How are leasehold improvements accounted for in financial statements?

• A. Leasehold improvements are capital expenditures; amortized over the shorter of lease term or asset life.
• B. Leasehold improvements are expensed in the period incurred.
• C. Leasehold improvements are depreciated over the full asset life regardless of lease term.
• D. Leasehold improvements are not depreciated.

Answer: (A)

Leasehold improvements are capitalized because they add value to the leased space and provide benefits over time. They are amortized, not expensed, over the period they will benefit the tenant—the shorter of the lease term (including renewal periods that are reasonably certain to be exercised) or the improvements’ useful life. This straight-line amortization matches the economic use of the improvements within the lease. If a renewal becomes reasonably certain, the amortization period extends accordingly. If the lease ends sooner, the remaining unamortized balance is expensed. This is why the correct approach is to amortize over the shorter of the lease term or the asset life; expensing immediately, depreciating for the full asset life, or not depreciating at all would misstate the asset’s ongoing economic benefit.