How do I handle lease termination agreements under ASC 842?

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?

Answers

Wayne Spivak Contributing Editor • September 23, 2022

Under ASC 842, lessees and lessors are required to recognize lease obligations and receivables in their financial statements. Since this is an operating lease, payments received by the Lessor are recorded straight-line, as they are received as income.

While others may show the transaction differently, the effect will be the same, but I would for each termination payment:

Db: Lease Termination (Contra-Revenue Acct)

  Cr: Cash

So at the December 31, the Lessors P/L statement would show:

Income

Lease Income $xxxx

Lease Termination       ($xxx)

Net Lease Income/(Loss)  $xxxx

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How do I handle lease termination agreements under ASC 842?

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