In FAS 13 & IAS 17, when operating leases have scheduled changes in rents, such as scheduled increases for planned inflation or rent holidays, the rent expense is recognized on a level basis over the life of the lease. The difference between the rent expense and the rent paid is deferred rent liability (assuming that the rent expense is greater than the rent paid; in the rare circumstance that the rent paid is greater, there is a deferred rent asset). For lessor leases, the situation is reversed, so that the excess of level rent income over rent paid is a deferred rent asset.
When you transition to the new standard (ASC 842, IFRS 16, or GASB 87), the deferred rent liability balance is applied against the right-of-use asset. The journal entry for setting up the capitalized operating lease (ASC 842) or the new finance lease (IFRS 16 & GASB 87) is in the form:
|Deferred rent liability||5,000|
|Long term liability||27,000|
This is the only time the deferred rent liability is recognized under the new standard. It reflects clearing out the liability that has built up from inception of the lease through the last day of the old standard, which is the balance in the deferred rent liability account at the date of transition.