Accounting for Closed Store Lease Obligations
It’s never easy making the decision to close a store, but once the choice is made, it’s important to understand how that decision will impact your GAAP financial statements. One critical factor to consider is the treatment of your remaining lease obligation on the store you are planning to close. How you will account for it depends on your situation.
If you are:
- Negotiating a complete buy-out with the landlord and the remainder of the lease is not yet paid: Accrue the full value of amount due at lease termination date.
- Still paying rent and obtained a subtenant: Once the store has been vacated, record an accrual representing the net present value of the remaining lease obligation less the fair market value of sublease rentals. Subtenants are often paying less than the monthly lease obligation, so this would result in a closed store liability. Based on materiality, disclose this transaction in the financial statement footnotes.
- Still paying rent and looking for a subtenant: Once the store has been vacated, record an accrual representing the net present value of the remaining lease obligation less the fair market value of expected sublease rentals. The expected fair market value of sublease rentals should be based on market comps for the area. An estimation of the time to sublease should be considered when calculating the closed store reserve. Based on materiality, disclose this transaction in the financial statement footnotes.
- Guarantor on a lease assumed by a third party, in case of default by the third party: Disclose the maximum obligation in the financial statement footnotes. Unless it is probable that the third party will default, no accrual is recorded.
- Legally released from a lease assumed by a third party: Your obligation has ceased; no accrual or disclosure is necessary.
Once you understand the impact this will have on your financial statements, be sure to review your bank covenants and other financial measurements to ensure compliance. It is best to have these discussions early to determine whether any closed store expenses can be treated as a non-recurring addback allowed by some bank covenants.
Conversely, if you keep your financial statements on the income tax basis of accounting, there is no closed store reserve necessary rather the rent expense is recognized upon payment.
For questions on how store closures may impact your GAAP financial statements, contact Kari Maue at email@example.com
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