The original FASB13 test was conducted and the lease came back as an operating lease. The lease is due to expire at the end of this year, however, our IT staff wants to extend the lease another year. What is the correct procedure?


After researching your question, it appears that the lease extension would be considered a new lease agreement versus a continuance of your original agreement. However, this assumes that you were under no obligation to renew the lease and that there was no penalty associated with not renewing or extending the lease. The FASB13 specifically indicates: except when a guarantee or penalty is rendered inoperative as described in paragraphs 108 and 113(e), any action that extends the lease beyond the expiration of the existing lease term, such as the exercise of a lease renewal option other than those already included in the lease term, shall be considered as a new agreement..."

The provision goes on further to indicate in paragraph 109(b)(2) that even if your original lease was a capital lease, which you have indicated it is not, the following applies: if the renewal or extension is classified as an operating lease, the existing lease shall continue to be accounted for as a capital lease to the end of its original term, and the renewal or extension shall be accounted for as any other operating lease."

We recommend that you ask your external accounting advisor about how to handle your lease situation since they understand your specific situation and can review documentation to make sure it is being properly accounted for in your records. Our answer is based on summary information.

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