Real Property / Leases / Lease Portfolio / Extension for Lease Accounting
Record an Option for Space Expansion (or Contraction) that has been Exercised (or likely will be exercised)
Record an option for space expansion or contraction that is reasonably certain to be exercised or that has been exercised
This procedure outlines recording an expansion option that meets one of the following conditions:
- is reasonably certain to be exercised in the future
- has been exercised when it was not previously marked as "Is reasonably certain?"
The procedures for the two use cases are identical. The only difference is that in the second case when the Lease Manager exports lease costs to the general ledger, the export will contain extra line items representing a gain or loss.
Requirement
For finance leases, when calculating options likely to be exercised, the option is added to the ROU Asset and lease liability and amortized over the life of the lease.
If the value of the ROU Asset and liability was previously reported on the books for previous years or quarters, calculate the gain or loss resulting from this asset re-evaluation.
Procedure
- Invoke the Lease Portfolio Console, available on the Navigator at Real Property / Leases / Lease Portfolio.
- Create an option record representing the contractual right to expand:
| Field | Value |
|---|---|
| Option Type | EXPANSION |
| Date Exercising Applicable |
1/1/2030, for example. Use the Date Exercising Applicable, as this option may not have been exercised yet, and the Date Exercised may not be present. |
| Is reasonably certain? |
Yes |
| Area Involved | 100,000 sqft, for example |
Note: For a contraction, set the Option Type to CONTRACTION and modify the existing lease Base Rent to be a lower cost per month reflecting the smaller area leased. Follow the below procedure, adjusting as necessary.
Note: Leave the Cost - Estimated field blank. You will use a Recurring Cost record since this is not a one-time cost. For information, see Concept: Lease Costs and Option Costs.
- Create an additional base rent Recurring Cost representing the additional rent you will pay over the remaining years of the lease for the expanded area:
| Field | Value |
|---|---|
| Cost Category | RENT - BASE RENT |
| Period | Month |
| Start Date | Enter the date of expansion, for example 1/1/2022 |
| End Date | Enter the end date of the lease, for example 12/31/2029 |
| Amount - Expense | Enter the additional monthly rent you will pay over the remaining years of the lease for the expanded area |
- If there are any tenant improvement allowances included as part of this expansion option, enter them as separate costs with a Cost Category of LEASE - IMPROVEMENTS. Use Amount - Income rather than Amount - Expense for the cost.
- If there are other fees or costs that are permitted to be amortized over the entire lease, enter them in separate costs with Cost Category LEASE - OTHER AMORTIZED COSTS.
- Load the Real Property / Leases / Lease Portfolio / Lease Classification Wizard.
- Work through the questions, changing the options from Pending and moving through the various tabs. The program saves the lease classification data, recalculates the ROU Asset and lease liability, and regenerates a new amortization schedule.
- Load the Real Property / Leases / Lease Portfolio / Generate Ledger Entries for Leases task.
- Note that the generation action includes entries for the gain or loss due to the re-evaluation of the ROU Asset.
-
When the organization actual executes the option, the Lease Administrator additionally:
- edits the Date Exercised (above, the classification uses the Date Exercising Applicable).
- changes the Lease's Area - Neg. Rentable to the new, expanded (or contracted) area.
Outcome
- The Audit Log shows any changes to the options.
- The Audit Log shows the new values of the Lease as of the Lease Manager's approval.
- The Options table shows the modifications and the effective dates.
- The amortization schedule includes:
- a "current" schedule representing the new amortization information.
- a set of "Archived" schedules representing previous amortizations.
- It is the difference between the two schedules that the program uses to calculate the gain or loss.