Effective Date:

Applicable FAM Policies: 510 - Tangible Capital Assets

Applicabiliy: GNWT Departments and Public Agencies

INTERPRETATION

Leased assets owned by a third party may require improvements to make them suitable for their intended purpose. Leasehold improvements (LI) are expenditures relating to the alteration of an asset which is an operating lease (see below).  The alteration increases the assets usefulness life or improve its functionality.. 

LI need to be tracked and recorded separately to distinguish between assets the government owns and those that it only has the right to use during the life of the lease.

To be considered a LI, the modification must have at least four characteristics:

1. The modifications must be made to assets that have been leased;
2. The lessee department/agency must pay for the improvements. If the expenses are the responsibility of the lessor then it will account for the expenses in its own records;
3. The LI should bring benefits to the department/agency for more than one year; and
4. The improvement reverts to the lessor at the end of the lease (i.e. cannot be detached from the leased property).

When improvements to a leased asset qualify as a TCA (they can be detached from the leased property) costs must be recorded as a TCA.

The capitalized value of a LI must be amortized over the shorter of:

1. the lease term plus the renewal period; or,
2. the useful life of the improvement.

Examples of LI include significant upgrades to an electrical system to meet the needs of computer systems and the installation of walls and doors to create permanent offices. Examples of modifications that would not normally be capitalized include remodeling costs such as painting and carpeting.

Improvements made to an asset subject to an operating lease where ownership does not transfer to the lessee (i.e. lease does not contain a bargain purchase option or provide for transfer of ownership of the asset) should be classified as a LI. Improvements made to an asset subject to a capital lease where ownership is expected to transfer to the lessee, should be classified as betterments. The cost of betterments should be capitalized as part of the cost of the capital asset (created as result of a lease being deemed a capital lease) and amortized over its useful life.

In cases where Infrastructure (INF) or a successor Department carries the lease (e.g. general office space) the owner department/agency should be the sponsoring department/agency.