Needeless

NeedsLease entered into a ten-year operating lease for office space in accordance with ASC 840, Leases. It has neither renewal option nor the ability to negotiate for renewal per lease agreement. Within the leased premise, NeedsLease has placed into service various leasehold improvements that have economic useful lives of 12 years. In the lease agreement, there are certain provisions that may require the lessee to perform certain activities and to incur certain costs at the end of the lease term. Such provisions include:
• Lessor may require the lessee to perform general repairs and maintenance on the leased premises.
• Lessor may require the lessee to remove all leasehold improvements, restoring to original condition. Related to the lease, NeedsLease has encountered situations in which certain costs and certain obligations imposed are less clear about accounting treatment. Such issues include how to account for: 1. The expenditures and depreciation (if applicable) of the leasehold improvements. 2. The general repairs and maintenance. 3. The reinstating to the property’s original condition.
The purpose of this memo is to analyze the circumstances and obligations arising under this lease agreement and make recommendations regarding the accounting treatment.

1. How to account for the expenditures and depreciation (if applicable) of the leasehold improvement? NeedsLease should capitalize the leasehold improvement and depreciate over the 10-year lease term.
According to ASC 840-10-35-6, leasehold improvements in operating lease are capitalized and depreciated over the shorter of (a) the estimated useful life of the improvement or (b) a required lease term including renewals. Per the lease agreement, the lease has a 10-year term and has no renewal option, while the estimated economic useful life of the leasehold improvements is 12 years.
Therefore, the expenditures for the leasehold improvements should be