Question

Cause a Scene, a large movie theater chain, leases its theater facilities. You are the corporate controller.

In conjunction with recent operating leases, the company recently paid an additional $36 million for seats and carpeting. The question at hand is the length of the depreciation period for these assets. The following information is available:

• The operating leases average 15-year terms
• A corporate accountant on staff suggests depreciating these assets over a period of 25 years, citing increased costs related to an expansion into the Pacific Northwest
• Recent trade publications indicate the typical useful life for similar assets is 12 years

What is your recommendation for the depreciation period for these assets (the seats and carpeting)?

*****

Prepare a professional memo:

1. Explaining what these assets (the seats and carpeting) are; what they represent in conjunction with the operating leases of the facilities
2. Providing your recommendation for the depreciation period for these assets (the seats and carpeting), citing the appropriate guidance in the FASB’s Accounting Standards Codification
3. Explaining the accounting effects of depreciating these assets (the seats and carpeting) over the other suggested time frames (back up your conclusions with numerical data)

Note: The guidance for leases has changed significantly in recent years. The appropriate guidance for SEC filers beginning January of 2019 is found in ASC 842 – Leases.

Answer 1

Since,the cost of leasehold improvements is more than the value of the operating lease,

the lessee can record the expenditure on seats and carpetting as leasehold improvements

asset account.

Since,the actual ownership of the leasehold improvements remains with the lessor and

not the lessee, the leaehold improvements are treated in way similar to intangible assets.

The lessee only has an intangible right to use the leasehold improvement asset during

the lease term.Hence, the leasehold improvements are amortized and not depreciated.

The lessee would have to return the leasehold asset after expiry of the lease term and as

a result would also use the right to use the leasehold improvements made by him.

Considering the above mentioned points, leasehold improvements should be amortized

over the period of unexpired lease term.

FASB Accounting Standard state that the lease period must be determined at the

beginning of the lease period and the depreciation/amortization is limited to the lease

period which would include renewable periods that are reasonably assured.

In the example provided, the leasehold improvements cost $ 36 million and the average

operating lease period is 15 years.

Hence, the leasehold improvements shall be amortized over a period of 15 years