5 GAAP/SOX Rules You Need to Know

1. Rent straight-lined over the term if rent increases are known.

2. Landlord Tenant Improvement Dollars are shown as a net rent credit, and Total construction cost including Landlord’s TI Dollars are depreciated.

3. GAAP rent starts with “beneficial use” GAAP rent starts earlier of when construction starts or lease commences

4. Restoration amortized over term

The methodology used is to estimate the cost now, then apply an inflation factor to estimate the cost at the end of the term, the Future Cost.

The Future Cost is then discounted to a Present Value. The Discounted Present Value of the Future Cost is straight-lined over the lease term AND an accretion expense is applied to the increasing liability. The accrual starts with the GAAP lease term since it represents a liability. Cash Flow needs to be adjusted to reflect the P&L liability and the payment of the actual cost at the end of the lease term

5. Rules for sublease analysis write-offs have been further defined

• Cost written off when decision made. When vacate space or if vacant, when decide to sublease
• Costs include NPV of rental costs, depreciation write-off, estimated subleasing costs and sublease income
• Income Statement (P&L) charged the NPV of write-off
• Monthly, interest expense on declining balance of the NPV Write-Off charged to P&L
• Declining balance determined by taking net monthly costs and
  interest expense, deducting that from the NPV write-off