This post originally appeared on tBL Marketplace Partner LeaseQuery's blog Your Lease Queries, Answered and is republished with permission. Find out how to syndicate your content with theBrokerList.

Our article on sublease accounting under FASB topic 840 lead to many enriching discussions. Often, one answer can lead to many more. As we receive those questions, we are glad to provide easy to understand solutions so that others with similar queries may find this topic useful. This article is a follow-up to two of the questions we received regarding the treatment of a loss for sublease accounting.

Subleasing Accounting at a loss

Our first question deals with properly accounting for the income received from a sublease.

“We lease 2 floors of a commercial building. One floor we occupy ourselves and the other we sub-let to another organization. There is escalation written into both the head lease and the sublease. The term of the sublease is not the same as the term of the head lease. On our balance sheet we have a deferred rent liability and on our income statement we recognize rent expense on a straight-line basis.

We recognize sublease revenue as received but do not show an asset on our balance sheet corresponding to future sublease payments receivable. We are subleasing at a loss and the head lease was signed twenty-one months before the sublease, so I do not believe we anticipated subleasing the floor. How should we properly reflect this income stream in both the income statement and balance sheet?

How to account for subleases at a loss

Our Response:

Because you are subleasing at a loss, the first thing that needs to be done is to calculate the present value of the remaining lease payments and the present value of the expected receipts from subleasing (this will mark your liability to market).

To do so, the journal entry will be:

  • A debit to a receivable account for the present value of the sublease.
  • A credit to a liability account for the present value of your remaining lease payments and a debit to a loss account for the difference.

The liability will be reduced as you make payments via the effective yield method (a portion of the payment will go to interest while the other to liability reduction) and the asset will be reduced as you receive payments.

Sublease accounting calculated

Our next question deals with partially subleased office space. 

“We have an office space where we subleased 50% of the rent-able square footage to another entity.

Under our original lease,

  • we received incentives for leasehold improvements,
  • dollars to pay off the early buyout from a previous lease, and
  • free rent up front on the new lease.

Under the new 50% sublease agreement, the net cash flows show a loss over the life of the lease.

Should we offset this loss by writing off 50% of the deferred liability for straight-line rent, 50% for the deferred liability for the previous lease termination cash payout, and 50% of the deferred liability established for the tenant improvement allowance?

Also, if we write off 50% of the deferred liability for the tenant improvement allowance, would we write off 50% of the net book value of the leasehold improvement asset? Finally, why would we account for this under ASC 420 vs. just accounting for it under ASC 840-20-25-14-15? “

Sublease accounting at a loss

Our Response:

Yes, as you indicated, the loss would be offset by reducing 50% of the deferred rent liability and 50% of the previous lease termination payout incentive, and 50% of the tenant improvement allowance. In addition, since you are reducing the TIA liability by 50% you would also write off 50% of the NBV of the leasehold improvement.

Additionally, 840-20-25-15 specifies that if the costs under the head lease exceeds the revenues under the sublease, then a loss would be recognized. ASC 420-10 then tells you HOW to calculate that loss so rather than using one or the other you will use both parts of the standard for various reason.


Hopefully, these clarifications will close the brackets on the treatment of a loss for sublease accounting, but if not, feel free to contact us by completing the form below. This doesn’t only apply to this topic, but to any lease accounting inquiry. We are happy to provide answers from our lease accounting experts for your tenacious questions.

As always, we write detailed blogs like this to demonstrate that our experts at LeaseQuery are not just real estate professionals, but also lease accounting experts. Trust us, there’s a difference. Our clients have access to our accounting professionals, and we consult with them on complex lease accounting issues just like this one.

We know full well the difficulties faced by real estate and equipment leasing professionals, as well as the accounting departments supporting them. Our lease accounting software reflects our expertise.

Schedule a lease accounting demo with leasequery accountants


About LeaseQuery:  

LeaseQuery is lease accounting software that helps companies manage their leases.  Rather than relying on excel spreadsheets, our clients use LeaseQuery to get alerts for critical dates (renewals, etc), calculate the straight-line amortization of rent and TI allowances per GAAP, provide the required monthly journal entries (for both capital and operating leases) and provide the commitment disclosure reports required in the notes and the MD&A.  Contact us here.

Do NOT follow this link or you will be banned from the site!