subscription to Inform, PwC’s online accounting and financial reporting reference tool (www.pwcinform.com), or by contacting a PwC representative. Note: To understand the accounting for tenant improvement allowances under ASC 840, read our blog on TI allowances. This guide considers existing guidance as of March 31, 2016. These improvements can be offered as a credit in the rent or provided separately. As a result of the incentive adjustment, periodic rent expense on the income statement is $210,113 ($220,195 – $10,082). LeaseQuery.com info@LeaseQuery.com 1-800-880-7270 Accounting for Tenant Improvement Allowances Under Current GAAP 2 3. For simplicity sake let’s consider it happened in December of year 7 for $64,000. Leasehold improvements are typically provided over and above the building allowance. Future editions will be released to Improvement allowances may be a fixed amount or based on a certain amount per square foot. You will amortize $8,000 per year until the end of the 15 year lease. In order to induce the tenant to enter into the lease, the landlord agrees to provide funding of up to $1,000 for leasehold improvements. There is no lessee accounting impact, unless the lessee fronts the cost and is reimbursed by the lessor. Scenario: You have a mid-term tenant improvement that takes part in year 7 of a 15 year lease. If improvement payments are deemed to be for assets of the lessor, then the lessor capitalizes the related cost as a fixed asset. How the rent-free period will be shown on the amortization schedule The landlord could also provide the tenant with free rent, in lieu of an improvement allowance, at the beginning of the lease (typically for the same amount that the allowance would have been). The tenant improvement allowance is an outstanding benefit, and tenants should enter negotiations prepared to negotiate hard for it. In order to understand the correct accounting, here is an example: Assume a tenant enters into a 10 year operating lease requiring the tenant to make payments of $1,000 in years 1-5 and $2,000 in years 6-10. To the extent the tenant uses this improvement allowance to construct its improvements in its lease space, the tenant may depreciate these assets. Guidance date As the environment continues to change, so will the content in this guide. If the landlord provides a cash allowance to the tenant for the tenant to construct improvements it will own and use, this cash payment will constitute immediately taxable income to the tenant. If the cost of the leasehold improvements exceeds the tenant improvement allowance, the tenant pays for those improvements out of pocket. Leasehold improvements are defined as the enhancements paid for by a tenant to leased space. This allowance is usually a certain dollar amount per square foot of space. Examples of leasehold improvements are: Interior walls and ceilings Electrical and plumbing additions Built-in cabinetry Carpeting and tiles Leasehold improvements generally revert to the owne Sometimes, the landlord gives the tenant an allowance, called a tenant improvement allowance, to pay for the leasehold improvements. Accounting for tenant improvement allowances 1. LeaseQuery.com info@LeaseQuery.com 1-800-880-7270 LeaseQuery Your Easy Button For Lease Accounting 1 2. 2. The tenant will typically amortize the improvements over the term of the lease, and in most cases the improvements revert to the building owner upon lease termination. The tenant would have to use its own funds for the cost of the improvements and would depreciate the cost over the statutorily prescribed life. 168(k). 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