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

Concept: Lease Costs and Option Costs

When calculating the ROU Asset value and the lease liability, the Lease Classification Wizard includes both costs from the cost tables and costs from the Options table. You should record a cost for a lease in only one of these locations.

Recurring Costs

Use recurring costs to specify exact amounts and schedules for dates. For instance, the Base Rent costs have the exact timing of the payments due. You can also enter Cost records for payments (e.g. first and last month) that were due in advance, for partial payments, etc.

Costs and Scheduled Costs

Use costs to specify multiple costs and exact timing of costs for a right-of-use option.

For example, if you have a Tenant Improvements allowance that you will draw $50,000 on the first day of the lease and $50,000 three months later, you can enter in two cost records to indicate that the Tenant Improvement allowances should be applied to different fiscal periods.

As another example, suppose you have unamortized Initial Direct Costs that FASB 842 allows you to add to the ROU Asset value upon transition. You can add a cost record representing this initial direct cost to occur on the Commencement Date (that is on the date you apply the new lease treatment).

Estimated Costs in Option Records

Use right-of-use options to specify good faith estimates on costs that are reasonably certain. When establishing your lease, you typically enter right-of-use options in the Options table. Later, when the option is exercised, you can set Reasonably Certain to be Exercised? to Yes. For your convenience, the Lease Classification Wizard's Step 3 tab provides access to the Options records so that you can enter or edit right-of-use options directly from the Wizard. You can then recalculate amortization to see if the adjusted option costs affect the ratio of initial liability.

When completing the Option records, follow these guidelines for entering the option's cost information:

Consider the following examples:

Entering Costs

Using the Costs tables:

Using Option records:

Reference

The program applies all costs in a consistent fashion. If you are familiar with the standard Archibus cost features, you see that accounting for different lease conditions is a matter of changing the Cost Category and the Date Due. For Recurring Costs, you can also change the recurrence period (e.g. to generate yearly or monthly costs) and apply an index (e.g. CPI). No special features are needed to enter costs for the Extension for Lease Accounting.

Type of Cost Option Type Recorded as a Cost with a Cost Category of Can this type of cost be Estimated with an Option Record?
Base Rent for Lease <N/A> RENT - BASE RENT No (as there is no associated option)
Initial Direct Costs <N/A> LEASE - INITIAL DIRECT COSTS No (as there is no associated option)
Tenant Improvements IMPROVEMENTS LEASEHOLD IMPROVEMENT

Yes (but the Cost table is recommended, as it is more flexible for recording improvement costs).

Automatic Transfer of Ownership AUTOMATIC TRANSFER OF OWNERSHIP LEASE - OTHER AMORTIZED COSTS (e.g. for transfer fees) Yes (as an alternative for fees)
Non Amortized Costs (Security, Taxes, Maintenance, etc.) for gross leases <N/A> Cost with any other Cost Category No (since there is no option and these costs are not amortized)

Lease Renewal

RENEWAL RENT - BASE RENT for additional periods of lease

No (because a recurring rent schedule is needed for capturing the different payments and fiscal periods)

Option to Buy

OPTION TO BUY LEASE - OTHER AMORTIZED COSTS Yes (for the cost of the buyout option)
Reassignment REASSIGNMENT LEASE - OTHER AMORTIZED COSTS for fees

Yes (for any fees to owner for reassignment)

Renew Longer Term (ad hoc extension of current lease) RENEW LONGER TERM RENT - BASE RENT, for additional periods of lease No (because a recurring rent schedule is needed for capturing the different payments and fiscal periods)
Expansion or Contraction

EXPANSION

CONTRACTION

RENT - BASE RENT – for adjusted rent to cover new area and payments

LEASE - OTHER AMORTIZED COSTS - for fees or other costs that can be amortized over the entire term of the lease.

No (for the rent since a schedule is required)

Yes (for any fees, but it's recommended to keep all costs together in the Costs table)

Early Termination EARLY TERMINATION

RENT - BASE RENT – for adjusted rent to cover shorter lease period

LEASE - OTHER AMORTIZED COSTS - for fees or penalties

No (for the rent since a schedule is required)

Yes (for any fees, but it's recommended to keep all costs together in the Costs table)