I had a client that was wondering how to properly account for leasehold improvements in the gym / fitness center financial model. The gist of it was they were acquiring the facility and operating the business, leasing the facility, and contributing a fair amount of leasehold improvements.
As far as the proper accounting goes, there are a few things to note with leasehold improvements. First of all, such things are depreciable and the recovery period has been 15 years (meaning you can take a depreciation expense of 1/15 of the total cost each year). During covid this was eligible for 100% bonus depreciation, meaning you could expense the entire amount in the year of the capital expenditure if desired, but that was phased out in 2022.
Keep in mind the tax code changes all the time, but there is likely always going to be the ability to depreciate this over 15 years. If the improvements qualify as personal tangible property, you can likely depreciate such things for a shorter recovery period (accelerate some of the depreciation expense be cost segregating them).
As far as the financial model template goes...
There is a specific tab called 'CAPEX' where the user can enter the various leasehold improvements, the date they are purchased / paid for, and the useful life. If you don't want to account for a gain or loss on these items, you can simply copy the adjusted basis into the value at disposition (if you are selecting to populate an exit value at the end of the forecast period). That will effectively result in 0 gain/loss. If you are not selecting to show an exit value, then there is no need to do any manual adjustment and the balance sheet simple shows the value of all fixed assets / leasehold improvements in their respective rows as well as the total accumulated depreciation.
There are many caveats to consider with the accounting of leasehold improvements at disposition. The model is flexible enough to let the user manual define the value at sale, or simply let the logic work, which assigns a percentage of the total sales of the business to each capex item and figure out the gain/loss dynamically that way. The template has logic to look at the adjusted basis against the value at sale, and populate a fixed asset gain if that is the result.
Note, if the lease ends and the landlord maintains position of the leasehold improvements, the adjusted basis may be eligible to count as a loss at the sale / end of lease term for the lessee.
Article found in Real Estate.
