Sublease Accounting (Loss on Sublease)

Wayne Spivak President & CFO • July 31, 2012

As I read the question, Company A has excess space which it is legally bound to pay rent, tax and COLA. Company A may, if it so chooses, sublease. It does.

The amount collected from the subleasee can netted against the expense since Company A is not in the real estate renting business. The alternative is to list the income in the Profit section of the P/L, but the same results are obtained.

No additional transactions are needed for the collection of the sublease rentals.

2

Iryna Buynytska Assistant Controller • January 21, 2015

Can you please point me to where I can find more information in the Codification about your comment: "The amount collected from the sub lessee can be netted against the expense since Company A is not in the real estate renting business." Thank you!

Wayne Spivak President & CFO • January 22, 2015

I don't have full access to the ASC's, but 840, possible 870.

Here is what I believe is the applicable part of 840:

Subsection
25-14

If the nature of a sublease is such that the original lessee is not relieved of the primary obligation under the original operating lease, the original lessee (as sublessor) shall account for both the original lease and the new lease as operating leases.

Subsection
25-15

If costs expected to be incurred under an operating sublease (that is, executory costs and either amortization of the leased asset or rental payments on an operating lease, whichever is applicable) exceed anticipated revenue on the operating sublease, a loss shall be recognized by the sublessor.

At the end of the day, after going round and round with multiple ASC pronouncements, you will have netted the sub-lease payments against the lease payments, discovered you have a loss and record the same.

Sometimes (ok, often times) these accounting standards are circular, and serve no additional purpose but to keep CPA firms and these Standard Boards in business. They surely don't help the average investor and many times creditor's just discount leases (which are now capitalized) as an asset for their purposes. So who does this help?

Sarah Jackson Associate Editor • May 31, 2016

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Vernon Reizman CFO • August 2, 2012

I would like to put some numbers to this as I am not clear on the answer.

Assume Company A has a five year lease on 10,000 sq feet of office space at $10,000 monthly gross. ($12.00/annum w/no escalations)

Scenario A--It vacates the entire office after year 1. Do you record the loss on the pv of the future years 2-5 of rental obligation?

Scenario B--It reduces its office needs at end of year 1 to only 7,000 feet and subleases 3,000 feet to an unrelated Company B at $8.00/annum. Do you record the pv of the $2.00 per foot per annum loss?

Michael Peress Partner • August 2, 2012

I believe you are correct in that Company A should recognize a loss representing the net future cash outlays under the sublease agreement in the current period. See FASB ASC 840-20-25-15

Kevin Roones Senior Accounting Professional • August 6, 2012

If Company A is no longer using the space that it is legally obligated to pay rent on under an operating lease, then you should refer to ASC 420, Exit or Disposal Cost Obligations. The fair value of the remaining obligation would be recorded; i.e. remaining lease rentals, less any prepaid or deferred items recognized, reduced by estimated sublease rentals that could be reasonably obtained, even if Company A does not sublease (as long as it is contractually allowed).

Patrick Dunne Chief Financial Officer • September 19, 2014

Recognize the loss of the lease immediately in the current period. Do not compute this as an NPV.

Sublease Accounting (Loss on Sublease)

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