Transcription:

Welcome to training with VLU. This course is designed to cover the basics behind creating new calculations in Visual Lease’s lease accounting module. Our goal is to ensure you have what you need to gain compliance with the newest Accounting standards published by FASB, IASB and GASB.

By the end of this course, you will learn:

• The various inputs of a lease accounting calculation, and how to create a Lease Schedule and journal entries from these inputs.

 

Please take a moment to review the agenda. If you are looking for a specific topic, feel free to navigate to the corresponding timestamp.

To get accurate information out of Visual Lease, we have to ensure we put complete and accurate data into it. That is especially true for lease accounting calculations, which pulls inputs from various fields within your lease record. The integrity of those inputs is critical to producing accurate calculations. Let’s review some together.

Before we get started it is important to note that the options shown on this screen may be different based on your configuration.

First, let’s visit the General Tab. In particular, the Record Type, Commencement and Expiration Dates are key inputs.

The Record type will establish whether this is treated as a Lessor or Lessee record, and may also affect other treatments depending on your configuration.

The Commencement and Expiration Dates will serve as the default start and end dates to your lease accounting calculations.

Make sure to review and confirm these fields before building your calculations.

Now, let’s take a brief look at your financial entries. Let’s click on the Financials Tab.

Underneath that, you’ll see a series of sub-tabs, you’ll look for Entries.

Financial entries are a key input into your accounting calculation. At a minimum, this could include base rent, but may include other items, including but not limited to end of lease costs.

Finally, let’s take a look at your lease options. You can find these in the Clauses tab.
To navigate here, select Edit from the Options List, open the Option Details, and select Edit from the action menu here.

If they are marked as “likely to be Exercised”, they will impact the term of your lease accounting calculations. Remember, though, we are entering new calculations in this example. The threshold for “Likely to be Exercised” is fairly high, so it is unlikely to be met at inception unless the original lease term is quite short.

Now that we reviewed key information throughout the lease record, let’s look at how to generate a lease accounting calculation from the Lease Accounting Module.

It can be found under the Financials tab, if you click on Lease Accounting. This is where all of your lease accounting calculations will be created and stored.

You can find all of your created and stored calculations by selecting the Financials tab and then selecting lease accounting
Let me show you around. All lease accounting actions can be completed by using the Create Calculations button on the top-right of the screen, and the Kebab in each row of a calculation.

Or by clicking here to edit, remeasure, and perform other actions for existing calculations.
But before we explore that further, let me show you the other areas of this module.

Beneath that, the screen breaks into various sections such as the lease schedule and journal entries summary for the selected calculation. Additionally, in the left sidebar, the Accounting Information section contains basic lease information, that will impact all calculations on the lease,

Once you create lease accounting calculations, additional actions will become available. First, though we need to create a calculation.

Now, let’s walk through how to create a FASB 842 lease accounting calculation. Once you understand how this works, you will easily be able to explore more complex scenarios and calculations in this module.

To get started, click Create Calculations.

As you can see, you can create a new calculation, or you can create a transition calculation. A new calculation runs from the commencement date of the lease. A transition calculation is what you’ll create when the lease already exists on your books under the former accounting standard. In this course, we will focus on creating a new calculation from commencement.

For now, let’s select New Calculation. You will see the Calculation Wizard appear which will walk you through each step of creating a calculation.

You will see the Add New Calculation window open. The first step is to specify the accounting standard I wish to apply. In my configuration, I can apply either the old or new standards for all three major standards boards. For this example, we’ll use the FASB 842 standard.
Then, you will specify the calculation status.

Pending status is typically what I recommend using at first, because that gives you the ability to review the lease schedules and journal entries before you activate the calculation. As a pending calculation, data will not flow through to your Accounting Feed, so you can feel confident that your calculation is set up correctly. You can then easily make it active.
Active is used to identify live calculations, which will enable them to flow through to your ERP system.

We also have the ability here to create hypothetical calculations. If you’re looking at various scenarios and want to do some “what if” analyses, but don’t have any intention of those ever being live calculations, hypothetical is a good way to segregate those calculations.
There is also an option to choose a retrospective period calculation, but with the FASB’s updated guidance that opened up modified retrospective to virtually all companies, the platform’s functionality on this is effectively disabled.

Use the Schedule Upload checkbox to enable you to upload precalculated schedules (using a provided template) pertaining to rare scenarios that Visual Lease currently does not calculate, so they can be compared to Visual Lease-calculated schedules. You also have the option to upload the corresponding journal entries in the same template or have journal entries generated from the provided schedule. The uploaded schedule and journal entries will flow to the appropriate GL feeds. When selecting this option, you will have the opportunity to upload the template in step 6 of the wizard.

Once you make your selections, hit next to arrive at the next step of the wizard.
Step 2 will allow you to specify a calculation name and period. We recommend that you name your calculation to make it easily distinguishable. In this case, we’re just using the default name. For this example, I will simply name the calculation after the standard itself.

The platform will use the commencement date and the expiration date as the start and end default values. The commencement date on the General Tab is the LEGAL commencement date, though. Please note that the accounting commencement date is the date of possession, which is likely could possibly be different than the legal commencement date. If this is the case, you will need to override that default value with the possession date.

Always use the appropriate date for your schedules depending on the circumstances of the lease. The assumed end date is going to default to the expiration date of the lease, which is stored on the General tab.

Check “send to accounting feed” if you want the information sent to the ERP system when the status is moved to Active. Prorate Lease Payments typically will not have an impact on your numbers, but it applies in the rare event of the cash payment and accounting schedule prorating a period over different durations. Unchecking this box would prevent a double proration.

Step 3 of the wizard is where we get the opportunity to input various values that are not housed in other areas of the lease record, that will have an impact on your calculation.
For example, here you can bring in an initial prepaid rent. Initial Prepaid Rent entered here will be applied to the first period’s payment and thereafter until the entire prepaid amount is reached.

You only enter a Probable amount Owed at the end of the lease if you have some reasonable expectation of that amount. You might have some expectations at commencement, but it is much more likely you will not have any level of certainty until you get closer to the end of the term.

Remember that Residual Value Guarantees are handled differently under the new standards. If the guarantee exists, enter it in the RVG box.

In addition, note that you have the ability to indicate whether or not lease payments are consistently prepaid one month prior. If you’re in a situation where you’re sending paper checks, and you mail them before the end of the prior month to ensure that it reaches the landlord by the first, you can go ahead and select Yes.

Any unamortized lease incentives and initial direct costs are also entered here. Everything in these new accounting schedules standards is based off of the time value of money. If you’re accelerating those payments by one or even a few months that’s going to have an impact on those assets and liability values; go ahead and take advantage of that.

Let’s go ahead to step 4, where you enter the discount rate. Your platform can hold a schedule table of discount rates based upon organization, country, currency, lease term, etcetera. The platform will automatically look at all of that information and then select from the table the appropriate rate. But, you don’t have to use the number that the platform has come up with, you could select something different. If you do override the populated default rate, the platform will ask you for an override reason. We’re always building an audit trail for any time that you’re making a variation from the standard or default treatment. I’m going to just take us back to our default rate.

Sometimes, a lease may explicitly state a discount rate. This is rare, but you may see this happen with vehicles or equipment. If so, you must enter that defined rate here.

In step 5, we select which financial entries are going to be included—and how they are going to be included—in the calculation.

Each entry listed here will be ones that exist on this lease within the start and end date of this calculation (specified in Step 2). Those flagged as Lease Payment will obviously be treated as lease payments, the basis for the schedule; at least one such entry is required. I also have a payment that’s being treated as a variable expense. It will flow through to my disclosure statements, but it is not part of the basis of calculating the asset and liability schedules.

By default the system will only show those financial entries that factor into accounting schedules or reporting, but I can check the Show Excluded box to see all the other payments for this lease, which are set to be excluded from this calculation as a default.

While I can override the default by changing the selection, I’m just going to keep the payments entries and treatment types consist with my defaults. So, I accept this and move on to the final step.

Step 6 is the lease type test. Here’s where, in the FASB 842 world, we apply the lease type test to determine whether it’s an operating or a finance lease. Questions one, two, and five are subjective. You must make the determination whether it’s a yes or no and provide a reason why you selected yes.

Questions three and four are objective value questions: 75% of the useful life or NPV more than 90% of the fair market value. These are automatic calculations. These values are adjustable, consistent with the revised guidance under ASC 842.
Please note, for IFRS16 and GASB87 there will be fewer questions to answer, since all such calculations are considered Finance, unless you take certain practical expedients. You can learn more about this in our VLU course on Short Term/Low Value leases.

We should spend a minute here talking about fair market value and useful life. The useful life for this lease is 39 years because this is a real estate lease. We use 39 years because that’s the amortization period for real estate in the US Tax code. You may have set up other default values for other Record Types. Regardless of the default value, you should enter the life specific to the asset. It’s important for the Lease Type Test, and also used for determining the amortization of assets purchased at the end of the lease.

In a real estate transaction, you’re often going to leave the Fair Market Value field blank. The rule is if it’s difficult to ascertain the fair market value of the distinct asset, you don’t have to fill that in. For example, if this were an office lease, say it’s for the 50th floor of the Empire State Building, you can’t just buy the 50th floor. You would have to buy the whole building. I can’t determine what the value of that single floor of the building is, so I would just leave this fair market value here as a blank or 0.

If any of the five questions answer YES, the lease is determined to be a Finance Lease, or a Capital Lease under one of the older standards. It is possible to override the calculated value for these questions, and also possible to just override the type. For audit trail purposes, any time you do so, you will be asked for an Override Reason.

Once this is saved, you will see the rest of the sections on the Lease Accounting Page appear.

The details of this calculation appear in the Calculations section.

If I select “Show More” I’ll see all the inputs that went into creating this individual schedule.

You can also change the view by clicking on the pivot icon, here. This will switch the columns and rows giving you a list-type view that will not require as much horizontal scrolling.

Please note: The calculations section will default to the list type view.

In this view, the action menu will be located here, and is where you will be able to perform actions such as create a remeasurement calculation.

If I select “Show More” I’ll see all the inputs that went into creating this individual schedule.

The lease schedule created will contain all the necessary detail including the lease payments, straight line rent, right of use asset, amortization, interest and liabilities.

The schedule is then the basis of creating the Journal Entry Summary at the bottom of the page. The Journal Entries provide the linkage to feed these details to your ERP system.
Please note, though, that the Description given here is NOT the GL account where the value will be posted, it is merely a system description. During your platform configuration, mappings were created which consider the description, the record type, the accounting standard and lease type, and direct the values to the appropriate accounts in your General Ledger.

You can filter your journal entries by year by clicking here and selecting a year, or multiple years, or by entering a date range.

GASB 87 calculations are similar to FASB 842 and IFRS16 with a few caveats in the calculation wizard. This video will demonstrate how to create a new GASB 87 calculation in the Visual Lease platform.

You can find all of your created and stored calculations by selecting the Financials tab and then selecting lease accounting.

Let me show you around. All lease accounting actions can be completed by using the Create Calculations button on the top-right of the screen, and the Kebab in each row of a calculation or by clicking here to edit, remeasure, and perform other actions for existing calculations. But before we explore that further, let me show you the other areas of this module.

The screen breaks into various sections such as the lease schedule and journal entries summary for the selected calculation. Additionally, in the left sidebar, the Accounting Information section contains basic lease information, that will impact all calculations on the lease.

Once you create lease accounting calculations, additional actions will become available. First, though we need to create a calculation.

As you can see In General, you can create a new calculation, or you can create a transition calculation.

However, It is important to note, all GASB 87 calculations must be a NEW CALCULATION. If you happen to select Transition, the option to select GASB 87 as an accounting standard will be unavailable.

You will see the Add New Calculation window open. The first step is to specify the accounting standard you wish to apply. For this example, we’ll use the GASB 87 standard.
Then, you will specify the calculation status.

Pending status is typically what I recommend using at first, because that gives you the ability to review the lease schedules and journal entries before you activate the calculation. As a pending calculation, data will not flow through to your Accounting Feed, so you can feel confident that your calculation is set up correctly. You can then easily make it active.
Active is used to identify live calculations, which will enable them to flow through to your ERP system.

We also have the ability here to create hypothetical calculations. If you’re looking at various scenarios and want to do some “what if” analyses, but don’t have any intention of those ever being live calculations, hypothetical is a good way to segregate those calculations.
There is also an option to choose a retrospective period calculation, but this has no function for GASB.

Once you make your selections, click next to arrive at the next step of the wizard.

Step 2 will allow you to specify a calculation name and period. We recommend that you name your calculation to make it easily distinguishable. In this case, we’re just using the default name. For this example, I will simply name this after the standard.

For the GASB 87 accounting standard, it is important to note that if the lease commenced prior to your GASB 87 adoption date, you will should override the Start Date field with the GASB 87 adoption date. For leases that commenced after the adoption date, leave the Start Date as is.

Check “send to accounting feed” if you want the information sent to the ERP system when the status is moved to Active. Prorate Lease Payments typically will not have an impact on your numbers, but it applies in the rare event of the cash payment and accounting schedule prorating a period over different durations. Unchecking this box would prevent a double proration.

Step 3 of the wizard is where we get the opportunity to input various values that are not housed in other areas of the lease record, that will have an impact on your calculation.
For the GASB 87 accounting standard, it is important to note, that in this step, IF your lease commenced prior to your GASB 87 adoption date, select Yes from the Transition Drop-down. If it commenced after the adoption date, leave the Transition field as NO.
Please note: If the transition drop-down is selected as YES then Initial Pre-paid Rent, Initial Unamortized Lease Incentives, and Initial Unamortized Direct Costs will become INACTIVE, and the corresponding fields labeled “at transition” will be editable.

These fields include:

• Prepaid Rent at Transition which is the amount pre-paid as of the transition date and will be applied to the first due rent under the lease and thereafter until the entire prepaid amount is reached

• Unamortized Lease Incentives at Transition and Unamortized Direct Costs at Transition are amounts paid or received before the start of the schedule. Values entered in these fields should be the unamortized portion as of the transition date, not the full amount.

• Deferred Rent Balance at Transition is an existing balance brought in from the straight-line rent schedule. This field is critical to establishing the proper straight-line rent amount.

I’m now going to set the Transition field option back to “No”.

You only enter a Probable amount Owed at the end of the lease if you have some reasonable expectation of that amount. You might have some expectations at commencement, but it is much more likely you will not have any level of certainty until you get closer to the end of the term.

Remember that Residual Value Guarantees are handled differently under the new standards. If the guarantee exists, enter it in the RVG box.

In addition, note that you have the ability to indicate whether or not lease payments are consistently prepaid one month prior. If you’re in a situation where you’re sending paper checks, and you mail them before the end of the prior month to ensure that it reaches the landlord by the first, you can go ahead and select Yes.

Everything in these new accounting schedules standards is based off of the time value of money. If you’re accelerating those payments by one or even a fews months that’s going to have an impact on those assets and liability values; go ahead and take advantage of that.

Please note that if the Transition dropdown is selected as “No,” these corresponding transition fields we just discussed will be unavailable.

Let’s go ahead to step 4, where you enter the discount rate. Your platform can hold a schedule table of discount rates based upon organization, country, currency, lease term, etcetera. The platform will automatically look at all of that information and then select from the table the appropriate rate. But, you don’t have to use the number that the platform has come up with, you could select something different. If you do override the populated default rate, the platform will ask you for an override reason. We’re always building an audit trail for any time that you’re making a variation from the standard or default treatment. I’m going to just take us back to our default rate.

It’s rare, but a lease may explicitly state a discount rate. You may see this happen with vehicles or equipment. If so, you must use that defined rate and enter the information here.

In step 5, we select which financial entries are going to be included—and how they are going to be included—in the calculation.

Each entry listed here will be ones that exist on this lease within the start and end date of this calculation (specified in Step 2). Those flagged as Lease Payment will obviously be treated as lease payments, the basis for the schedule; at least one such entry is required. I also have a payment that’s being treated as a variable expense. It will flow through to my disclosure statements, but it is not part of the basis of calculating the asset and liability schedules.

Be default the system will only show those calculations that factor into accounting schedules or reporting, but I can check the Show Excluded box to see all the other payments set to be excluded from this calculation as a default.

While I can override the default by changing the selection, I’m just going to keep the payments entries and treatment types consist with my defaults. So I accept this and move on to the final step.
In step 6, for GASB 87 standards, enter a useful life in years or months (if applicable). We default useful life to 39 years as that is the current depreciation period for commercial real estate under US tax law. You should select whatever is appropriate for your asset. If it is exactly 39 years and 0 months, enter 0 in the Useful Life (Months) field.

Answer if there is a Bargain Clause on the lease, which is defaulted to no. If Yes is selected, then the leased asset is amortized over the useful life of the asset and the lease term is not used for amortization purposes.

Once this is saved, you will see the rest of the sections on the Lease Accounting Page appear.

The details of this calculation appear in the Calculations section.

If I select “Show More” I’ll see all the inputs that went into creating this individual schedule.

You can also change the view by clicking on the pivot icon, here. This will switch the columns and rows giving you a list-type view that will not require as much horizontal scrolling.

Please note: The calculations section will default to the list type view.

In this view, the action menu will be located here, and is where you will be able to perform actions such as create a remeasurement calculation.

If I select “Show More” I’ll see all the inputs that went into creating this individual schedule.

The lease schedule created will contain all the necessary detail including the lease payments, straight line rent, right of use asset, amortization, interest and liabilities.

The schedule is then the basis of creating the Journal Entry Summary at the bottom of the page. The Journal Entries provide the linkage to feed these details to your ERP system.
Please note, though, that the Description given here is NOT the GL account where the value will be posted, it is merely a system description. During your platform configuration, mappings were created which consider the description, the record type, the accounting standard and lease type, and direct the values to the appropriate accounts in your General Ledger.

You can filter your journal entries by year by clicking here and selecting a year, or multiple years, or by entering a date range.

This concludes our course on the basics behind building a lease accounting calculation. We’ve reviewed the data required to create your schedules, and how to create a new calculation within the lease accounting module.

Thank you for attending this course. Any questions, suggestions, or feedback may be sent to training@visual lease.com.