Under FAS 13, rent on such leases is to be expensed “on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed.” This creates a deferred liability (or asset, if the rent is scheduled to decrease) for the difference between the cash rent paid and the rent expense. FTB 85-3 explicitly prohibits recognizing rent expense as incurred on these leases if the change in rent is based on “the time value of money, anticipated inflation, or expected future revenues.”
GASB Statement 13, on the other hand, permits recognizing the rents as scheduled “when the pattern of the payment requirements, including the increases, is systematic and rational. Following are examples of payment schedules that are considered systematic and rational.
- Lease agreements specify scheduled rent increases over the lease term that are intended to cover (and are reasonably associated with) economic factors relating to the property, such as the anticipated effects of property value appreciation or increases in the costs due to factors such as
- Lease payments are required to be made on a basis that represents the time pattern in which the leased property is available for the use of the Lessee.”
If the rent schedule includes concessionary rental terms, such as a rent holiday or a bargain renewal option, the rent should be recognized on a straight-line basis.
(GASB Statement 13 also permits recognition of the implicit financing involved, based on the estimated fair value of the rental, but EZLease is not designed to provide such calculations, since they are only permitted in this one unusual case, and straight-line recognition is equally acceptable.) Check the Level Operating Rent box for such a lease.