Breaking Down Deferred Rent under Robust GAAP Lease Accounting Rules

Defining Deferred Rent

Deferred rent refers to the balance sheet account used primarily in legacy lease accounting standards (ASC 840 and IAS 17). Companies used this balance sheet as the principal mechanism for straight lining. However, the concept still applies to the new ASC 842 standard, but with very different presentation.

The Impact of Deferred Rent

Because leases rarely have even rents throughout the entire lease term, due to features like escalations and free rent periods, the cash rent paid is almost always out of sync with straight-line rent expense. At one time, straight-line rent expense presentation was a requirement for operating leases under legacy standards. Consequently, it is still required for operating leases under the new US standard, ASC 842. Before, it was easy to see the impact of straight-line rent in the deferred rent account. Under new US guidelines, the impact is still there. One can easily observe the impact in the interaction of ROU Asset and Lease Liability amortization.

Deferred rent can also have an impact on income tax under legacy and updated lease accounting rules, due to the temporary difference between financial statements and the tax returns. However, tax accounting for leases is not always as simple as comparing the GAAP presentation to the cash activity. Several items can impact the tax calculations in addition to deferred rent, including TIA (tenant improvement allowances), other incentives, direct costs (e.g. commissions) and impairments. Deferred rent is one of the key inputs for proper transition to ASC 842 and IFRS 16 lease accounting standards, and typically becomes a component of the opening ROU Asset balance.