How do I handle lease termination agreements under ASC 842?
Under the ASC 842 framework, lease termination agreements involve the recognition and allocation of termination payments. This article analyzes the lessor's accounting treatment through a specific case (a lease extension through 2020-2021, with the lessor paying termination fees in three installments totaling $80,000), emphasizing the need to determine whether the agreement constitutes a lease modification based on its substance and to recognize expenses appropriately.
My question is around the proper handling of lease termination payments.
In this scenario-
The lease term is extended for two years, let's say Jan 1, 2020- Dec 31, 2021. The tenant will pay monthly rent payments in the amount of $3,000. The lessor will pay the tenant three lease termination payments:
- One for $26K on Jan 1, 2020.
- One for $26K on Jan 1, 2021.
- The final one on the last day of the lease, Dec 31, 2021.
Total termination fee paid to tenant is $80k.
What is the accounting treatment of this scenario for the Lessor?