Welcome to Sublease training for FASB 842, IFRS 16, and GASB 87 with VLU. This course is designed to give you a better understanding of the accounting treatment of subleases under FASB 842 within the Visual Lease Platform

By the end of this course, you should be able to:

• The difference between Master Lease, Overlease, and Sublease
• Understand the accounting treatment of subleases in FASB 842/IFRS 16
• Understand the accounting treatment of subleases in GASB 87

Please take a moment to review the agenda. To view a particular topic, jump to the corresponding timestamp.

Master Lease vs. OverLease

In this video we will discuss the differences between a Master Lease and an Overlease.

There are differences between a master lease, an overlease, and a sublease, and it is important to note the are not interchangeable words.

An overlease is a lease that is superior to a sublease, and a sublease is sometimes referred to as a subordinate lease. Together, they set up a chain of ownership.

For example, in real estate, there is a company who owns the land and the building on it. That company chooses to lease their assets to another party who becomes the subtenant. If permitted, the subtenant may have the right to sublease all or part of their asset to another entity. When they sublease a portion of their leased asset, they become the overlease. So the flow of ownership will look something like this: Fee holder (or the land and building owner) or the master lease, to a lease holder which is the overlease, to a sublease holder that is being sublet by the overlease holder.

All of them rank in terms of interest from one superior to another inferior.

**Master lease change to fee holder
** Fee Holder > Lease holder
**when subletting > change lease holder to overlease

Subleases are always part of an overlease.

As explained a moment ago, the overlease entity may not own the property but can lease some or all of their portion of the lease out all or part of the asset to another entity.

For example. Company A leases 6 floors of a 10 story office building. They can sublease out all 6 floors, or 1 floor, or any amount in between so long as they do not rent out more than the 6 floors they have the agreement for. The company that leases the 6 floors would be the overlease. Company B rents, say, 2 of those 6 floors would be the sublease and sub tenant.

A master lease, on the other hand, is a lease that encompasses more than one asset.

For example, a company can have master lease agreements with real estate developers with one legal document that includes properties in Iowa, Kansas, Kentucky, and Florida. They are all different real estate, but under a single lease agreement. Since the lease includes multiple assets it becomes the master lease

ACS 842

In this video, we will discuss how subleases are treated under FASB 842 standards.

When subletting under FASB 842, the standards indicate that the treatment is to book all leases, including subleases.

So, what does this mean? Because the overlease and sublease are two separate documents, with different parties, terms and conditions, they should be entered into the Visual Lease platform as two records. They are treated as two distinct accounting schedules. Neither ASC 842 nor IFRS 16 permits the sublease income to be treated as an offset to the overlease expense. The reason is simple; if the subtenant fails to make their payments, the tenant/sublessor is not relieved of their obligations under the overlease.
**PPt change (sublease to sublessor)

It is important to note, the company will need to make one of the two records an income record, and the other should be an expense record.

To set this up, we need to go to the contacts tab as there are some differences that need to be noted.

First, if it is an income lease, the company should put their own information in as the landlord and put their sub-tenant in the tenant field and then the payor.

Next, the company will need to navigate to the financials tab and open the Payees window. Here, the company will need to add the tenant from the contacts tab as the Payee, which will be listed here. We know the tenant is the payor, but this crucial step is important for the platform to create the appropriate financial records.

On the entries page, the category should show Base Rent Income and the record will need to be changed from “payable” to a “receivable” which will change this drop-down from “Payment-To” to, “Payment-From”, and will create the proper schedules.

Why base rent income? This is to be consistent with the underlying accounting that will need to be done, as well as remain consistent with the overall treatment under FASB 842. Under 842, sublease income is treated as income, not as a reduction in the overlease’s rent payments.

We have also added a one-time lease commission as noted here. This amount will be used when creating the schedule.

Once the entries are set up and consistent with the accounting treatment, the best practice is to create the lease accounting schedule to be associated with it.

To create the new schedule, we will need to create a new calculation on the lease accounting page.

Go through all the steps of the wizard to create a standard calculation.

In step 3, it is much simpler due to it being an income record, and only have the Accrued Rent Receivable field to complete. It is important to note that the accrued rent is the impact of straight lining on the schedule.

Just as the difference between the cash paid and straight-line rent expense is called “Deferred Rent”, the difference between cash receipts and straight-line rent income is called Accrued Rent Balance.

So, if there is a balance the company wants to bring forward, just enter it in the field in step 3. For this example, we will leave this a zero.

In step 4, ensure the Treatment is lease payment and the category reflects the Base Rent Income.

Also, check the box “Show Excluded”, then include the lease commission entry as a lease payment since it’s a one time payment and happens at the very beginning of the lease.

Once complete, click save and the platform will create the schedule.

Please note, there is no lease type test since the platform only supports operating leases from an income perspective.

Also note that with income leases, there are no transition or remeasurement options like you would normally see on an expense lease.

Instead, if for example, we wanted to shorten the lease by a year, we would have to create a new calculation with the same effective date, but for the end date, we will enter it a year earlier which is March 2025 instead of 2026. (14:00) Move throughuntil you get to step 3.

On step 4, check the box “Show Excluded”, then include the lease commission entry as a lease payment since it’s a one time payment and happens at the very beginning of the lease.

Under both ASC 842 and IFRS 16, operating income leases do not have an asset or liability associated with them the way expense leases do. In fact, if there is no straight-line rent impact, there is no impact on the balance sheet. Without that balance sheet impact, we therefore do not have a remeasurement option in Visual Lease for income leases in these standards.
That doesn’t mean that the leases never have to be modified, though. The lease term may be extended or shortened if the terms of the underlying lease change. The process for these changes is simpler than for expense leases. In fact, if there is no straight-line impact, there isn’t a need to change the schedule at all. To extend the term, just add on an additional schedule after the current schedule expires. This can be done ahead of time, just give the schedule a commencement date in the future. To shorten the term just end the schedule early using the End Calc function.

Note, though, that you should end the calculation in the final period. Using the End Calc function changes the status to Historical, even if the expiration date is in the future. That would preclude the appropriate journal entries from being posted in the final months of the lease.
If there is a straight-line impact to the income lease, then the schedule should be modified when the change is recognized.

Whether the change is an increase or reduction in the term or a change in the payment schedule, the process is the same. First, make the necessary changes throughout the lease record. Then end the existing calculation. It is usually cleanest to end the schedule on the last day of the month recognizing the change. Take note of the accrued rent receivable balance in the schedule being ended. You will need to enter that in the new schedule.

Now create a new schedule, starting on the next day (usually the first of the following month). In step 3 of the wizard, enter the accrued rent receivable. In step 5 of the wizard, be certain that only the lease payments and associated expenses within the new schedule dates. For example, the leasing commission we included in the earlier example is now outside the revised dates. That is not included in the new schedule; its impact is already factored into the accrued rent receivable balance. The resulting new schedule will have an adjusted straight-line rent, which amortizes the accrue rent receivable to zero at the new expiration date.

A quick note about IFRS 16. The process is very similar to that of FASB 842 since IFRS 16 includes public and private companies under the standards.

GASB 87

In this video, we will discuss how subleases are treated under GASB 87 standards.

GASB will be different that FASB since it will not treat subleases as straight lining exercise.

In the lease accounting window, when creating a new calculation, in step 3 of the wizard, we will see the field for “Initial Prepaid Income”, instead of “Accrued Rent Balance” like we saw in the FASB calculation. The reason for this field is that with GASB, they will have to set up balance sheet items and will need to know if income has come in ahead of time.

In step 5 of the wizard, we will have the ability to identify the lease commission as a lease payment, and will be reflected in the schedule.

Once the calculation is complete, we will see a present value of the lease payments, but you will also see something called deferred inflow. This is basically where the Right of Use would be for FASB. We also see a total ending receivable, which is where the Total Ending Liability would be in FASB. The treatment of these will be similar as FASB as well. The receivable will burn down based upon cash received, less the interest expense, and the deferred inflow is going to be based on the lease revenue, which is straight lined, less the deferred expense.

Related Leases: Connecting the Sublease

In this video, we will discuss the process of connecting a sublease to a main record through the related tab.

When a sublease is created, it will be affiliated with another lease record. Subleases always imply that there is a relationship between the sublease record and the main record and it can easily be managed in the Related Tab.

On the related tab, click Add Related to open the popup window.

From the dropdown, select a lease type relationship which can be an Overlease, Sublease, Master Lease ID, and Location ID. Then, enter the lease ID number to make the connection.

Please note, as you type the lease ID a list will populate. The more you type in the field, the narrower the list will become.

Once complete, click Link Record and you will see the related sublease connected to the lease we are currently working which is the overlease.

Please note, if we are working inside of the sublease and wish to connect it to the overlease, follow the same process, but instead of selecting “Sublease” like we did in the previous example, just select “Overlease” to connect it to the main record.

The result of making either type of connection is that it will create an independent record.

A question we may ask is “where do I see the reduction in my expense for the overlease?” The answer is you will not see this.

For example. If a sublease tenant defaults and stops paying the lease, the sublandlord is not relieved of obligations to the superior landlord. As a result, that liability cannot be reduced, the payments cannot be reduced, and 100% of the original payments to the superior landlord must still be made.

Key Takeaways

This concludes our video on Subleases for FASB 842, IFRS 16, and GASB 87.

Remember…

• Companies will need to have 2 separate records of the overlease and sublease.
• The related tab can quickly connect leases together as an overlease and a sublease
• Sublandlords over the overlease are still obligated to the superior landlord if a sublease tenant defaults, so payments cannot be reduced.
• It is important to understand the chain of ownership and the differences between a master lease and an overlease is important

Thanks for watching. Any questions, suggestions, or feedback can be sent to support@visuallease.com