Onboarding existing Operating Lease contracts (ASC 842)
ASC 842 Operating leases must calculated as a straight-lined expense (from which is deducted the periodic interest of the lease liability to calculate the periodic depreciation expense of the right-of-use asset).
The amount of the straight-lined lease expense depends on the last remeasurement of the lease liability.
Therefore, forecasted lease payments are not sufficient to reassess the straight-lined lease expense for the remaining term of the onboarded existing lease.
ASC 842 also doesn’t require the lease liability of an Operating lease to be remeasured when the index on which depends a variable lease payment evolves.
The difference between the amount of variable lease payment at which the lease liability has been measured, and the amount of variable lease payment reflecting the new index is recognized as variable lease cost.
The amount for a variable lease payment depends on the last remeasurement of the lease liability.
Therefore, current lease payments are not sufficient to reassess the measurement of the lease liability and continuing in the recognition of the appropriate variable lease cost.
For those reasons, onboarding existing ASC 842 Operating leases requires three information to be provided in addition to the ones required for a Finance lease:
1. The amount of the variable lease payment reflecting the last value of the index they are based on.
2. The amount of the variable lease payment with which the carrying value of the lease liability is measured.
3. The amount of the straight-lined lease expense.
As for Finance leases, the amount of the variable lease payment reflecting the last value of the index they are based on will be imported in the field ‘Amount’ of the Lease amount contract line.
When the current amount of the variable lease payment reflecting the last value of the index they are based on differs from the amount of the variable lease payment with which the carrying value of the lease liability is measured, the later must be provided in the field ‘Offset amount’.
The amount of the straight-lined lease expense must be provided in the field ‘Offset lease amount’.
Example: lease that has been indexed before onboarding
8 years lease classified as ASC 842 Operating lease, with an annual rent of $120,000 paid on a quarterly basis in advance, IBR of 2.16. The contract specifies that the rent amount for each year will increase on the basis of the increase in the Consumer Price Index.
Initial measurement of the lease liability is $884,781.53, reflected on the right-of use asset.
The straight-lined lease expense is of $10,000.00
On November 12 of year 1 it’s notified that at the beginning of year 2, the rent amount is increased to $120,124.52 to reflect the new value of the CPI. The rent increase is entered in the system at that date, effective 01/01/Y01. The lease liability is not remeasured.
On November 14 of year 2 it’s notified that at the beginning of year 2, the rent amount is increased to $120,218.89 to reflect the new value of the CPI. The rent increase is entered in the system at that date, effective 01/01/Y01. The lease liability is not remeasured.
The lease is onboarded onto Planon Lease Accounting Solution effective beginning of year 3.
Carrying values at the end of year 2 are the following:
• Lease liability: $677,558.65
• Right-of-use asset: $677,558.65
• Accumulated depreciation: $207,222.88
The straight-lined lease expense is still of $10,000.00.
The variable lease payment amount based in which the lease liability is calculated is the initial one, $120,000.00. It’s current value, based on which the payments are made, is $120,218.89.
The lease has to be created in Planon Lease Accounting as regular lease.
A specific attention regarding the set up of the rent amount.
Field | Value |
|---|
Amount | 120,218.89 |
Amount per | Year |
Payment frequency | 3 Months (or ‘1 Quarter’) |
The onboarding values have to be entered in the Offset fields .
Field | Value |
|---|
Offset - liability | 677,558.65 |
Offset transition ROU | 677,558.65 |
Offset - accumulated depreciation | 207,222.88 |
Offset - straight-lined lease expense | 10,000.00 |
Offset lease amount | 120,000.00 CAUTION | The amount must be entered in regard of the one that has been entered in the field ‘Amount’, i.e. in this example a yearly amount. |
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