Real Property / Leases / Lease Portfolio / Extension for Lease Accounting
To Record a Lease Renewal Option that is Reasonably Certain to be Exercised
For finance leases, include options likely to be exercised. Extend the amortization schedule to include the length of the option. When calculating the present value of the lease liability, take into account the schedule of payments (e.g. by month or by year) for the option.
Procedure
Suppose you have a 10-year lease starting in 2020. You have a three-year option that is reasonably certain to be exercised.
- Invoke the Portfolio Edit Wizard or the Lease Portfolio Console. Both are available on the Navigator at Real Property / Leases / Lease Portfolio.
- In the Lease Portfolio Wizard create a lease record representing the lease's 10 year term.
| Field | Value |
|---|---|
| Start Date | 1/1/2020 |
| End Date | 12/31/2029 |
- In the Lease Portfolio Wizard, create a base rent Recurring Cost representing these 10 years of payments:
| Field | Value |
|---|---|
| Cost Category | RENT - BASE RENT |
| Check Cost Dates Match Lease? | 12/31/2029 |
| Period | Month |
| Start Date | 1/1/2020 |
| End Date | 12/31/2029 |
- In the Lease Portfolio Wizard, create an option record representing the contractual right to renew.
| Field | Value |
|---|---|
| Option Type | RENEWAL |
| Date Exercising Applicable | 1/1/2030 |
| Is reasonably certain? | Yes |
| Description | describe the option |
Note: Leave the Cost - Estimated field blank. Since this is not a one-time cost, you will track this as a recurring cost. For information, see Concept: Lease Costs and Option Costs.
Note: If an option "is reasonably certain" to be exercised, mark it as such. If you change an option, and the lease is already has a workflow status of "Submitted for Approval" or "Approved", then the Lease Classification Wizard will capture your comments on the change for the audit log, log the change, and flag the lease for Re-evaluation.
- In the Lease Portfolio Wizard, create a base rent record representing the rent that is due during the option's three-year term.
| Field | Value |
|---|---|
| Cost Category | RENT - BASE RENT |
| Period | Month |
| Start Date | 1/1/2030 |
| End Date | 12/31/2032 |
- View the lease in the Real Property / Leases / Lease Portfolio / Lease Classification Wizard.
- Based on the input data above, the Reasonably Certain Term for the lease is calculated as 13 years, and it is this 13 year period for which the program will generate the ROU Asset value, lease liability, and amortization schedule.
- Work through the questions of the Lease Classification Wizard, changing the options from Pending and moving through the various tabs. The program saves the lease classification data and regenerates a new amortization schedule.
Outcome
- Lease record representing the full term of the lease and the options.
- Option record describing the renewal.
- Recurring Cost record representing the schedule of costs of the extension option.
- Lease Amortization Schedule holding the schedule of amortized costs over the life of the lease.