Table of Contents

Administration | Users

User Roles

Below is the list of user roles and their associated permissions.

Administration | Reporting Entity

Reporting Entity

Reporting Entity is the financial reporting entity for which you produce financial statements. At your organization, a reporting entity might be known as a company, business unit, subsidiary, fund, institution, organization or office. 

In Administration/GL Accounts, each reporting entity has its own set of GL Accounts. 

There is no hierarchy for reporting entities in LeaseCrunch; instead, users select the reporting entities to combine for reporting at My Leases and each combination can be saved as a Custom View.

Accounting Standard 

Selecting an Accounting Standard at Administration/Reporting Entity of either FASB ASC 842 or IFRS 16 is solely informational for users (i.e., the software does not behave differently based on this selection).

If a lease needs to be reported under both FASB ASC 842 and IFRS 16, we recommend that you enter the same lease twice if you would encounter any of the following situations:

• Initial Application Dates. Depending on the organization, different initial application dates (e.g., 1/1/19 for IFRS, 1/1/22 for FASB) could drive differences in calculations:

  • Different discount rates

  • Different existing balances under previous accounting guidance affecting initial ROU Asset value

  • Different transition policy election FASB/IFRS could impact calculations.  See Accounting Policy templates at Administration/Policies.

• Operating Leases. IFRS 16 excludes Operating leases. A lease classified as operating under FASB ASC 842 would be a finance lease under IFRS 16.

• Footnote:  Selecting the IFRS 16 footnote excludes operating leases from the export. 

• Minimum Exemptions. IFRS has a $5,000 exemption limit that has no corollary for FASB.

• Discount Rate. For nonpublic companies, the FASB allows for the risk-free rate election for the discount rate and IFRS does not.

• Lease Revisions. If a lease modification or a lease remeasurement resulted in a change in classification under FASB from finance to operating lease, the revised lease would have to be entered as a finance lease to properly report under IFRS 16.

• Index-Based Payments. Lease payments based on an index need to be recorded as a remeasurement under IFRS and a variable expense under FASB, although this might be immaterial.

Initial Application Date:

Summary Guidance:  The Initial Application Date is the beginning of the earliest period presented in the financial statements in which the lease standard is first applied. 

An election can be made to not restate prior periods.

For a non-public company not restating prior periods and with a December 31 fiscal year end, the Initial Application Date is January 1, 2022.

For a non-public company not restating prior periods and with a June 30 fiscal year end, the Initial Application Date is July 1, 2022.

Download this file to calculate your initial application date: IAD Calculator.xlsx

Detailed Guidance: To select your Initial Application Date, you must first determine your Effective Date.  U.S. private companies have an Effective Date for fiscal years beginning after December 15, 2021, while U.S public companies and international companies (under IFRS 16) have an Effective Date for fiscal years beginning after December 15, 2018.  Companies have 2 options for an Initial Application Date:

Option 1:  Apply lease standard only to the most recent period without restatement of prior periods presented.  Thus, Initial Application Date would be the beginning of the most recent period presented in the financial statements (i.e., the same as the Effective Date).  

Option 2:  Apply lease standard to all prior period(s) presented in the financial statements; thus, Initial Application Date would be the beginning of the first period presented (i.e., prior to the Effective Date).  

Example:  Company with 1 prior period presented.

Technical Guidance (FASB: 842-10-65-1): The following represents the transition and effective date information related to Accounting Standards Update No. 2016-02, Leases (Topic 842):
a. A public business entity, a not-for-profit entity that has issued or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market (with an exception for those 8 entities that have not yet issued their financial statements or made financial statements available for issuance as described in the following sentence), and an employee benefit plan that files or furnishes financial statements with or to the U.S. Securities and Exchange Commission shall apply the pending content that links to this paragraph for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A not-for-profit entity that has issued or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market that has not yet issued financial statements or made financial statements available for issuance as of June 3, 2020, shall apply the pending content that links to this paragraph for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Earlier application is permitted.

b. All other entities shall apply the pending content that links to this paragraph for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application is permitted.

c. In the financial statements in which an entity first applies the pending content that links to this paragraph, the entity shall recognize and measure leases within the scope of the pending content that links to this paragraph that exist at the application date, as determined by the transition method that the entity elects. An entity shall apply the pending content that links to this paragraph using one of the following two methods:

1. Retrospectively to each prior reporting period presented in the financial statements with the cumulative effect of initially applying the pending content that links to this paragraph recognized at the beginning of the earliest comparative period presented, subject to the guidance in (d) through (gg). Under this transition method, the application date shall be the later of the beginning of the earliest period presented in the financial statements and the commencement date of the lease.

2. Retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment, subject to the guidance in (d) through (gg). Under this transition method, the application date shall be the beginning of the reporting period in which the entity first applies the pending content that links to this paragraph.

(IFRS 16: Paragraph C1): An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2019.

(IFRS 16: Paragraph C5): A lessee shall apply this Standard to its leases either:

a. retrospectively to each prior reporting period presented applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; or
b. retrospectively with the cumulative effect of initially applying the Standard recognised at the date of initial application in accordance with paragraphs C7–C13.

Local Currency:

Summary Guidance:  Local Currency is the currency used to pay your lease obligations (typically the currency used in the entity's particular geographical location).  Local Currency is used in the following tabs:

Administration | Reporting Entity:  User selects the Local Currency default for your Reporting Entity.

Add Lease:  The Local Currency default from Administration | Reporting Entity will appear, but the user is able to select a different currency.  

Functional Currency:

Summary Guidance:  Functional Currency is the currency of the primary economic environment in which your entity conducts its business.  The functional currency is usually either the local currency or the currency of its parent company.

Technical Guidance (FASB: 830-10-45-2/IAS 21: Paragraph 8): An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. 

Administration | Policies

Require Review + Approval for every new Lease created:

When you select the Require Review policy at Administration/Policies, the following is true for any subsequently entered lease or lease revision:

• Review Tab: When adding a lease, the Review tab only appears when Require Review policy is selected. The Review tab requires a user to submit a lease for review by another user.

  • Note: Users can optionally choose to send an email notification to reviewer(s) when a lease is ready for review.

• Incomplete Status: Before submitting a lease for review, the lease remains in Incomplete status even if all required data fields are entered.

• Review Status: After submitting a lease for Review, the lease status changes from Incomplete to Review.

• Reporting: Leases in either an Incomplete or Review status cannot be exported at My Leases.

• Reviewer: Any User can review and approve a lease in review except the last person to edit the lease. Approving a lease changes the status from Review to Complete and the lease can then be included in My Leases exports.

• Lease Edits: When a lease is edited, the lease status is returned to Review, requiring approval by any user who did not last edit the lease.

  • Note: A lease created before Require Review is selected will not require a review even for edits made after Require Review is selected.

Administration | GL Accounts

Fixed Asset:

Fixed Asset GL Accounts are only used if you have a Finance Lease with an ROU Asset Life greater than the Lease Term (entered in the Add Lease tab).  The final journal entry will transfer the remaining ROU Asset balance to a Fixed Asset GL Account. 

GL Accounts for Existing Balances under Previous Lease Accounting Guidance:

GL Accounts at Administration/GL Accounts under the heading “Existing Balances Under Previous Lease Accounting Guidance” are used to remove balances from your opening balance sheet upon initial application of ASC 842 and/or IFRS 16.  After entering your GL Accounts (or modifying the default GL Accounts), follow the steps below:

If your existing balance under previous lease accounting guidance is a liability:

1. Go to Add Lease screen under the section “Lease Payments and Classification.”

2. Select a Liability GL Account from the dropdown.

3. Enter the existing balance as a positive value.

The initial journal entry will remove the liability by debiting the existing balance entered on Add Lease screen with an offsetting credit to the ROU Asset.

If your existing balance under previous lease accounting guidance is an asset:

1. Go to Add Lease screen under the section “Lease Payments and Classification.”

2. Select an Asset GL Account from the dropdown.

3. Enter the existing balance as a positive value.

The initial journal entry will remove the asset by crediting the existing balance entered on Add Lease screen with an offsetting debit to the ROU Asset.

Operating Lease Example:
Upon initial application of the standard, assume you have entered (on Add Lease screen) the following existing balance sheet balances under the previous lease accounting guidance (ASC 840/IAS 17):

Deferred Rent Long-Term Asset (GL#500)                             $1,000
Deferred Rent Short-Term Asset (GL#505)                            $2,000

Upon initial application, the opening entry will remove your existing balances under previous lease accounting guidance with an offset to the ROU Asset:

Dr. ROU Asset (GL#110)                                                        $50,000*
            Cr. Lease Liability (GL#120)                                                               $50,000
Dr. ROU Asset (GL#110)                                                        $3,000*
            Cr. Deferred Rent Long-Term Asset (GL#500)                                   $1,000
            Cr. Deferred Rent Short-Term Asset (GL#505)                                  $2,000

*In this example, the ROU Asset is calculated to be $50,000 under the new lease accounting guidance.  An additional $3,000 of ROU Asset is recognized in the journal entry to remove the balances under previous lease accounting guidance.

Finance Lease Example:       
Upon initial application of the standard, assume you have entered (on Add Lease screen) the following existing balance sheet balances under the previous lease accounting guidance (ASC 840/IAS 17):

Capital Lease Asset (GL#600)                                                $48,000
Capital Lease Liability (GL#605)                                             $50,000

Upon initial application, the opening entry will remove your existing balances under previous lease accounting guidance with an offset to ROU Asset:

Dr. ROU Asset (GL#210)                                                        $50,000*
            Cr. Lease Liability (GL#220)                                                               $50,000
Dr. Capital Lease Liability (GL#600)                                       $50,000
            Cr. ROU Asset (GL#210)                                                                    $2,000*
            Cr. Capital Lease Asset (GL#605)                                                      $48,000

* In this example, the ROU Asset is calculated to be $50,000 under the new lease accounting guidance.  The ROU Asset is reduced by $2,000 in the journal entry to remove the balances under the previous lease accounting guidance.

General Ledger Accounts for Revisions:

General Ledger (GL) Accounts at Administration/GL Accounts under the heading “Revisions” have two different GL Account types:

1. Suspense Account for Transferring Balances  This GL Account is used:

   1. For all revisions: When a revision is complete, we will freeze the old version of this lease. The final journal entry for the old version will zero out the balance sheet accounts (ROU Asset & Lease Liability).

      1. We will use a Suspense Account in the event the ROU Asset does not equal the Lease Liability.

      2. We will reverse the final journal entry for the old version in the first entry of the latest revision to establish the balance sheet accounts.  

2. Gain/Loss Account:  This GL Account is used if:

   1. Your revision start date and end date are in the same month (i.e., terminating the lease). The difference between your ROU Asset and Lease Liability (if any) will be recorded in a Gain/Loss Account. (FASB: 842-20-40-1/IFRS 16: Paragraph 46(a))

   2. If your revision’s adjustment of the Liability causes the carrying amount of the ROU Asset to be reduced to $0, then any remaining amount will be recorded in a Gain/Loss Account.  (FASB: 842-20-35-4/IFRS 16: Paragraph 46(a))

   3. If your revision is an Impairment, the reduction of the ROU Asset is recorded in a Gain/Loss Account. (FASB: 842-20-35-9/IFRS 16: Paragraph 33)

   4. For a revision to “Derecognize ROU Asset under certain subleases:” The ROU Asset is reduced to $0 with the value of the ROU Asset transferred to a Gain/Loss Account, which you will reverse in the initial entry as a Lessor of the subleased asset.   (FASB: 842-20-35-14/IFRS 16: BC233)

Administration | Currency

Foreign Exchange Rates:

Summary Guidance:  When entering foreign exchange rates in the fields “Currency (From-To),” the “From” is the currency you are starting with and the “To” is the ending currency (i.e. the currency you are translating to).  For example:

• From = Local Currency of Lease; let’s assume USD

• To = Reporting Currency of a reporting entity; let’s assume EUR

• “Currency (From-To)” = USD - EUR  (see below: $1 USD = 0.85€ EUR at EOM at 2024-01)

EOM Rate = Used to translate ending balance sheet values:

1. ROU Asset* 

2. ST Lease Liability

3. LT Lease Liability

* Excluding Functional Currency translation, which uses Historical Fx Rate entered by the user for each lease at Add Lease tab

Ave Rate = Used to translate the transactions made throughout the month:

1. Initial Journal Entry at Lease Commencement

2. Amortization of ROU Asset affecting:

   1. Amortization Expense* or Operating Lease Expense*

   2. ROU Asset*

3. Payments of Liabilities affecting:

   1. Cash/AP Clearing Account

   2. LT Lease Liability 

4. Interest Expense affecting:

   1. Interest Expense

   2. LT Lease Liability 

5. Non-Lease Payments affecting:

   1. Cash/AP Clearing Account

   2. Variable Expense, Other P&L Account or Other Balance Sheet Account

* Excluding Functional Currency translation, which uses Historical Fx Rate entered by the user for each lease at Add Lease tab

Download a file displaying the translation of each column in Amortization Schedule for Functional Currency: Functional_Currency_Translation.xlsx

Download a file displaying the translation of each column in Amortization Schedule for Final Reporting Currency: Final_Reporting_Currency.xlsx

Foreign currency translation is guided by ASC 830, Foreign Currency Matters.
Monetary assets and liabilities (cash, accounts receivable, accounts payable, and long-term debt) are measured at the end of each reporting period based on the then current exchange rates, resulting in foreign currency gains and losses, which are recorded in current period net income. 

Nonmonetary assets and liabilities (inventory and property, plant, and equipment) are initially measured using historical exchange rates. Because there should be no further reason for translation, all aspects of the ongoing accounting for these items (e.g., depreciation, impairment, lower of cost or market) should be measured in terms of the operation’s functional currency. In other words, you translated it once at the start date of the lease, no need to keep translating it.

Technical Guidance (FASB: 842-20-55-10/IFRS 16: top of Page 64): The right-of-use asset is a nonmonetary asset while the lease liability is a monetary liability. Therefore, in accordance with Subtopic 830-10 on foreign currency matters, when accounting for a lease that is denominated in a foreign currency, if remeasurement into the lessee’s functional currency is required, the lease liability is remeasured using the current exchange rate, while the right-of-use asset is remeasured using the exchange rate as of the commencement date.

(FASB: 830-30-45-3/IAS 21: Paragraph 39) Translation Using Current Exchange Rate
All elements of financial statements shall be translated by using a current exchange rate as follows:
a. For assets and liabilities, the exchange rate at the balance sheet date shall be used.
b. For revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized shall be used.

(FASB: 830-10-55-10 to 11/IAS 21: Paragraph 40) Use of Averages or Other Methods of Approximation 
55-10 Literal application of the standards in this Subtopic might require a degree of detail in record keeping and computations that could be burdensome as well as unnecessary to produce reasonable approximations of the results. Accordingly, it is acceptable to use averages or other methods of approximation. For example, because translation at the exchange rates at the dates the numerous revenues, expenses, gains, and losses are recognized is generally impractical, an appropriately weighted average exchange rate for the period may be used to translate those elements. Likewise, the use of other time- and effort-saving methods to approximate the results of detailed calculations is permitted.

55-11 Average rates used shall be appropriately weighted by the volume of functional currency transactions occurring during the accounting period. For example, to translate revenue and expense accounts for an annual period, individual revenue and expense accounts for each quarter or month may be translated at that quarter's or that month's average rate. The translated amounts for each quarter or month should then be combined for the annual totals.

My Leases

Lease Status:

Incomplete: This status indicates that all required fields are not filled out. Leases in an Incomplete status cannot be exported at My Leases.

Review: This status is only available if Require Review policy is selected at Administration/Policies. Review status requires a reviewer (other than the user who last edited the lease) to approve the lease. Leases in a Review status cannot be exported at My Leases.

Complete: This status indicates all required fields are entered. If Require Review Policy is checked, this lease was also approved by a reviewer

Deleted: This lease was deleted. Leases in a Deleted status cannot be exported at My Leases.

Data By Lease

This selection produces an additional tab in an export called “Data By Lease” with values for each selected lease for the GL Start Date to the GL End Date. This feature is currently available for the Amortization Schedule export.

Foreign Currency Translation (Functional Currency & Reporting Currency)

Summary Guidance:  ROU Asset & Lease Liability are translated at EOM rate, while all other transactions are translated at the Average rate.  The exception is Amortization Expense & ROU Asset are translated to their Functional Currency at Historical rate. See Administration | Currency for how to enter EOM and Average foreign exchange rates.

Download a file displaying the translation of each column in Amortization Schedule for Functional Currency: Functional_Currency_Translation.xlsx

Download a file displaying the translation of each column in Amortization Schedule for Final Reporting Currency: Final_Reporting_Currency.xlsx

Foreign currency translation is guided by ASC 830, Foreign Currency Matters.
Monetary assets and liabilities (cash, accounts receivable, accounts payable, and long-term debt) are measured at the end of each reporting period based on the then current exchange rates, resulting in foreign currency gains and losses, which are recorded in current period net income. 

Nonmonetary assets and liabilities (inventory and property, plant, and equipment) are initially measured using historical exchange rates. Because there should be no further reason for translation, all aspects of the ongoing accounting for these items (e.g., depreciation, impairment, lower of cost or market) should be measured in terms of the operation’s functional currency. In other words, you translated it once at the start date of the lease, no need to keep translating it.

Technical Guidance (FASB: 842-20-55-10/IFRS 16: top of Page 64): The right-of-use asset is a nonmonetary asset while the lease liability is a monetary liability. Therefore, in accordance with Subtopic 830-10 on foreign currency matters, when accounting for a lease that is denominated in a foreign currency, if remeasurement into the lessee’s functional currency is required, the lease liability is remeasured using the current exchange rate, while the right-of-use asset is remeasured using the exchange rate as of the commencement date.

(FASB: 830-30-45-3/IAS 21: Paragraph 39) Translation Using Current Exchange Rate
All elements of financial statements shall be translated by using a current exchange rate as follows:
a. For assets and liabilities, the exchange rate at the balance sheet date shall be used.
b. For revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized shall be used.

(FASB: 830-10-55-10 to 11/IAS 21: Paragraph 40) Use of Averages or Other Methods of Approximation 
55-10 Literal application of the standards in this Subtopic might require a degree of detail in record keeping and computations that could be burdensome as well as unnecessary to produce reasonable approximations of the results. Accordingly, it is acceptable to use averages or other methods of approximation. For example, because translation at the exchange rates at the dates the numerous revenues, expenses, gains, and losses are recognized is generally impractical, an appropriately weighted average exchange rate for the period may be used to translate those elements. Likewise, the use of other time- and effort-saving methods to approximate the results of detailed calculations is permitted.

55-11 Average rates used shall be appropriately weighted by the volume of functional currency transactions occurring during the accounting period. For example, to translate revenue and expense accounts for an annual period, individual revenue and expense accounts for each quarter or month may be translated at that quarter's or that month's average rate. The translated amounts for each quarter or month should then be combined for the annual totals.

Add Lease Screen

Local Currency:

Summary Guidance:  Local Currency is the currency used to pay your lease obligations (typically the currency used in the entity's particular geographical location).  Local Currency is used in the following tabs:

Administration | Reporting Entity:  User selects the Local Currency default for your Reporting Entity.

Add Lease:  The Local Currency default from Administration | Reporting Entity will appear, but the user is able to select a different currency. 

Historical Exchange (fx) rate:   

Summary Guidance:  The Historical fx Rate is the exchange rate from the local currency to the functional currency at the start date of the lease.  It is used to translate (throughout the term of the lease) the ROU Asset and amortization expense (or operating lease expense) from the local currency to the functional currency.

Add Revision:  Adding a Revision is how you amend, modify, remeasure or change a lease at a date before the end of the lease. The software will freeze a version of the lease and then allow you to change parameters that only affect the lease on/after the date of the Revision. Upon remeasuring the ROU Asset for a Revision, you will either input the Historical fx Rate from the previous lease version or input a new Historical fx Rate on the date of the Revision. No technical guidance exists as to which method to use other than a SEC inquiry response that follows the same guidance as to when to update the Discount Rate or reassess Classification. The SEC response is to input a new Historical fx Rate on the date of the Revision (if your Local Currency is different than your Functional Currency) for the following Revision types:

• Modification (amendment of a lease)

• Remeasurement of: a) lease term or b) purchase option

• IFRS 16 ONLY: Change in payments due to payments tied to a floating interest rate (e.g., LIBOR) used to determine those payments

Therefore, you would input the same Historical fx Rate (entered in the previous version of the lease) for all other Revision types.

Technical Guidance (FASB: 842-20-55-10/IFRS 16: top of Page 64): The right-of-use asset is a nonmonetary asset while the lease liability is a monetary liability. Therefore, in accordance with Subtopic 830-10 on foreign currency matters, when accounting for a lease that is denominated in a foreign currency, if remeasurement into the lessee’s functional currency is required, the lease liability is remeasured using the current exchange rate, while the right-of-use asset is remeasured using the exchange rate as of the commencement date.

Start Date:

Summary Guidance: The Start Date is the:

• Initial Application Date for leases that have a Commencement Date prior to the Initial Application Date. This date is used to recognize and measure leases, as determined by the transition method that the entity elects.

• Commencement Date for leases that begin after the Initial Application Date.

Commencement Date is defined as the date on which the lessor makes an underlying asset available for use by a lessee.

Technical Guidance (FASB: 842, Page 22, 842-10-65-1(c)/IFRS 16: Appendix A, Page 26, C5): Commencement Date is the date on which a lessor makes an underlying asset available for use by a lessee.

c. In the financial statements in which an entity first applies the pending content that links to this paragraph, the entity shall recognize and measure leases within the scope of the pending content that links to this paragraph that exist at the application date, as determined by the transition method that the entity elects.

End Date:

Summary Guidance: The End Date is typically the last day of the lease. However, you must consider early termination options and renewal options. If you determine that you will exercise an early termination option because there is not an economic incentive to continue the lease, then use the date of the early termination option as the End Date. If you determine that you will exercise one or more renewal options, because there is an economic incentive to do so, use the last day of the renewal option(s) you are reasonably certain to exercise.

Technical Guidance (FASB: 842-10-30-1/IFRS 16: Paragraphs 18-20): Lease Term is the noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following:

a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option
b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option (i.e., bypassing an early termination option)
c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.

Lease Term:

Summary Guidance: The Lease Term is the number of months from the Start Date to the End Date.

1. The Start Date is not the date you sign the lease but instead is the Commencement Date of the lease, which is defined as the date on which the lessor makes an underlying asset available for use by a lessee.

2. The End Date is typically the last day of the lease. However, you must consider early termination options and renewal options. If you determine that you will exercise an early termination option because there is not an economic incentive to continue the lease, then use the date of the early termination option as the End Date. If you determine that you will exercise one or more renewal options, because there is an economic incentive to do so, use the last day of the renewal option(s) you are reasonably certain to exercise.

Technical Guidance (FASB: 842-10-30-1/IFRS 16: Paragraphs 18-20): Lease Term is the noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following:

a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option
b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option (i.e., bypassing an early termination option)
c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.

Lease Term Guidance Wizard: This wizard is meant to help you in 2 ways:

1. Guide you to correctly identify the Lease Term as there involves judgment with regards to early termination options and renewal options.

2. Create an audit trail of your answers for review by you, management or your auditors.

ROU Asset Life:

Summary Guidance: The ROU Asset Life is almost always the same as the Lease Term. However, for finance leases in which the lessee is reasonably certain to exercise an option to purchase the underlying asset, the ROU Asset Life is the useful life of the asset (i.e., how long the asset will be available for your use), which can be longer than the Lease Term. The ROU Asset is amortized to expense over the ROU Asset Life. For a ROU Asset that should not be amortized, enter 999,999,999 in the ROU Asset Life field. This will reduce the amortization expense to either 0.00 or an immaterial amount.

The software uses a full month convention, amortizing evenly over the number of months in the ROU Asset Life. If your lease ends in the middle of the month, the ROU Asset Life defaults to Term minus one month to stop the amortization in the second to last month. You can update Asset Life as needed for different expense recognition. See Example below.

Technical Guidance (FASB: 842-20-35-8/IFRS 16: Paragraph 32): A lessee shall amortize the right-of-use (ROU) asset from the commencement date (Start Date) to the earlier of:

1. The end of the useful life (defined below) of the right-of-use asset; or

2. The end of the Lease Term.

However, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, the lessee shall amortize the right-of use asset to the end of the useful life of the underlying asset.

(FASB: Page 101/IFRS 16: Appendix A, Page 28): Useful life means the period over which an asset is expected to contribute directly or indirectly to future cash flows, which is the period over which:

1. an asset is expected to be available for use by an entity; or

2. the number of production or similar units expected to be obtained from an asset by an entity.

Discount Rate:

Summary Guidance: The Discount Rate should be the annual rate implicit in the lease.  The implicit rate is the rate derived when:

• FASB: PV of Lease Payments + PV of Lessor’s Residual Value = Fair Value of Asset (less investment tax credits) + Lessor’s Initial Direct Costs (Download Calculator)

• IFRS: PV of Lease Payments + PV of Lessor’s Residual Value = Fair Value of Asset + Lessor’s Initial Direct Costs (Download Calculator)

  • Note: The PV of Lease Payments is a different calculation than the sum of Total Payments. The sum of Total Payments must be greater than the Fair Value of the underlying asset in order to arrive at an implicit rate.

If inputs to the implicit rate are not readily determinable, which is often the case, the Discount Rate is then the lessee's incremental borrowing rate (i.e., what the lessee can borrow under the same payment stream and timeframe). 

Alternatively, non-public companies subject to FASB 842 (not allowed under IFRS 16) can elect by asset class to use a risk-free rate of return as the discount rate. The risk-free rate can only be used if the implicit rate is not readily determinable. The risk-free rate for various time periods that approximate the Lease Term can be found at: US Treasury Rates

Add Revision: The following Revision types will require you to input a new discount rate on your Revision Date:

• Modification (amendment of a lease)

• Remeasurement of: a) lease term or b) purchase option

• IFRS 16 ONLY: Change in payments due to payments tied to a floating interest rate (e.g., LIBOR) used to determine those payments

You would input the same Discount Rate (entered in the previous version of the lease) for all other Revision types.

Technical Guidance (FASB: 842-20-30-2 to 2/IFRS 16: Paragraph 26): The discount rate for the lease initially used to determine the present value of the Lease Payments for a lessee is calculated on the basis of information available at the commencement date.

(FASB: 842-20-30-3/IFRS 16: Paragraph 26): A lessee should use the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, a lessee uses its incremental borrowing rate. (FASB: 842 Only, Not Allowed under IFRS 16): A lessee that is not a public business entity is permitted to use a risk-free discount rate for the lease instead of its incremental borrowing rate, determined using a period comparable with that of the lease term, as an accounting policy election made by class of underlying asset.

(FASB 842: Page 28): Rate Implicit in the Lease:  The rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that a lessor expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the lessor and (2) any deferred initial direct costs of the lessor.  Fair Value (page 23): The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

(IFRS 16: Page 26): Interest Rate Implicit in the Lease: The rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor. Fair Value: For the purpose of applying the lessor accounting requirements in this Standard, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

(FASB: 842, Page 23/IFRS 16: Appendix A, Page 27): Incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the Lease Payments in a similar economic environment.

(FASB: 842-20-35-5 /IFRS 16: Paragraphs 40,43): If there is a remeasurement of the lease liability in accordance with paragraph 842-20-35-4, the lessee shall update the discount rate for the lease at the date of remeasurement on the basis of the remaining lease term and the remaining lease payments unless the remeasurement of the lease liability is the result of one of the following:

a. A change in the lease term or the assessment of whether the lessee will exercise an option to purchase the underlying asset and the discount rate for the lease already reflects that the lessee has an option to extend or terminate the lease or to purchase the underlying asset.

b. A change in amounts probable of being owed by the lessee under a residual value guarantee (see paragraph 842-10-35-4(c)(3)).

c. A change in the lease payments resulting from the resolution of a contingency upon which some or all of the variable lease payments that will be paid over the remainder of the lease term are based (see paragraph 842-10-35-4(b)).

Incentives Received:

Summary Guidance: Incentives Received are:

1. Payments (at or before the Start Date) made by the lessor to the lessee (e.g., lessor pays cash to lessee for a furniture purchase).

2. The reimbursement or assumption by a lessor of costs of a lessee (e.g., lessor pays off lessee’s remaining payments from a previous office lease in order to have them relocate early).

Any payments by the lessor to the lessee after the Start Date should not be included as Incentives Received. Instead, these payments should be entered as negative payment streams on the dates received in the Lease Payments section of the software.

Technical Guidance (842-10-55-30/IFRS 16: Appendix A, Page 26): Incentives received are payments made by lessor to lessee, or the reimbursement or assumption by a lessor of costs of a lessee.

(FASB: 842-20-30-5/IFRS 16: Paragraph 24): The Incentive Received reduces the calculation of the right-of-use asset. At the Start Date, the cost of the right-of-use asset shall consist of all of the following:

a. The amount of the initial measurement of the lease liability
b. Any Lease Payments made to the lessor at or before the commencement date, minus any lease Incentives Received
c. Any Initial Direct Costs incurred by the lessee

Initial Direct Costs:

Summary Guidance: Initial Direct Costs are costs that would not occur if the lease is not signed (e.g., commissions, payments made to an existing tenant to incentivize that tenant to terminate its lease). Initial Direct Costs do not include legal fees or tax advisory fees as those fees are not dependent on signing the lease.

Technical Guidance (FASB: 842, Page 23/IFRS 16: Appendix A, Page 26): Initial direct costs are incremental costs of a lease that would not have been incurred if the lease had not been obtained.

(FASB: 842-10-30-9/IFRS 16: Appendix A, Page 26): Initial Direct Costs for a lessee may include, for example, either of the following:

a. Commissions
b. Payments made to an existing tenant to incentivize that tenant to terminate its lease

(FASB: 842-20-30-5/IFRS 16: Paragraph 24):
The Initial Direct Costs increases the calculation of the right-of-use asset. At the Start Date, the cost of the right-of-use asset shall consist of all of the following:

a. The amount of the initial measurement of the lease liability
b. Any Lease Payments made to the lessor at or before the commencement date, minus any lease Incentives Received
c. Any Initial Direct Costs incurred by the lessee

Add Lease Payment Stream:

Summary Guidance: For a comprehensive list of payments that are considered Lease Payments, see our Technical Guidance section below. In summary, Lease Payments include:

• fixed payments

• variable lease payments (see details and examples below) that depend on an index or rate that are measured on the Start Date

• purchase cost at the End Date of a lease

• termination fees

• residual value guarantees

• reimbursement of lessor costs (e.g., real estate taxes in an office lease) as long as they are not variable (e.g., no true up)

• nonlease component costs like common area maintenance (CAM) if lessee has made a policy election to combine lease and nonlease components.

• lease incentives paid after the Start Date, which reduce Lease Payments

If you desire to capture payments that do not fit the definition of Lease Payments in the software, those payments can be entered in the Variable Expense and Non-Lease Payments tab.

Variable lease payments are defined as payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date (Start Date), other than the passage of time. As summarized in the table below, variable lease payments are either a:

1. Lease Payment (entered in the Lease Payments & Classification tab); or

2. Variable Lease Expense (entered in the Variable Expense and Non-Lease Payments tab)

Technical Guidance (FASB: 842-10-30-5/IFRS 16: Paragraph 27): At the commencement date (Start Date), the Lease Payments shall consist of the following payments relating to the use of the underlying asset during the Lease Term:

a. Fixed payments, including in substance fixed payments (i.e., payments that may, in form, contain variability but that, in-substance, are unavoidable-See FASB: 842-10-55-31/IFRS 16: Paragraph B42), less any lease incentives paid or payable to the lessee. The reduction for lease incentives should be only those received after the Start Date. If the incentives are received at or prior to the Start Date, include them in the Incentives Received field in the software.

1. Fixed payments includes activities or costs that are not components of a contract, such as reimbursement of lessor’s costs (e.g., real estate taxes or insurance in an office lease) per FASB 842-10-55-142 through 3.

b. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date (Start Date). Variable lease payments are defined as payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. Variable lease payments not dependent on an index or rate, such as % of sales, are not deemed Lease Payments and should be entered into the "Variable Expenses & Non-Lease Payments" section of the software.

1. Under FASB only, each time there is a change in the variable lease payment resulting from a change in the reference index or rate, record as a period expense, which can be entered in the section titled, "Payment Stream for Variable Expense and Non-Lease Payments." See Examples at FASB: 842-10-55-225 through 231.

2. Under IFRS 16 only, each time there is a change in the payment resulting from a change in the reference index or rate, revise the Lease Payments to include this change (Use Revision tab).

c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option (assessed considering the factors in paragraph FASB: 842-10-55-26/IFRS 16: Paragraphs B37-B40).
d. Payments for penalties for terminating the lease if the Lease Term reflects the lessee exercising an option to terminate the lease.
e. Fees paid by the lessee to the owners of a special-purpose entity (SPE) for structuring the transaction.
f. Amounts probable of being owed by the lessee under residual value guarantees (see FASB: 842-10-55-34 through 36/IFRS 16: Appendix A, Page 27).
g. Payments made to return the underlying asset to its original condition (see FASB: 842-10-55-34/IFRS 16: Paragraph 24 for criteria).
h. Payments for nonlease components (e.g., common area maintenance payments in an office lease) only if lessee has elected a policy to combine lease and nonlease components per FASB: 842-10-15-37/IFRS 16: Paragraph 15.

(FASB: 842-10-30-6): Lease Payments do not include any of the following:

a. Variable Lease Payments not based on an index or a rate. Examples include payments based on a % of sales or based on the number of hours an asset is used. See examples at FASB: 842-10-55-150 through 154 and 842-10-55-232 through 234.

b. Any guarantee by the lessee of the lessor’s debt

c. Amounts allocated to nonlease components in accordance with 842-10-15-33 through 42/IFRS 16: Paragraph 12-16) if lessee does not elect a policy to combine lease and nonlease components per FASB: 842-10-15-37/IFRS 16: Paragraph 15).

d. Payments for activities or costs that are not components of a contract (e.g., taxes or insurance in an office lease) if those amounts are variable per FASB 842-10-55-141 through 142.

Classification:

Summary Guidance: Classification is relevant for FASB ONLY; all leases under IFRS are classified as Finance Leases. Under FASB, a lease will be classified as either Operating or Finance. A lease that meets at least one of the criteria below will be classified as a Finance Lease. All other leases will be classified as Operating Leases.

Classification Criteria:

a. Transfers ownership to lessee
b. Option to purchase that lessee is reasonably certain to exercise
c. Lease Term is a major part (e.g., 75%) if its economic life (life of the asset by all users, not just the lessee)
d. Present value of Lease Payments that is substantially all (e.g., 90%) of the fair market value
e. Leased asset has no future use by lessor

Add Revision: The following Revision types will require you to reassess the classification:

• Modification (amendment of a lease)

• Remeasurement of: a) lease term or b) purchase option

You would input the same Classification (entered in the previous version of the lease) for all other Revision types.

Technical Guidance: (FASB: 842-10-25-2): A lessee shall classify a lease as a finance lease when the lease meets any of the following criteria at lease commencement:

a. The lease transfers ownership of the underlying asset to the lessee by the end of the Lease Term.

b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

c. The Lease Term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date (Start Date) falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.

(FASB: 842-10-55-2 (a)): Major part defined as 75% of the economic life is deemed a reasonable approach.

(FASB: 842, Page 23): Economic Life is either the period over which an asset is expected to be economically usable by one or more users or the number of production or similar units expected to be obtained from an asset by one or more users. Economic life is longer useful life (term used to determine ROU Asset Life) because it is the period by which all of the users can utilize the asset, while useful life is the period by which the lessee (only) will utilize the asset.

d. The present value of the sum of the Lease Payments and any residual value guaranteed by the lessee that is not already reflected in the Lease Payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset.

(FASB: 842-10-55-2 (c)): Substantially all defined as 90% of the fair value of the underlying asset is deemed a reasonable approach.

e. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the Lease Term.

(FASB: 842-10-25-1): An entity shall classify each separate lease component at the commencement date. An entity shall not reassess the lease classification after the commencement date unless the contract is modified and the modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8. In addition, a lessee also shall reassess the lease classification after the commencement date if there is a change in the lease term or the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset.

Add Variable Expense & Non-Lease Payment Stream:

Summary Guidance: This is an optional field which can be used to track Variable Lease Expense and Non-Lease Payments within the software. The reason for including each is discussed below.

Variable Lease Expense: There are three types of variable lease payments, as discussed below. Each is either included as a Lease Payment or a Variable Lease Expense. Payments that were excluded from the Lease Payment section above would be included here as Variable Lease Expense. Variable Lease Expense is a required footnote disclosure. While including this information in the software is optional, it is recommended for ease in populating your footnotes. The three types of variable lease payments are:

1. Payments dependent on an index or a rate initially measured at the Start Date. These payments should NOT be entered here as they are included in the "Lease Payment and Classification" section.

2. Payments dependent on an index or a rate that change after the Start Date

   1. FASB only, each time there is a change in the payment resulting from a change in the reference index or rate, record as a Variable Lease Expense in Variable Expense & Non-Lease Payments tab. See Examples at FASB: 842-10-55-225 through 231.

   2. IFRS only each time there is a change in the payment resulting from a change in the reference index or rate, select Add Revision and enter new payments in Lease Payments & Classification tab.

3. Payments that vary because of changes in circumstances, not related to an index or rate (e.g., payments based on a % of sales). This type of payment would be included as a Variable Lease Expense.

The different types of variable lease payments, and the accounting treatment for each are summarized below.

Non-Lease Payments are any payments that are not deemed Lease Payments or Variable Lease Expenses. They include nonlease components and any other payments that are unrelated to the lease standard. The software allows you to enter Non-Lease Payments that are made at the same time as Lease Payments in order to provide a complete journal entry. Some examples of Non-Lease Payments include:

1. Nonlease components (maintenance services or other activities that transfer a good or service)

   1. Annual Maintenance on ROU Asset

   2. Parking expenses

   3. Common Area Maintenance (CAM)

2. VAT

Nonlease components includes items such as CAM, unless the lessee makes a policy election to account for nonlease and lease components combined as a single lease component. If this election is made, CAM would be included in the "Lease Payment and Classification" Section and would not be included here.

Technical Guidance: (FASB: 842, Page 36/IFRS 16: Appendix A, Page 18):

Variable Expenses: Variable lease payments are defined as payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date (Start Date), other than the passage of time. Variable lease payments not based on an index or a rate (such as the Consumer Price Index or a market interest rate) should be entered here as they are not deemed Lease Payments. Examples include a) payments based on a % of sales or based on the number of hours an asset is used, or b) real estate taxes that are not fixed. See examples at FASB: 842-10-141, 842-10-55-150 through 154 and 842-10-55-232 through 234. Variable lease payments that depend on an index or a rate initially measured using the index or rate at the commencement date are "Lease Payments" and should be entered in “Lease Payment and Classification Section.”

1. FASB only, each time there is a change in the payment resulting from a change in the reference index or rate, record as a period expense, which can be entered in this section titled, "Payment Stream for Variable Expense and Non-Lease Payments." See Examples at FASB: 842-10-55-225 through 231.

2. IFRS only (IFRS 16: Paragraph 42(b)), each time there is a change in the payment resulting from a change in the reference index or rate, revise the Lease Payments to remeasure the lease liability to include this change (Use Revision tab)

Technical Guidance: (FASB: 842, Page 11/IFRS 16: Paragraphs 12-16):

Nonlease Components: Topic 842 requires an entity to separate the lease components from the nonlease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Although this was a requirement in previous GAAP, Topic 842 provides more guidance on how to identify and separate components than previous GAAP. Only the lease components must be accounted for in accordance with Topic 842. The consideration in the contract is allocated to the lease and nonlease components on a relative standalone price basis for lessees. Consideration attributable to nonlease components is not a Lease Payment and, therefore, is not included in the measurement of lease assets or lease liabilities. Entities should account for nonlease components in accordance with other applicable Topics.

As a practical expedient, a lessee may elect, by class of underlying asset, not to separate nonlease components from lease components, and instead account for each lease component and any associated nonlease components as a single lease component.

Lease Term Guidance Wizard

Lease Term:

Summary Guidance: The Lease Term is the number of months from the Start Date to the End Date

1. The Start Date is not the date you sign the lease but instead is the Commencement Date of the lease, which is defined as the date on which the lessor makes an underlying asset available for use by a lessee.

2. The End Date is typically the last day of the lease. However, you must consider early termination options and renewal options. If you determine that you will exercise an early termination option because there is not an economic incentive to continue the lease, then use the date of the early termination option as the End Date. If you determine that you will exercise one or more renewal options, because there is an economic incentive to do so, use the last day of the renewal option(s) you are reasonably certain to exercise.

Technical Guidance (FASB: 842-10-30-1/IFRS 16: Paragraphs 18-20): Lease Term is the noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following:

a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option
b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option (i.e., bypassing an early termination option)
c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.

Tool Tip: Lease Term Guidance Wizard: This wizard is meant to help you in 2 ways:

1. Guide you to correctly identify the Lease Term as there involves judgment with regards to early termination options and renewal options.

2. Create an audit trail of your answers for review by you, management or your auditors.

Reasonably Certain:

Summary Guidance: Reasonably Certain is not a guess at what you would most likely do; rather, it is an assessment considering the following economic incentives/factors relevant to that assessment:

1. Contract-based factors

2. Asset-based factors

3. Market-based factors

4. Entity-based factors

An entity’s assessment will often require the consideration of a combination of those factors, as they are interrelated.

Technical Guidance (FASB: 842-10-55-26/IFRS 16: Paragraphs B37-B40):

At the commencement date, an entity assesses whether the lessee is reasonably certain to exercise or not to exercise an option by considering all economic factors relevant to that assessment—contract-based, asset-based, market-based, and entity-based factors. An entity’s assessment often will require the consideration of a combination of those factors because they are interrelated. Examples of these economic factors include but are not limited to:

a. Contractual terms and conditions for the optional periods compared with current market rates, such as:

1. The amount of Lease Payments in any optional period

2. The amount of any variable lease payments or other contingent payments, such as payments under termination penalties and residual value guarantees

3. The terms and conditions of any options that are exercisable after initial optional periods (for example, the terms and conditions of a purchase option that is exercisable at the end of an extension period at a rate that is currently below market rates).

b. Significant leasehold improvements that are expected to have significant economic value for the lessee when the option to extend or terminate the lease or to purchase the underlying asset becomes exercisable.

c. Costs relating to the termination of the lease and the signing of a new lease, such as negotiation costs, relocation costs, costs of identifying another underlying asset suitable for the lessee’s operations, or costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location.

d. The importance of that underlying asset to the lessee’s operations, considering, for example, whether the underlying asset is a specialized asset and the location of the underlying asset.

The shorter the non-cancellable period of a lease, the more likely a lessee is to exercise an option to extend the lease or not to exercise an option to terminate the lease. This is because the costs associated with obtaining a replacement asset are likely to be proportionately higher the shorter the non-cancellable period.

A lessee’s past practice regarding the period over which it has typically used particular types of assets (whether leased or owned), and its economic reasons for doing so, may provide information that is helpful in assessing whether the lessee is reasonably certain to exercise, or not to exercise, an option. For example, if a lessee has typically used particular types of assets for a particular period of time or if the lessee has a practice of frequently exercising options on leases of particular types of underlying assets, the lessee shall consider the economic reasons for that past practice in assessing whether it is reasonably certain to exercise an option on leases of those assets.

Lease Classification Wizard

Classification:

Summary Guidance: Classification is relevant for FASB ONLY; all leases under IFRS are classified as Finance Leases. Under FASB, a lease will be classified as either Operating or Finance. A lease that meets at least one of the criteria below will be classified as a Finance Lease. All other leases will be classified as Operating Leases.

Classification Criteria:

a. Transfers ownership to lessee
b. Option to purchase that lessee is reasonably certain to exercise
c. Lease Term is a major part (e.g., 75%) if its economic life (life of the asset by all users, not just the lessee)
d. Present value of Lease Payments that is substantially all (e.g., 90%) of the fair market value
e. Leased asset has no future use by lessor

Add Revision: The following Revision types will require you to reassess the classification:

• Modification (amendment of a lease)

• Remeasurement of: a) lease term or b) purchase option

You would input the same Classification (entered in the previous version of the lease) for all other Revision types.

Technical Guidance: (FASB: 842-10-25-2): A lessee shall classify a lease as a finance lease when the lease meets any of the following criteria at lease commencement:

a. The lease transfers ownership of the underlying asset to the lessee by the end of the Lease Term.

b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

c. The Lease Term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date (Start Date) falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.

(FASB: 842-10-55-2 (a)): Major part defined as 75% of the economic life is deemed a reasonable approach.

(FASB: 842, Page 23): Economic Life is either the period over which an asset is expected to be economically usable by one or more users or the number of production or similar units expected to be obtained from an asset by one or more users. Economic life is longer useful life (term used to determine ROU Asset Life) because it is the period by which all of the users can utilize the asset, while useful life is the period by which the lessee (only) will utilize the asset.

d. The present value of the sum of the Lease Payments and any residual value guaranteed by the lessee that is not already reflected in the Lease Payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset.

(FASB: 842-10-55-2 (c)): Substantially all defined as 90% of the fair value of the underlying asset is deemed a reasonable approach.

e. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the Lease Term.

(FASB: 842-10-25-1): An entity shall classify each separate lease component at the commencement date. An entity shall not reassess the lease classification after the commencement date unless the contract is modified and the modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8. In addition, a lessee also shall reassess the lease classification after the commencement date if there is a change in the lease term or the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset.

Major Part:

Summary Guidance: Generally, the Lease Term is considered a Major Part of the asset’s economic life if the Lease Term is at least 75% of the asset’s economic life. Technical guidance has removed the bright line of 75%; however, that threshold is still considered a reasonable measurement. You may elect an alternate threshold in your lease accounting policy.

Technical Guidance (FASB: 842-10-25-2): The Lease Term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date (Start Date) falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.

(FASB: 842-10-55-2 (a)): Major part defined as 75% of the economic life is deemed a reasonable approach.

(FASB: 842, Page 23): Economic Life is either the period over which an asset is expected to be economically usable by one or more users or the number of production or similar units expected to be obtained from an asset by one or more users. Economic life is longer useful life (term used to determine ROU Asset Life) because it is the period by which all of the users can utilize the asset, while useful life is the period by which the lessee (only) will utilize the asset.

Tool Tip: If you have an underlying asset type (e.g., office lease) in which you cannot determine the true economic life of the underlying asset but the number is so large that the answer is positively "No" to the question, you may want to determine a policy to enter the same large number (1000 months) in order to achieve a “No” answer.

Substantially All:

Summary Guidance: The present value of the Lease Payments is Substantially All of the leased asset’s fair market value. Historically, 90% was used as the threshold to measure "substantially all". Technical guidance has removed this bright line; however, the threshold is still considered a reasonable measure. You may elect an alternative threshold in your lease accounting policy.

Technical Guidance (FASB: 842-10-25-2): The present value of the sum of the Lease Payments and any residual value guaranteed by the lessee that is not already reflected in the Lease Payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset.

(FASB: 842-10-55-2 (c)): Substantially all defined as 90% of the fair value of the underlying asset is deemed a reasonable approach.

Tool Tip: If you have an underlying asset type (e.g., office lease) in which you cannot determine the true fair value of the underlying asset but the number is so large that the answer is positively "No" to the question, you may want to determine a policy to enter the same large number ($1,000,000,000) in order to achieve a “No” answer.

Reasonably Certain:

Summary Guidance: Reasonably Certain is not a guess at what you would most likely do; rather, it is an assessment considering the following economic incentives/factors relevant to that assessment:

1. Contract-based factors

2. Asset-based factors

3. Market-based factors

4. Entity-based factors

An entity’s assessment will often require the consideration of a combination of those factors, as they are interrelated.

Technical Guidance (FASB: 842-10-55-26/IFRS 16: Paragraphs B37-B40):

At the commencement date, an entity assesses whether the lessee is reasonably certain to exercise or not to exercise an option by considering all economic factors relevant to that assessment—contract-based, asset-based, market-based, and entity-based factors. An entity’s assessment often will require the consideration of a combination of those factors because they are interrelated. Examples of these economic factors include but are not limited to:

a. Contractual terms and conditions for the optional periods compared with current market rates, such as:

1. The amount of Lease Payments in any optional period

2. The amount of any variable lease payments or other contingent payments, such as payments under termination penalties and residual value guarantees

3. The terms and conditions of any options that are exercisable after initial optional periods (for example, the terms and conditions of a purchase option that is exercisable at the end of an extension period at a rate that is currently below market rates).

b. Significant leasehold improvements that are expected to have significant economic value for the lessee when the option to extend or terminate the lease or to purchase the underlying asset becomes exercisable.

c. Costs relating to the termination of the lease and the signing of a new lease, such as negotiation costs, relocation costs, costs of identifying another underlying asset suitable for the lessee’s operations, or costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location.

d. The importance of that underlying asset to the lessee’s operations, considering, for example, whether the underlying asset is a specialized asset and the location of the underlying asset.

The shorter the non-cancellable period of a lease, the more likely a lessee is to exercise an option to extend the lease or not to exercise an option to terminate the lease. This is because the costs associated with obtaining a replacement asset are likely to be proportionately higher the shorter the non-cancellable period.

A lessee’s past practice regarding the period over which it has typically used particular types of assets (whether leased or owned), and its economic reasons for doing so, may provide information that is helpful in assessing whether the lessee is reasonably certain to exercise, or not to exercise, an option. For example, if a lessee has typically used particular types of assets for a particular period of time or if the lessee has a practice of frequently exercising options on leases of particular types of underlying assets, the lessee shall consider the economic reasons for that past practice in assessing whether it is reasonably certain to exercise an option on leases of those assets.

Add Revision:

Summary Guidance:  Adding a Revision is how you amend, modify, remeasure or change a lease at or before the end of the lease. By selecting the “Add Revision” button on the top right of the screen in edit mode, the software will freeze the lease and then allow you to change parameters that only affect the lease on/after the date of the Revision. The modified lease payments will adjust the lease liability with a corresponding adjustment to the ROU asset . If your revision’s adjustment of the Liability causes the carrying amount of the ROU Asset to be reduced to $0, then any remaining amount will be recorded in a Gain/Loss Account.

Below is a list of Revision types:

Modification: This is an amendment to a lease (including lease termination).

If the two criteria below are not met, you shall edit lease and select “Add Revision” button on the top right of the screen. An entity shall account for initial direct costs, lease incentives in the same manner as those items would be accounted for in connection with a new lease.

Do not adjust the accounting for the original lease through the end of its term; instead, create a new lease for the Modification (amendment) if the following exist:

1. Modification grants an additional right of use not in the original lease (e.g., original lease includes 10,000 sq. ft. and amendment includes an additional 2,000 sq. ft.).

2. Lease payments increased commensurate with standalone price of additional right of use.

Remeasurement: Reassess lease due to an event (i.e., no contract amendment). A remeasurement comes in the following three forms:

1. Contingency resolved such that variable lease payments become fixed

2. Change in amounts probable under Residual Value Guarantee

3. Reassessment of: a) lease term or b) purchase option ONLY IF one of the following events occurs:

   1. significant event/change in circumstances that is in control of lessee that affects whether they exercise or not exercise an option*

   2. event occurs (that was previously written into the contract) that obliges the lessee to exercise or not exercise an option*

   3. lessee elects to exercise an option* (when previously determined it wouldn't)

   4. lessee elects to not to exercise an option* (when previously determined it would)

* option can be an early termination option, renewal option or option to purchase the underlying asset

Impairment of ROU Asset: Lessee reduces ROU Asset to zero with adjustment recognized in a Gain/Loss Account.

Derecognize ROU Asset under certain subleases: The original lessee (as sublessor) shall continue to account for the original lease in one of the following ways:

1. If the sublease is classified as an operating lease, account for the original lease as you did before the sublease.

2. If the sublease is accounted for as a sales-type lease or direct financing lease, account for the original lease by derecognizing the ROU Asset and accounting for the Liability as it did before the sublease. In the software, after selecting “Add Revision,” you shall input a ROU Asset Life = 0 causing the value of the ROU Asset to be transferred to a Gain/Loss Account. You will reverse the Gain/Loss Account as part of the initial entry as a Lessor of the subleased asset (outside of scope of the software).  

Change lease data in the middle of a lease: This Revision is not part of the technical guidance, but rather a practical consideration in which you can change a parameter of the lease (e.g., Location, GL Accounts) in the middle of the lease, allowing lessee to report on that lease differently from the date of the Revision.

IFRS 16 ONLY: Change in index: Change in payments due to a change in an index (e.g., cost of living adjustment) used to determine those payments .

IFRS 16 ONLY: Change in interest rate: Change in payments due to payments tied to a floating interest rate (e.g., LIBOR) used to determine those payments.

Other Revision Tool Tips: After selecting “Add Revision” in edit mode, for the three parameters below, take one of the two following actions:

1. Update values as of the date of the Revision, indicated with “Update” below

2. Input the same values from the previous version of the lease (i.e., do not reassess values as of the date of the Revision), indicated with “S” which stands for Same below

(1)  No technical guidance exists as to updating Historical fx Rate (when local currency is different than functional currency) for a Revision, other than a SEC inquiry response. The SEC response is to follow the same technical guidance as to when to update the Discount Rate or reassess Classification (see Discount & Classification columns in the table above and technical references in (2) & (3) below).

(2) (FASB: 842-20-35-5 /IFRS 16: Paragraphs 40,43)

(3) (FASB: 842-10-25-1)

Technical Guidance: The technical guidance for all types of Revisions are too numerous to restate, but referenced below are the main provisions:

ASC 842:
Modifications: (842-10-25-8 to 14)
Remeasurements: (842-10-35-1 to 5, 842-10-55-28 to 29)
Impairment: (842-20-35-9 to 11, 842-20-25-7)
Derecognize ROU Asset under certain subleases: (842-20-35-14)

IFRS 16:
Modifications/Remeasurements: (Paragraphs 39 to 46)
Impairment: (Paragraph 33)
Change in Index/Change in Interest Rate: (Paragraphs 42 to 43)
Derecognize ROU Asset under certain subleases: (BC 233)

Partial Termination: Update ROU Asset Value

Summary Guidance:  Because you have selected Partial Termination, you are given the ability to enter a value to over-write the ROU Asset, creating a Gain/Loss to the account selected in the GL Accounts Tab. Follow the steps below:

1. Complete all required fields of this Revision without entering a new ROU Asset Value on the Revision Information Tab

2. Export the Local Currency Amortization Schedule by selecting the lease, including all Revisions.

   1. GL Start Date: Month prior to Start of Revision

   2. GL End Date: Month of Revision

3. The technical guidance offers two ways to calculate the new ROU Asset Value. Fill out the ROU Asset Calculator to determine the ROU Asset Value under either method. 

4. Edit the Revision and enter the updated ROU Asset Value at the Revision Information Tab.

Technical Guidance: The technical guidance for all types of Revisions are too numerous to restate, but referenced below are the main provisions:

ASC 842:
Partial Termination: (FASB: 842-10-25-13, 842-10-55-181 to 185)

IFRS 16:
Partial Termination: (Paragraph 16)