A significant term in most commercial leases is the right or obligation of landlord or tenant to remodel the leased premises during the lease term. Typically, non-structural improvements which do not exceed a sum certain (often $10,000 or less) do not require landlord approval.

What should be included in leasehold improvements?

Examples of costs that would be included as parts of a leasehold improvement include:

• Interior partitions made up of drywall, glass and metal.
• Miscellaneous millwork, carpentry, lumber, metals, steel, and paint.
• Acoustic, drywall, and plaster ceilings.
• Restroom accessories.
• Electric lighting fixtures.

How are leasehold improvements made in a building?

Leasehold improvements are typically made by the owner. Interior spaces are modified according to the operating needs of the tenant. For example, changes made to to ceilings, flooring, and inner walls. Alterations to the exterior of a building or modifications that benefit other tenants in the building are not considered leasehold improvements.

When to capitalize and record leasehold improvements?

The criteria to capitalize and record leasehold improvements also depends on any internal capitalization or materiality policy of the company (i.e., tenant), and should be considered when accounting for leasehold improvements. Here are some common leasehold improvement examples:

How are leasehold improvements accounted for in ASC 410?

If that is the case, the lessee will record an ARO liability and will need to account for it under ASC 410, in addition to accounting for the leasehold improvements as fixed assets. For example, assume a lessee enters into a building lease and paints the walls to match their company brand colors.

How are Aros accounted for in leasehold improvements?

ASC 410, Asset Retirement and Environmental Obligations, section 20 (ASC 410-20) contains the guidance from FASB on how to account for AROs. Sometimes the terms of a lease contract require a lessee to remove leasehold improvements they have made to the leased asset prior to returning the asset to the lessor at the end of the lease term.