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.

  1. Invoke the Portfolio Edit Wizard or the Lease Portfolio Console. Both are available on the Navigator at Real Property / Leases / Lease Portfolio.
  2. 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
  1. 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
  1. 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.

  1. 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
  1. 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