Case 9-4

1791 Words May 12th, 2012 8 Pages
Case 9-4
Trueblood Case 09-4 Solution
Case 9-4
How should NeedsSpace account for the two obligations noted as provisions in the lease agreement?
● Provision 1: “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.”
By entering the lease agreement, NeedsSpace (the lessee) becomes legally and contractually responsible for performing general repair and maintenance on the leased premises. Assuming that the lessee is required to make deposits to financially protect the lessor concerning the maintenance obligation by setting up a reserve, the guidance in ASC 840-10-05-9A through 840-10-05-9C states that the maintenance reserve shall be recognized as a deposit asset and reimbursed later when the
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Comparison to IFRS
In IFRS, the maintenance requirement provision in the lease agreement may be considered as a contingent liability. In IAS 37, a contingent liability is defined as “a present obligation that arises from past events but is not recognized because (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (2) the amount of the obligation cannot be measured with sufficient reliability.” Since the provision simply clarifies who is responsible for the repair and maintenance and not specifies the amount paid for the maintenance, the present obligation from the provision would not be recognized.
A contingent liability under IFRS shall not be recognized but disclosed in the financial statements with a brief description of the nature, an estimate of financial effect, and an indication of the uncertainties involved., and the possibility of an of contingent liability.
● Provision 2: “Lessor may require the lessee to remove all leasehold improvements such that the premise is reinstated to original condition.”
According to ASC 840-10-35-6, leasehold improvements in operating lease are capitalized and amortized over the shorter of (1) the useful life of the assets and (2) lease term, considering required lease periods and renewals. In the lease agreement above, no renewal option is provided; and the lease term of 10 years happens to be the same to the economic useful lives of the leasehold

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