·         the various inputs of a lease accounting calculation

·         How to create a transition for an Operating Lease

·         How to create a transition for a Capital Lease

After completing you transition process, please also view the Lease Accounting: New Calculation course, where we cover the process of creating new calculation in the accounting module within Visual Lease.

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

Record types 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 usually 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.

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.  As a minimum you must enter data from your transition date forward, but we recommend a full recounting of the financial history as a complete audit trail.

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.

The values in the middle are initially set by Record Type but can be adjusted to reflect the specifics of this individual asset.  Note that this information is not date specific, though.  Enter the initial values here.  Later, when we create a calculation, you will see where this data is updated to reflect conditions at that time.

To get started, click Create Calculations.

Select the check boxes next to the calculations to include in the transition.

Your account might instead have calculations created with the legacy Straight-Line Rent module that you need to transition. If so, select the Straight-Line Rent Calculations button and select the calculations that appear.

Another possible situation is that you have no existing calculations in Visual Lease. You can then create an unlinked transition calculation by not selecting any calculations here.

Then, you will specify a transition date.

Please note: Your platform may be preconfigured to prevent this date from being changed,.  Since this is a database used for training, I have permitted it to be changed. Changing it may change the list of available calculations. If you don’t have that data in Visual Lease already, you will have the ability to enter any data later.  You do not have to recreate your FASB 840 or IAS 17 schedules in order to create a transition calculation.

Next, specify the accounting standard you wish to transition to. Since I’m transitioning an existing 840 calculation, the platform has preselected 842.

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.

The Use Schedule Upload checkbox  enables 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, select next to arrive at the next step of the wizard.

The platform will use the Transition date as the start date.  The expiration date will be the end date, unless any options are set as Likely to be exercised.

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.

The fields shown here, and the ability to edit them, depend on what has already been set in the wizard and the calculations being transitioned, if any.

Since we are transitioning an 840 Operating calculation, the Opening Deferred Rent Balance shows the final deferred rent balance just before the transition date.  This is brought in from the existing schedule, which is critical to establishing the proper straight-line rent amount.

You only enter a Probable amount Owed at the end of the lease if you have some reasonable expectation of that amount.  I’ll cover in more detail when we cover transitioning Capital Leases.

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

Other values to include are typically amounts paid or received prior to the start of this schedule.

Initial Prepaid Rent entered here is not any original prepaid rent, but the amount prepaid as of the transition date, and will be applied to the first period’s payment and thereafter until the entire prepaid amount is reached..  Opening Accrued rent balance is any rent due from a prior period that will be paid after transition, but that catch up payment will need to be in your financial entries.

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.

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 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 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 payment entries and treatment types consistent with my defaults. So I accept this and move on to the final step.

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 there will be fewer questions to answer, since all such calculations are considered Finance.

Let’s go ahead and save this transaction.

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.

The liability balance under 840 included the total amount of the residual value guarantee so that must get brought forward here.

When creating the transition, you can fill-in the residual value guarantee here, just like you would in an operating lease, but the results are going to be different.

The result is going to be a lease which does not completely amortize at the end of the term. Instead, there will be a balance left. This balance is the residual value guarantee.

It is expected that you will have that discrepancy at the transition. Our accounting partners advise keeping this balance on the books until you have some certainty about any final payment.

At some point in the future, you will need to recognize whether you’re likely to pay that amount or not, and perform a remeasurement at that future date, once you have some certainty

Remember…

·         Your system may be preconfigured to prevent transition dates from being changed

·         Capital Leases had liability and asset balances under the old standards.  This means they have different data to bring forward into a transition calculation

·         Our accounting partners advise leaving the residual value guarantee field blank until you have some certainty as to what amount might be paid, if any

·         Finally, remember to also view the Lease Accounting: New Calculation course, where we cover the process of creating new calculations in the accounting module within Visual Lease.