Case Study ABC Inc
ABC Inc.
Date: January 11th, 2015
Prepared by:
Reviewed by: Professor
ISSUE: Accounting for ABC’s tenant improvements and lease incentive obligations under the lease agreement with Landlord LLC (the “Landlord”).
BRIEF BACKGROUND OF COMPANY
ABC Inc. was founded in 2007 and is headquartered in San Francisco. Revenues and net income for 2010 are $500 million and $80 million, respectively. In September 2010, ABC Inc. (“ABC” or the “Company”) entered into an agreement with Landlord LLC (the “Landlord”) to lease approximately 268,000 square feet or 40% of a building located at 100 Smith Street, San Francisco. The building was originally configured to be used as office space. However, ABC wished to re-configure the interior layout and make certain improvements to the lease space to meet ABC’s design specifications. The tenant improvements (“TIs”) as specified in the lease agreement are for general purpose and not structural. The total estimated budget for tenant improvements is approximately $37 million.
KEY CONSIDERATIONS INVOLVED IN THE ACCOUNTING QUESTIONS
1. What type of arrangement is between ABC and the Landlord?
2. Who is responsible and owns the tenant improvements and lease incentive obligation on the leasing space?
3. What are the risks with tenant improvements?
4. How does ABC account for tenant improvements?
5. What is the treatment of lease incentives and are the tenant improvements subject to amortization for the lease period?
SUMMARY CONCLUSION ON ACCOUNTING QUESTIONS
1. The arrangement between ABC and the Landlord is classified as an operating lease based on the criteria ASC840. The agreement fails to meet any one of the 4 criteria that determine the classification of a capital lease.
2. For the tenant improvements, ABC will be responsible for any expenses above $13 million. The Landlord is giving ABC the tenant improvements as a tenant incentive.
3. ABC will assume the risk and expenses of construction overruns.
4. ABC
Date: January 11th, 2015
Prepared by:
Reviewed by: Professor
ISSUE: Accounting for ABC’s tenant improvements and lease incentive obligations under the lease agreement with Landlord LLC (the “Landlord”).
BRIEF BACKGROUND OF COMPANY
ABC Inc. was founded in 2007 and is headquartered in San Francisco. Revenues and net income for 2010 are $500 million and $80 million, respectively. In September 2010, ABC Inc. (“ABC” or the “Company”) entered into an agreement with Landlord LLC (the “Landlord”) to lease approximately 268,000 square feet or 40% of a building located at 100 Smith Street, San Francisco. The building was originally configured to be used as office space. However, ABC wished to re-configure the interior layout and make certain improvements to the lease space to meet ABC’s design specifications. The tenant improvements (“TIs”) as specified in the lease agreement are for general purpose and not structural. The total estimated budget for tenant improvements is approximately $37 million.
KEY CONSIDERATIONS INVOLVED IN THE ACCOUNTING QUESTIONS
1. What type of arrangement is between ABC and the Landlord?
2. Who is responsible and owns the tenant improvements and lease incentive obligation on the leasing space?
3. What are the risks with tenant improvements?
4. How does ABC account for tenant improvements?
5. What is the treatment of lease incentives and are the tenant improvements subject to amortization for the lease period?
SUMMARY CONCLUSION ON ACCOUNTING QUESTIONS
1. The arrangement between ABC and the Landlord is classified as an operating lease based on the criteria ASC840. The agreement fails to meet any one of the 4 criteria that determine the classification of a capital lease.
2. For the tenant improvements, ABC will be responsible for any expenses above $13 million. The Landlord is giving ABC the tenant improvements as a tenant incentive.
3. ABC will assume the risk and expenses of construction overruns.
4. ABC