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Educational Lease Termination Video
Watch this video to learn more about terminations in Occupier, or read along below.
What is it?
A full or partial termination is a type of modification event that reduces the scope of the lease.
Why does it matter?
When a lease is fully or partially terminated before the expiration of the lease term, irrespective of whether the lease is classified as a finance lease or an operating lease, the lessee would derecognize the Right-of-Use (ROU) Asset and corresponding lease liability. The lessee would account for the termination as a type of lease modification.
A termination should be recorded by adjusting the lease liability and ROU Asset, any difference would be recognized as a gain or loss. If a lessee is required to make any payments or receives any consideration when terminating the lease, it would include such amounts in the determination of the gain or loss upon termination.
Accounting Impact
- Lease classification is reassessed as of the lease modification effective date
- Consideration is remeasured and reallocated
- Lessee would use the updated lease payments and discount rate to revise the lease liability and adjust the ROU Asset in a proportionate manner
- Difference between the proportionate reduction of the ROU Asset and lease liability is recognized in the income statement as a gain or loss
Types of Terminations
The accounting impact will depend on the type of termination and the timing of the termination.
Full Termination - immediate termination - Termination of all rights to use the underlying asset. Termination agreement and date is effective immediately or within the same month as the lease termination.
- Difference between the proportionate reduction of the ROU Asset and lease liability is recognized in the income statement as a gain or loss
- Example: Reduction in lease term and access to entire leased space. Lessee decides to terminate a 15 year lease in year 10
Modification event versus a termination - a decrease in lease term or space may not be considered as a termination event. Termination date is not immediate and not within the same month as the termination.
- Lease classification is reassessed as of the lease modification effective date
- Consideration is remeasured and reallocated
- Lessee would use the updated lease payments and discount rate to revise the lease liability and adjust the ROU Asset in a proportionate manner
Partial Termination - The right-of- use asset should be decreased on a basis proportional to the partial termination of the existing lease.
- A reduction in the underlying asset provided in the original agreement is a partial termination.
- Example: Reducing leased space from 100,000 square feet to 50,000 square feet.
Modification - Pending (Future) Termination
Decrease in lease term is known well in advance
- Example: Lessee or lessor decides to terminate a 15 year lease in year 10 and termination notification occurs in year 8.
Future near term termination
- Example: Lessee or Lessor decide to terminate a lease in the next month or near term subsequent months.
How does Occupier help?
Occupier helps by calculating the pending or future termination modification events, applying any lessee payments or considerations received and updating the amortization schedules. Additionally, for immediate terminations Occupier calculates the applicable termination journal entries, including the gain/loss amounts as a result of the terminated lease.