A leasehold improvement is a customization of rental property. Examples of leasehold improvements are new carpeting, cabinetry, lighting, and walls. A tenant may want to invest in leasehold improvements in order to adjust the characteristics of office or production space to its specific needs. The landlord may pay for these improvements in order to improve future lease rates for the rental property.
In accounting, a leasehold improvement is considered an asset of the tenant if the tenant paid for it, the investment exceeds the capitalization limit of the tenant, and the improvements will be usable for more than one reporting period. If so, the tenant records the investment as a fixed asset and amortizes it over the lesser of the remaining term of the lease or the useful life of the improvement.
Upon termination of a lease, all leasehold improvements become the property of the landlord.