, the lessee’s
accounting will depend on whether the master lease agreement obligates or commits the lessee to
use, and therefore obtain control of, a minimum quantity (units or dollars) of equipment. (See Sections
13.4.1 and 13.4.2, respectively, for additional information about situations in which a lessee is or is not
obligated or committed to use a minimum quantity of equipment.)
When a lessee obtains control of the use of additional underlying assets that
are subject to a master lease agreement and that agreement specifies a minimum
quantity or dollar amount, the lessee’s taking of control over the additional
assets would not be accounted for as a modification
unless the minimum quantity has already been achieved. In contrast, if the
agreement does not specify a minimum quantity or dollar value, the lessee’s
taking of control over the additional assets would always be accounted for as a
lease modification. See Section 8.6.4.2 for more information on the modification of
master lease agreements.
8.8.2 Leases Denominated in a Foreign Currency
ASC 842-20
55-10 The right-of-use asset is
a nonmonetary asset while the lease liability is a
monetary liability. Therefore, in accordance with
Subtopic 830-10 on foreign currency matters, when
accounting for a lease that is denominated in a foreign
currency, if remeasurement into the lessee’s functional
currency is required, the lease liability is remeasured
using the current exchange rate, while the right-of-use
asset is remeasured using the exchange rate as of the
commencement date.
Irrespective of lease classification, a lease liability
represents a monetary liability and an ROU asset represents a nonmonetary asset.
Therefore, in accordance with ASC 830-10, a lease liability and ROU asset
denominated in a foreign currency that are remeasured into an entity’s
functional currency would be accounted for in the following manner:
-
Lease liability — Remeasured by using the current-period exchange rate, with changes recognized in net income in a manner consistent with other foreign-currency-denominated liabilities (see guidance in ASC 830-20-35 for additional considerations).
-
ROU asset — Remeasured by using the historical exchange rate as of the commencement date, provided that the lease has not been modified. Questions have arisen regarding the exchange rate to be applied when a lease has been modified and the modification was not accounted for as a separate contract. See Section 8.8.2.2 for further details.
8.8.2.1 Foreign Exchange Rate Considerations Related to the Single Lease Cost in an Operating Lease
A lessee’s lease may be denominated in a foreign currency
(rather than in its functional currency). In such scenarios, the single
lease cost associated with an operating lease consists of two components:
(1) the expense associated with the accretion of the lease liability and (2)
the amount associated with the reduction of the ROU asset. Therefore, a
reasonable approach to recognizing the single lease cost would be to
bifurcate the cost into its two separate components (monetary and
nonmonetary) and account for the resulting amounts in accordance with ASC
830.
8.8.2.1.1 Lease Liability Accretion — Monetary Liability
In a manner consistent with the accounting for other
foreign-currency-denominated monetary liabilities, when remeasuring the
time-value-of-money component of the lease cost related to the lease
liability accretion, it would be appropriate for the lessee to use the
average exchange rate for the period.
8.8.2.1.2 ROU Asset Reduction — Nonmonetary Asset
In a manner consistent with the accounting for other
nonmonetary assets, when measuring the component of the lease cost
representing the change in the ROU asset in each period, it would be
appropriate for the lessee to use the historical exchange rate that was
used when the ROU asset was initially recognized. That is, the ROU asset
functional currency amount would be determined by using the foreign
currency rate that was in effect as of the date on which the ROU asset
was initially recognized (i.e., the latter of the date of initial
application of ASC 842 or the lease commencement date). Therefore, in
each period, the component of the lease cost representing the change in
the ROU asset balance is no longer considered a
foreign-currency-denominated amount; therefore, in each subsequent
period, this amount would be calculated by using the exchange rate
employed to initially determine the ROU asset and would not change
unless an impairment is recognized or the ROU asset is updated as a
result of a liability remeasurement event (e.g., a lease
modification).
8.8.2.2 Foreign Exchange Rate Considerations Related to Lease Modifications and Remeasurements
When an entity applies modification accounting under ASC
842, the modification can be accounted for either as the addition of a
separate contract (see Section 8.6.2) or as a change to the original lease (see
Section
8.6.3). As discussed further in Section 8.6.2, when a modification is
considered a separate contract, the lessee accounts for the separate
contract as if it were a stand-alone lease and applies the requirements of
ASC 842 to that discrete unit of account. Accordingly, in such
circumstances, a new lease liability and ROU asset are established for the
new separate contract and the exchange rate on the date of modification
would be applied to the new separate ROU asset resulting from the
modification.
On the other hand, if the modification is not accounted for
as a separate contract, the lessee would effectively account for the
modified arrangement as a new lease. That is, the lessee would reassess the
classification of the lease as of the effective date of the modification by
using the modified terms and conditions and would remeasure the lease
liability and, in most cases (excluding partial terminations of a lease),
recognize any difference between the new lease liability and the old lease
liability as an adjustment to the ROU asset (see Section 8.6.3.1). As stated in ASC
842-20-55-10, a lease liability represents a monetary liability and is
remeasured by using the current-period exchange rate. Therefore, when a
modification is not accounted for as a separate contract, the lessee would
continue remeasuring the lease liability by using the current-period
exchange rate.
However, an ROU asset represents a nonmonetary asset and
should therefore be remeasured by using the historical exchange rate as of
the commencement date. Questions have arisen regarding what rate should be
used — and how it should be used — to remeasure the postmodification ROU
asset and whether (1) the ROU asset, in its entirety, should be remeasured
by using the exchange rate as of the “new” lease commencement date (i.e.,
the date of the lease modification) or (2) the historical exchange rate as
of the original lease commencement date should be applied to the ROU asset
established before the modification and the exchange rate as of the date of
the lease modification should be applied to any increase in the ROU asset
resulting from the modification (i.e., a bifurcated approach to foreign
currency remeasurement).
Similarly, questions have arisen regarding what exchange
rate should be used upon the occurrence of any of the lease remeasurement
events described in ASC 842-10-35-4. As discussed in Section 8.5, some
lease remeasurement events are accounted for in a manner similar to lease
modifications (“Category A remeasurement events”), while others do not
result in a reassessment of lease classification, discount rate, or
stand-alone prices (“Category B remeasurement events”):
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Category A remeasurement events — Change in the (1) lease term or (2) assessment of whether the lessee is reasonably certain to exercise a purchase option.
-
Category B remeasurement events — (1) Change in the amount that it is probable the lessee will owe under a residual value guarantee or (2) resolution of a contingency, as a result of which future variable lease payments become fixed.
8.8.2.2.1 View 1 — Exchange Rate as of “New” Lease Commencement Date Applied to Full ROU Asset for Modifications and Category A Remeasurement Events; Historical Exchange Rate Applied to ROU Asset for Category B Remeasurement Events
Proponents of View 1 observe that paragraph BC173 of ASU
2016-02 states, in part, that “[w]hen a modification does not meet the
criteria to be accounted for as a separate contract, the lessee
remeasures the lease liability for the modified, existing lease as of
the effective date of the modification as if the modified lease were a
new lease that commences on that date.” That is, paragraph BC173 of ASU
2016-02 indicates that a modification results in accounting in which the
modified lease is treated as the termination of the old lease and the
creation of a new lease. An entity could thus interpret this paragraph
as indicating that the effective date of the modification represents the
new lease commencement date. Therefore, the exchange rate as of the
effective date of the modification would represent the exchange rate in
effect as of the commencement date and should be used to remeasure the
ROU asset, in its entirety, on a go-forward basis. Application of the
updated rate to the entire ROU asset will most likely result in a
corresponding foreign exchange gain or loss as of the date of the
modification.
As discussed in Section 8.5, stand-alone prices,
discount rates, and lease classification are all reassessed upon the
occurrence of Category A remeasurement events, which are economically
similar to lease modifications and thus accounted for in a similar
manner under ASC 842. On the other hand, Category B remeasurement events
do not result in the reassessment of stand-alone prices, discount rates,
or lease classification. Proponents of View 1 argue that Category B
remeasurement events represent an updated measurement of an existing
lease rather than the creation of a new lease. Therefore, according to
this view, upon the occurrence of a Category A remeasurement event, an
updated exchange rate (as of the remeasurement date) should be applied
to the ROU asset in the same manner as a lease modification; however,
upon the occurrence of a Category B remeasurement event, the historical
exchange rate should continue to be applied to the entire ROU asset,
including to any increases or decreases in the ROU asset as a result of
the remeasurement event.
8.8.2.2.2 View 2 — Historical Exchange Rate Applied to ROU Asset Established Before Modification/Remeasurement and Updated Exchange Rate Applied to Increases Resulting From Modification/Remeasurement
Proponents of View 2 note that an entity that applies
View 1 will recognize a foreign exchange gain or loss to bring the ROU
asset to the new exchange rate. However, paragraph BC175 of ASU 2016-02
(shown below) indicates that a modification other than a full or partial
termination should not result in a gain or a loss because there has been
no actual “termination, fully or partially, of the original lease.”
Therefore, while paragraph BC173 of ASU 2016-02 indicates that an entity
should account for a modification as if the original lease were
terminated, paragraph BC175 of ASU 2016-02 indicates that a termination
has not truly occurred and that an entity therefore should not recognize
any gain or loss. Paragraph BC175 of ASU 2016-02 states:
The Board concluded that for the types of
modifications in paragraph BC174(a), a
lessee should not recognize a gain or loss from the
modification because there has been no termination, fully or
partially, of the original lease. Instead, the
modification solely changes the cost of the right-of-use asset
resulting from the original lease. Consequently, the amount of the remeasurement of the lease
liability for the modified lease is recorded as an
adjustment to the right-of-use asset and, no amount is
recognized in profit or loss. In deliberating this
guidance, the Board noted that a lease may be modified even if
the stated terms of the modification do not change the stated
terms of the lease. For example, a stated change in the
consideration to be paid for a nonlease component may change the
remaining lease payments because the lessee must allocate that
change in consideration on the same basis as the original
consideration in the contract was allocated. [Emphasis
added]
As a result, proponents of View 2 believe that it is
inappropriate to apply the exchange rate as of the lease modification
date to the full ROU asset, since doing so would result in recognition
of a gain or loss upon modification and paragraph BC175 of ASU 2016-02,
while not directly addressing foreign currency remeasurement, appears to
suggest that the FASB did not intend for this outcome to occur. Instead,
proponents of View 2 believe that the exchange rate as of the
modification date should only be applied to any increase in the ROU
asset resulting from the modification. In a manner consistent with
paragraph BC175 of ASU 2016-02, View 2 would not result in recognition
of a gain or loss upon modification. According to View 2, each
subsequent increase in the ROU asset as a result of a modification that
is not accounted for as a separate contract would be subject to the same
remeasurement model, and any subsequent decrease in the ROU asset as a
result of a modification would need to be evaluated to determine the
“layer(s)” to which the decrease is related.
The same approach would also be applied to both Category
A and Category B remeasurement events. For example, if the ROU asset
increases because variable payments become fixed, the increase would be
measured at the then-current exchange rate; however, the historical
exchange rate would continue to be applied to the previously recognized
ROU asset balance.
On the basis of formal discussions with the SEC staff,
we understand that either View 1 or View 2 is acceptable. Entities
should elect one of the two approaches as an accounting policy and apply
it consistently to all leases. In addition, entities should disclose the
accounting policy elected, if material. However, we understand that
these views should not be applied by analogy to revenue transactions
within the scope of ASC 606.
8.8.3 Accounting for Leasehold Improvements
8.8.3.1 Amortization of Leasehold Improvements
ASC 842-20
35-12 Leasehold improvements shall be amortized over the shorter of the useful life of those leasehold
improvements and the remaining lease term, unless the lease transfers ownership of the underlying asset to
the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, in which
case the lessee shall amortize the leasehold improvements to the end of their useful life.
Pending Content (Transition Guidance: ASC 842-10-65-8)
35-12 Leasehold improvements, other than those accounted for in
accordance with paragraph 842-20-35-12A, shall be
amortized over the shorter of the useful life of
those leasehold improvements and the remaining
lease term, unless the lease transfers ownership
of the underlying asset to the lessee or the
lessee is reasonably certain to exercise an option
to purchase the underlying asset, in which case
the lessee shall amortize the leasehold
improvements to the end of their useful life.
35-12A Leasehold improvements
associated with a lease between entities under
common control shall be:
- Amortized over the useful life of those improvements to the common control group as long as the lessee controls the use of the underlying asset through a lease. If the lessor obtained the right to control the use of the underlying asset through a lease with another entity not within the same common control group, the amortization period shall not exceed the amortization period of the common control group determined in accordance with paragraph 842-20-35-12.
- Accounted for as a transfer between entities under common control through an adjustment to equity (net assets for a not-for-profit entity) when the lessee no longer controls the use of the underlying asset.
35-12B An
entity with leasehold improvements accounted for
in accordance with paragraph 842-20-35-12A shall
apply the impairment requirements in paragraph
360-10-40-4, considering the useful life to the
common control group.
35-12C If
after the commencement date the lessee and lessor
become within the same common control group or are
no longer within the same common control group,
any change in the required amortization period for
leasehold improvements shall be accounted for
prospectively as a change in accounting estimate
in accordance with paragraph 250-10-45-17.
Amounts attributable to leasehold improvements (i.e., improvements to leased
property, such as additions, alterations, remodeling, or renovations) are
recognized separately from the underlying ROU asset that is the subject of a
lease. A lessee is generally required to amortize leasehold improvements
over the shorter of their useful life or the lease term unless the
improvements are part of a common-control arrangement. (ASU 2023-01 amends
the guidance on how to amortize leasehold improvements in a common-control
arrangement. See Section 17.3.1.10.2 for further
discussion of these changes.) The useful life of an asset is the period over
which an asset is expected to contribute directly or indirectly to the
owner’s future cash flows. (Note that the lease term is the same term used
to determine lease classification.)
If the ownership of the underlying asset that is the subject of the lease agreement is transferred to the
lessee at the end of the lease term or if the lease agreement includes a purchase option whose exercise
by the lessee is reasonably certain, the leasehold improvements would be amortized over their useful
life. In this case, the lessee is not constrained by the lease term since it will be able to benefit from the
leasehold improvements beyond the lease term (provided that the useful life is greater than the lease
term).
If the lease arrangement automatically transfers title of
the leased asset to the lessee at the end of the lease term, or the lessee
has a purchase option such that purchase of the leased asset is reasonably
certain, an amortization period greater than the lease term, if shorter than
the economic life of the leasehold improvements, may be appropriate.
In addition, if the lessee determines that leasehold
improvements can be relocated or sold upon lease expiration without
significant diminution in fair value (including removal costs, such as
relocation costs), it may be appropriate to amortize the leasehold
improvements over the lease term to expected fair value. In such cases, all
facts and circumstances should be considered and companies should establish
an accounting policy that should be applied consistently to similar
transactions.
Connecting the Dots
Amortization of Leasehold Improvements Under ASC 842 Is
Consistent With That Under ASC 840
The amortization of leasehold improvements under ASC
842 is generally consistent with that under ASC 840. As a result,
entities may not be significantly affected by the guidance on
leasehold improvements in ASC 842. However, see Q&A
16-2C for considerations related to transition for
leasehold improvements with an amortization period greater than the
remaining lease term.
As noted above, ASU 2023-01 further amends the guidance on how to
amortize leasehold improvements in a common-control arrangement.
This ASU requires a lessee in a common-control lease arrangement to
amortize leasehold improvements that it owns over the improvements’
useful life to the common-control group, regardless of the lease
term, if the lessee continues to control the use of the underlying
asset through a lease.
As a reminder, leasehold improvements, as well as
other long-lived assets in an asset group (e.g., ROU assets arising
from a lease), are subject to impairment testing under ASC 360. See
Section
8.4.4 for additional information about the
application of the impairment guidance in ASC 360 to a lessee’s ROU
assets.
Importance of Determining Which Party Owns the
Property Improvements
Determining which party in the arrangement owns the
improvements that are made to a property subject to a lease is
important and affects the related accounting. For example, if a
lessee (or the lessor on behalf of the lessee) is making
improvements to a rented space for the purpose of building out the
space to be consistent with the lessee’s branding and owns such
improvements, any costs that are paid by the lessor with respect to
the buildout would generally be considered a lease incentive. In
contrast, if the overall lease agreement was for a fully built-out
space (e.g., a fully functioning office space with interior walls,
plumbing, and lighting) and the lessor owns the improvements, any
costs that are paid would generally be considered as part of the
overall asset subject to the lease.
Factors for an entity to consider when evaluating
whether the lessee or lessor owns the improvements include, but are
not limited to:
-
Whether the terms of the lease agreement obligate the tenant to construct or install specifically identified assets (i.e., the leasehold improvements) as a condition of the lease.
-
Whether the tenant’s failure to make specified improvements is an event of default under which the landlord can require the lessee to make those improvements or otherwise enforce the landlord’s rights to those assets (or a monetary equivalent).
-
Whether the tenant is permitted to alter or remove the leasehold improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value.
-
Whether the tenant is required to provide the landlord with evidence supporting the cost of tenant improvements before the landlord pays the tenant for the tenant improvements.
-
Whether the landlord is obligated to fund cost overruns for the construction of leasehold improvements.
-
Whether the leasehold improvements are unique to the tenant or could reasonably be used by the lessor to lease to other parties.
-
Whether the economic life of the leasehold improvements is such that a significant residual value of the assets is expected to accrue to the benefit of the landlord at the end of the lease term.
All factors for each lease must be carefully
evaluated; no one factor should be considered determinative.
8.8.3.2 Leasehold Improvements Acquired in a Business Combination
ASC 842-20
35-13 Leasehold improvements acquired in a business combination or an acquisition by a not-for-profit entity
shall be amortized over the shorter of the useful life of the assets and the remaining lease term at the date of
acquisition.
Pending Content (Transition Guidance: ASC 842-10-65-8)
35-13 Leasehold improvements acquired in a business combination,
acquired in an acquisition by a not-for-profit
entity, or recognized by a joint venture upon
formation shall be amortized over the shorter of
the useful life of the assets and the remaining
lease term at the date of acquisition.
ASC 805-20
35-6 Leasehold improvements acquired in a business combination shall be amortized over the shorter of the
useful life of the assets and the remaining lease term at the date of acquisition. However, if the lease transfers
ownership of the underlying asset to the lessee, or the lessee is reasonably certain to exercise an option to
purchase the underlying asset, the lessee shall amortize the leasehold improvements to the end of their useful
life.
In a manner similar to the guidance on a lessee’s accounting for leasehold improvements, an acquiree is
required to amortize any of the leasehold improvements acquired in a business combination “over the
shorter of the useful life” of those improvements or the lease term unless “the lease transfers ownership
of the underlying asset to the lessee” or it is reasonably certain that the lessee will exercise the “option
to purchase the underlying asset.” Therefore, when the lease transfers ownership of the underlying
asset to the lessee or if the lessee’s exercise of an option to purchase the underlying asset is reasonably
certain, it would be appropriate for the lessee to amortize the leasehold improvements over their
estimated useful life.
8.8.4 Lessee’s Accounting for Maintenance Deposits
ASC 842-20
55-4 Under certain leases (for example, certain equipment leases), a lessee is legally or contractually
responsible for repair and maintenance of the underlying asset throughout the lease term. Additionally,
certain lease agreements include provisions requiring the lessee to make deposits to the lessor to financially
protect the lessor in the event the lessee does not properly maintain the underlying asset. Lease agreements
often refer to these deposits as maintenance reserves or supplemental rent. However, the lessor is required
to reimburse the deposits to the lessee on the completion of maintenance activities that the lessee is
contractually required to perform under the lease agreement.
55-5 Under a typical arrangement, maintenance deposits are calculated on the basis of a performance measure, such as hours of use of the underlying asset, and are contractually required under the terms of the lease agreement to be used to reimburse the lessee for required maintenance of the underlying asset on the completion of that maintenance. The lessor is contractually required to reimburse the lessee for the maintenance costs paid by the lessee, to the extent of the amounts on deposit.
55-6 In some cases, the total cost of cumulative maintenance events over the term of the lease is less than the cumulative deposits, which results in excess amounts on deposit at the expiration of the lease. In those cases, some lease agreements provide that the lessor is entitled to retain such excess amounts, whereas other agreements specifically provide that, at the expiration of the lease agreement, such excess amounts are returned to the lessee (refundable maintenance deposit).
55-7 The guidance in paragraphs 842-20-55-8 through 55-9 does not apply to payments to a lessor that are not substantively and contractually related to maintenance of the leased asset. If at the commencement date a lessee determines that it is less than probable that the total amount of payments will be returned to the lessee as a reimbursement for maintenance activities, the lessee should consider that when determining the portion of each payment that is not addressed by the guidance in paragraphs 842-20-55-8 through 55-9.
55-8 Maintenance deposits paid by a lessee under an arrangement accounted for as a lease that are refunded only if the lessee performs specified maintenance activities should be accounted for as a deposit asset.
55-9 A lessee should evaluate whether it is probable that an amount on deposit recognized under paragraph 842-20-55-8 will be returned to reimburse the costs of the maintenance activities incurred by the lessee. When an amount on deposit is less than probable of being returned, it should be recognized in the same manner as variable lease expense. When the underlying maintenance is performed, the maintenance costs should be expensed or capitalized in accordance with the lessee’s maintenance accounting policy.
Leases of certain types of equipment (e.g., an aircraft lease) may dictate that the lessee is legally or contractually required to perform all of the repair and maintenance of the underlying asset throughout the lease term. These leases often include a requirement that a lessee make deposits to the lessor to financially protect the lessor in the event that the lessee does not perform the required repair and maintenance activities. In these cases, the lessor must refund the deposits (often referred to as maintenance reserves or supplemental rent) to the lessee upon the completion of the contractually required repairs and maintenance activities.
The maintenance deposits under these types of arrangements are generally determined on the basis of a usage performance measure (e.g., hours of flight in the case of an aircraft). In accordance with the contract terms and to the extent the amount is on deposit, the lessor must reimburse the lessee any amounts paid for the required repairs and maintenance of the underlying asset once the maintenance activities have been completed.
8.8.4.1 Accounting for Maintenance Deposits During the Lease Term
The accounting for maintenance deposits, from the lessee’s perspective, is directly linked to whether, at the end of the lease term, the lessor must refund any excess portion of the maintenance deposit not expended by the lessee for maintenance activities.
8.8.4.1.1 Refundable Maintenance Deposit
If a lessee is entitled to a
refund of any maintenance deposit excess at the end of the lease term (a
refundable maintenance deposit), all lease payment amounts attributable to
repair and maintenance activities will be recognized as a deposit asset by
the lessee. Therefore, as the lessee makes a payment that is attributable to
the refundable maintenance deposit, it will recognize the following journal
entries:
As the lessee performs the
required repair and maintenance activities, it will be reimbursed by the
lessor for these costs by using the amounts on deposit. At the end of the
lease term, any remaining amounts returned to the lessee will offset the
deposit asset. Therefore, the lessee would recognize the following entries
during the term of the agreement and at the end of the lease term (in this
example, we have assumed that the lessee’s policy is to expense the
maintenance costs as incurred):
Repair and maintenance
activities (during term)
Residual balance returned
(end of the lease term)
In addition, to the extent
that the arrangement provides for interest on the deposit, any interest
earned on the refundable maintenance deposit that the lessee forgoes (i.e.,
that the lessor is entitled to retain) should be considered a variable lease
payment and would be recognized in the following manner:
Nonrefundable maintenance deposit
If a lessee is not entitled to a refund of the maintenance
deposit excess at the end of the lease term, at lease commencement, the
lessee must evaluate whether it is less than probable that the total amount
of payments will ultimately be reimbursed over the lease term through the
repair and maintenance activity requests.
Any amounts paid to the
lessor for repair and maintenance activities whose return is not deemed
probable should be accounted for in a manner similar to variable lease
expense (i.e., recognized in profit and loss in the period in which the
obligation for those payments is incurred). Any amounts paid to the lessor
for repair and maintenance activities whose return is deemed probable should
be recognized as a deposit asset that will be used to reimburse the lessee
as such activities are performed. Therefore, as the lessee makes a payment
that is attributable to the nonrefundable maintenance deposit, it records
the following journal entries (in this example, we have assumed that the
lessee’s policy is to expense the maintenance costs as incurred):
Nonrefundable deposit
recognition
The concept of probability should continually be reassessed
over the lease term and if no longer deemed probable, the deposit asset
should be reduced by recognizing variable lease expense.
Irrespective of whether the maintenance deposit is
refundable or nonrefundable, as the actual repair and maintenance activities
are performed, the lessee would capitalize or expense these costs in
accordance with its maintenance capitalization policy.
Connecting the Dots
Maintenance Deposits Versus
Other Deposits
Considerations Related to Refundable
Deposits
Refundable maintenance deposits are deferred and
recognized as a deposit asset until the actual repairs and
maintenance activities are performed during the lease term. Other
refundable deposits retained by the lessor (e.g., for other reasons
such as excess wear and tear on the underlying asset) would
generally be considered a variable lease payment. As with other
variable payment requirements, lessees should consider the
implementation guidance in ASC 842-20-55-1 and 55-2 when evaluating
whether a lessee should recognize costs from variable payments
before the achievement of a specified target (see Section 8.4.3.3.1 for further
details).
Considerations Related to Nonrefundable
Deposits
Nonrefundable maintenance deposits are accounted for
in the following manner: (1) amounts whose use is probable are
deferred and recognized as a deposit asset until the actual repairs
and maintenance activities are performed during the lease term and
(2) amounts whose return is less than probable are recognized as a
variable lease cost when return is no longer deemed probable. In
contrast, other types of nonrefundable deposits are considered lease
payments and included in the determination of the lease
liability.
See Section 6.1 for additional
discussion of other refundable and nonrefundable deposits.