Real Property / Leases / Lease Portfolio / Extension for Lease Accounting

Calculating the Amortization Schedule

The program follows this general procedure to calculate the amortization schedule.

  1. Creates a record list with one record in the Lease Amortization Schedule table (ls_amort_sched) for each fiscal period that exists for the lease.
  2. Sums the Initial Direct Costs into a single figure and prorate this value over the remaining life of the lease.
  3. Creates a cost projection of all Lease Costs that are material to FASB recognition on the same period as the amortization.
  4. Nets the options for each fiscal period.
  5. Totals the Lease Payments and Lease Liability Costs.
  6. Calculates the other Amortization Schedule fields.
  7. Saves the Lease Amortization Schedule records in the record list

For finance leases, the ROU Asset is amortized on a straight line basis over the course of the lease.

For operating leases, the ROU Asset amortization increases over the term of the lease to ensure that the lease expense remains constant for each period:

Fiscal Periods

When creating the amortization schedule, the program normalizes all costs within the same fiscal period. If a lease has its fiscal period in months, all costs for that lease that fall within that particular month are calculated as if they occurred on the first of the month. For instance, if the first month of a lease the base rent falls on the 2nd day of the month and the Initial Direct Costs fall on the 15th – both are added to the same fiscal period, and the 1st day of the month is taken as the date for these costs for the purpose of calculating the amortization schedule. Within the Archibus system, the actual Date Due and Payment Dates are preserved exactly as they occurred.

Initial Direct Costs

New Lease Classification. For a lease with a classification date after the Effective Date of the new guidance, the Initial Direct Costs are added to the ROU Asset.

Legacy ASC 842 and IFRS 16 Lease Classification. For a legacy lease (i.e. one in which the Start Date is earlier than the Effective Date of the new guidance), the program prorates the Initial Direct Costs. For instance, if there are 36 periods in the total Lease Term, but only 24 periods in the FASB/IASB lease term, the program uses two-thirds of the Initial Direct Costs.

Legacy ASC 840 Leases For legacy ASC leases, the program produces a legacy 840 lease amortization schedule under the old guidance for comparison reporting. When creating this amortization schedule, the program does not include the Initial Direct Costs in the ROU Asset.

Lease Re-evaluation For a lease re-evaluation, the program prorates any unamortized Initial Direct Costs over the new FASB/IASB Lease Term. For instance, suppose a lease has 10 periods. At the beginning of the 9th period, the lease administrator executes an extension option for another 3 years; this extension option previously had not been reasonably certain. The program takes the remaining unamortized initial direct costs (1/10th of the total Initial Direct Costs) and adds them to the new ROU Asset (effectively amortizing them over the remaining 6 periods – one period remaining in the original lease, 5 periods added as part of the extension).

Accrued Rent Liability / Deferred Rent

Legacy 840 Operating Leases. For legacy 840 leases that start after the Effective Date of the new guidance, the program adds to the ROU Asset value any accrued rent liability, that is, any rent that has been recognized before the Classification Date but has not been paid. For instance, if there is an accrued rent liability of $1,200 as of the 1 January 2019 Classification Date, that $1,200 will be added to the beginning value of the ROU Asset.

Other Leases. For all other lease types, the program does not require any provision for deferred rent.

Residual Value Guarantee

All leases add any residual value guarantee to both the ROU Asset value and the Initial Lease Liability.

Gain or Loss on ROU Modification

In some cases, an ROU Modification results in a gain or loss. For instance, suppose in previous years, you reported amortized values from a particular lease. Now in the current year, you execute an option to contract the space in the lease; previously, you had not believed that this option was reasonably certain to be executed. In this contraction, the ROU Asset loses value and the Lease Liability decreases. This results in a gain, because the ROU Asset value was previously reported as having been expended at a rate faster than will now occur.

When the lease administrator approves a re-evaluation, the program compares

To obtain the change in ROU Asset Value, the program subtracts the old value from the new value.

Similarly, to obtain the change in the Lease Liability, the program subtracts the old value from the new value.

To calculate the gain or loss, the program calculates the Change in Lease Liability minus the Change in ROU Asset. If this value is positive, the program shows a gain, if negative a loss.

The program writes the change in ROU Asset Value, the change in Lease Liability and the gain or loss to separate sub-ledger entries. The lease manager can configure the accounts to which the sub-ledger records assigns each value.

Reporting Period

The subledger rules always generate the sub-ledger entries for the entire life of the lease. This includes gain or loss. If an ROU Modification generates a gain or loss, the program always creates the subledger items for that gain or loss. The program writes entries for extensions and expansion option exercise to different account codes. The reason for this is that these actions are almost always forward looking: There will be no need to declare a gain or loss, as the ROU Modification affects only future periods; that is, periods that have not yet been closed and reported.