Transcription:

Welcome to training with VLU. This course is designed to cover the basics behind creating a Termination remeasurement calculation 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 about:

• The location and importance of key lease accounting inputs
• How to create a termination remeasurement for an existing calculation.
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.
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 will serve as the default start and end dates to your lease accounting calculations. The values, shown here, on the General Tab are the legal definition of those terms. The accounting definition may give different dates, which can be adjusted later when creating the record.

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. 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 leases 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 take a look at remeasurement calculations. There are various types of remeasurement calculations you can generate within the lease accounting module, but for this video, we will focus on the termination remeasurement calculation.
A partial termination is the type of remeasurement required when the use of a portion of the asset is ended early. A partial termination calculation starts on the date that portion of the asset is no longer used, and so generates the schedule and journal entries for the remaining used portion.

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, or by clicking here to edit, remeasure, or 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.

Before we walk through creating a partial Termination, a calculation must already exist on the lease.
To get started, find the calculation from the list you wish to terminate, and click here…to access the action menu. Select Create Remeasurement Calc from the list.

The Create Remeasurement Calculation window will open.

Select Termination as the type of remeasurement and then select Partial as the Type of Termination. It is important to note that If you have any termination penalties for a partial termination, changes to remaining lease payments as a result of a termination, or you are required to report the Probable Amount Owed at End of Lease under Residual Value Guarantee, you must create or edit financial entries for them before creating the calculation. When creating a partial termination, the Method of Termination, Effective Date, and End Date must be specified.

The Basis of Liability Change method calculates the reduced liability and ROU asset with data already available in the platform. The Basis of ROU Asset Reduction method calculates the reduced liability and ROU asset using the percentage you enter here. I will return to the Basis of Liability Change for this example.

Click Create Remeasurement.

You will see the Calculation Wizard appear which will walk you through each step of creating a Termination.

Since this is a remeasurement of an existing calculation, the accounting standard has already been selected and cannot be changed. Therefore the standard drop-down list is inactive.
You will, however, need to 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 that 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.
Some statuses cannot be assigned to a remeasurement calculation, depending on the status of the predecessor calculation. The platform will tell you if the status is valid…here
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. We recommend that you name your calculation to make it easily distinguishable. In this case, we’re just using the default name.
Since this is a termination, the assumed end date is going to be the expiration date that was selected in the previous window.

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.

Once your selections are made, click Save.

Step 3 of the wizard is where we get the opportunity to input various a couple of 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 due rent payment under the leaseremeasurement and thereafter until the entire prepaid amount is covered.

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.

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.

Let’s go ahead to step 4, where you enter the discount rate. Your platform can hold a schedule 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. This is rare, but 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). 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.

I can check the Show Excluded box to see all the other payments that are associated with the lease. While I can override the default by changing the selection, I’m just going to keep the payments entries and treatment types consistent 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.

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 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 zero.

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” you’re going to 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.

A full termination is the type of remeasurement required when the entire contract is ended earlier than the expiration date.

For full terminations, you may specify a termination penalty value directly in the wizard.

For full terminations, only the End Date must specified.

Please note that Upload Schedule will not work when doing a full termination.

(When describing what happens when you save the calc) Note that the termination has replaced the original calculation and the end date is what was specified in the wizard.

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

Remember…

• A calculation must exist on the lease in order for a termination remeasurement calculation to be completed.
• That if a contract or portion of an asset is ended early, a termination remeasurement calculation must be completed.
• If there are any penalties from termination, changes to lease payments or are required to report the probable amount owed at the end of the lease, you must create or edit financial entries before the remeasurement calculation is completed.

Thank you for attending this course. Any questions, suggestions, or feedback may be sent to support@visuallease.com.