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During a bankruptcy proceeding, a debtor's existing lease agreements will be affirmed, amended, or rejected. Until the Court approves an action, the debtor should continue to amortize right-of-use assets and consider impairment and/or revisions to the assets’ useful lives. Lease liabilities should continue to be recognized until rejected leases are approved by the Court. Leases affirmed in the bankruptcy process without modification should continue to be accounted for under ASC 842. In most instances bankruptcy law requires that any unpaid prepetition lease payments for affirmed leases become current and the continuing lease payments remain current throughout the proceedings. Leases that are amended by the lessor during the bankruptcy process should be accounted for under the lease modification guidance in ASC 842. See LG 5 for guidance on modification and remeasurement of a lease. Finally, leases rejected in the bankruptcy process will usually result in the leased property being returned to the lessors. Lease liabilities are not secured debt. As the lessee can reject the lease and return the right-of-use asset or negotiate a shorter lease term or lower lease payments, lease liabilities are generally subject to compromise. Lease liabilities generally become subject to compromise on the petition date (and not when management files a motion to reject a lease). Unpaid lease payments, including any damages to lessors for terminating the leases (often calculated by formulas used by the Court), usually become allowed claims subject to compromise. The Bankruptcy Code places limits on the maximum amounts of allowed claims for certain types of executory contracts, including leases. Following the guidance in ASC 852-10, such claims should be recorded at the allowed claim amounts and not the amounts expected to be paid to the lessors.
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