Subleasing space is a common practice when time remains on a long lease term, yet the lessee does not need physical use of a space during the entire term. This can apply to a percentage of the space, or in its entirety. The business decision to sublease a space affects both the real estate and accounting departments, especially as every lease 12 or more months in duration is getting special attention during the transition to ASC 842 compliance.
For example, let’s say a company has a 10-year lease for two floors of a class A office building, an expensive lease at a premium location. Six years into the lease organizational changes are made, and the company only needs use of one floor of the office building. To mitigate the loss, the unused floor (50 percent of the space) is subleased to another organization.
Lease accounting for sublease payment
If GAAP is not adhered to, the differences can be drastic. A common mistake is the primary tenant deciding to sublease a space and continuing to make payments to the landlord and continuing with straight-line amoritization of the original lease while starting a new sublease. Instead, here are the correct steps to be taken under current GAAP:
- The liability should be calculated as the PV of the remaining minimum lease payments due under the head lease (original lease) reduced by the PV of the estimated income generated by the sublease
- The deferred rent from the original lease should be written off
- If subleased at a loss, the loss should be recorded on the income statement
Lease Accounting Software The right lease accounting software solution makes it easier to manage the myriad of details ad deadlines associated with real estate, equipment and other leased assets, including workflow, notifications and automated notifications of status changes for critical data elements, including renewals.