Depreciation Life of Leasehold Improvements

Adding a fence is a leasehold improvement.

A leasehold improvement is when the lessee of a lease improves the leased property. The improvement must be permanent, like adding an air conditioner, and not temporary, like putting a painting on the wall.

Depreciation

Businesses must depreciate assets under the generally accepted accounting principles. Depreciation is the reduction of worth in an asset. As the company uses an asset, it moves the asset from the balance sheet to the income statement as a depreciation expense over the life of the asset.

Choice

To depreciate an asset, the accountant must know the depreciable life of the asset. Normally, depreciation of assets is over the asset's useful life. However, with leasehold improvements, the depreciation time is the lessor of the remaining time on the lease or the asset's life.

Asset Life

The asset life is how long the asset is reasonably expected to last. For example, a ceiling fan may normally last 10 years before needing replacing. Therefore, the asset life of the ceiling fan would be 10 years. This number is an estimate based on past use or research.

Lease Life

The other option is over the remaining lease life. If a person has a 10-year lease and four years into the lease replaces the air conditioning system in the leased building, then the remaining lease life is six years.

References

• Portland Online: FIN 6.11---Capital Assets