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, and even more so under new ASC 842 guidelines. A common practice has been to offset the head lease expense with the sublease income. However, that is not always appropriate under GAAP. Now, requirements for lessor and lessee accounting are quite different regarding balance sheet impact around operating leases, so companies should be careful to evaluate accounting policies. The following questions can be used to help evaluate:
- Should accounting guidelines regarding discontinued operations be considered?
- Is there a formal “right of offset” in the head lease?
- Should disclosure footnotes be modified?
- Should a loss be recorded?
Lease Accounting Software The right lease accounting software solution makes it easier to manage the myriad of details and 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.