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leasehold improvement

Dear all,

During the company audit in March 2013, I observe that the fixed assets register is not booked in accordance with the company fixed asset policy.

They are applying useful lives according to the local legislation, e.g.

  • leasehold improvement are amortized by 20 years instead of the shorter of the remaining economic live of the asset or the remaining lease term,
  • tooling above 10.000 USD is amortized by 6 instead of 3 years,
  • a few assets below 5.000 USD got capitalized,
  • computer software, computer hardware, machinery and equipment as well as furniture and fixtures are amortized according the useful lives published by local legislation instead of the company useful lives.

An adjustment of the fixed asset register according company fixed asset policy would result in a major impairment, especially for the leasehold improvements, which are capitalized between 2002 and 2010 with 20 years useful live.

The leasing contract for the factory building had been signed in March 2002 for a duration of 2 years incl. 5 options for 2 years prolongation.

The landlord reserved a right to terminate the contract with a notification period of 3 month.

A few appendixes had been added to the contract as the company enlarged the shop floor since then. This is also the reason why sub-assets had been added from time to time to each of the capitalized leasehold improvements.

The above mentioned contract had been cancelled by the end of 2012 and replaced by a new contract as the owner of the facility changed the legal form of the company and to get rid of all different appendixes. The negotiation regarding a new contracts started 10.09.2010 and is documented with respective emails (in attachment).

Considering below mentioned paragraph to the company fixed asset policy would we be able to apply the prolongations for our amortization period?

Leasehold improvements has to amortized by the shorter of the remaining economic live of the asset or the remaining lease term March 2014.

Can we apply the 2012 signed contract for leasehold improvements, which are in connection with the new contract even although we already installed them in 2010 based on the negotiation.

“Lease extensions may be considered in the lease term only if the extension is fully within our control (i.e. the lessor cannot object) and it is highly probable that the lease will be extended (i.e. it makes commercial and economic sense to extend the lease).”

Can you please share your opinion or advise.