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Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Extension for Lease Accounting

Concept: Overall Procedure for Recording and Classifying a Lease

This topic outlines the overall procedure for entering, classifying, and analyzing lease financial data.

Prerequisite: Review these concepts

FASB and IASB Accounting

• Background on FASB ASC 842 and IASB IFRS 16
• Resources for Understanding FASB and IASB Accounting Standards
• IASB Retrospective Methods
• Finance Leases and Operating Leases
• Accounting Requirements and Corresponding ARCHIBUS Features

ARCHIBUS Concepts

• ARCHIBUS Extension for Lease Accounting
• Right-of-Use Options and Lease Classification
• Lease Costs and Option Costs
• Amortization Schedule
• Calculating the Amortization Schedule
• Lease Classification Audit Log
• Glossary Words

Step 1: Define rules and parameters for classification

A lease manager typically defines the underlying rules governing the classification process according to the procedures at their site.

1. Define Sub-ledger Rules
2. Review the parameters related to lease classification and adjust the default values as necessary using the System Administration / ARCHIBUS Administrator - Configure Application Configuration / Configure Application Parameters task. See:
   • Set Default Transition Dates and Other Preferences
   • Change the Default Names of Cost Categories for Costs

Step 2: Enter building information

A staff member, typically a Lease Abstractor, enters the buildings using Real Estate Portfolio Management / Lease Administration / Background Data / Define Locations. See Defining Locations.

1. Add a building and enter these fields, which the Lease Classification Wizard uses:
   • Building Date Built (bl.date_bl)
   • Building Age (bl.age)
   • Building Value - Building (bl.value_bldg), the fair market value of the building alone, without its land.

Step 3: Enter leases and their options

A staff member, typically a Lease Abstractor, adds a lease using Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Lease Portfolio Console. See Lease Portfolio Console.  To classify a lease, you must enter the recurring costs (properly tagged with their cost categories), options, and option exercise dates.

1. Check that leases to be classified have values for the following fields. Use the Real Estate Portfolio Management / Lease Administration / Lease Portfolio Console view to complete these fields.
   • Lease End Date
   • Lease Start Date
   • FASB/IASB Lease Type

2. Add Base Rent records to describe the rent schedule.
3. Add Option records to describe right-of-use options.

See these procedures for details:

• Enter a Gross Lease
• Record Initial Direct Costs
• Record International Leases

• Record a Residual Value Guarantee
• Record a Sublease
• Account for Leases in Multiple Currencies
• Account for a Lease Classified in the Middle of its Term
• Record a Transition Lease (FASB 840 and 842)
• Record a Transition Lease (IFRS 16)

Procedures for initially entering options:

• Record a Tenant Improvement Option
• Record a Lease Renewal Option
• Record a Space Expansion Option
• Record a Buy-out Option

Step 4: Classify a lease

1. A staff member, typically a Lease Administrator, uses the Lease Classification Wizard's automated questionnaire to classify the lease using Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Lease Classification Wizard. See these topics for details:
   • Working with the Wizard
   • Select a Lease to Classify
   • Step 1 tab - Enter basic information.
   • Step 2 tab - Enter financial data and calculate amortization.
   • Step 3 tab - Revise right-of-use options, or enter new options.
2. When finished working through the questions, route the classification for approval.

Step 5: Approve the lease classification

A staff member with appropriate authorization, usually a Lease Manager or Portfolio Manager, uses the Lease Classification Wizard's approval actions to review and then accept or reject the lease classification.

• Use the Approve action to approve the lease classification.
• Use the Reject for Re-evaluation action to comment on an observed deficiency, log the rejection, and send the classification back for review and editing.

Step 6: Review reports

The lease information can now be reported to stakeholders or used to create journal entries for accounting. See:

• Export Lease Costs to the General Ledger
• Lease Classification Analysis Console
• Lease Expense Recognition Report
• Quantitative Disclosure Report

• Reports Available from the Lease Classification Wizard
  • Lease Classification Audit Tracking
  • Amortization Schedule
  • Subledger Report
  • Expense Comparison Chart
  • Lease Profile
  • Lease Details

Ongoing: Update lease data and re-evaluate classifications

As issues change at your site, you may need to exercise right-of-use options, which might effect the lease classification. See these procedures for re-evaluating a lease and updating right-of-use options that you decide to execute during the lease term.

• Re-evaluate a lease
• Record an Option for Space Expansion (or Contraction) that has been Exercised
• Record an Option for Early Termination that has been Exercised
• Record an Option for Improvement that has been Exercised

Note Under FASB and IASB guidelines, you do not need reclassify a lease in the middle of its term to reflect changes in building value, incremental borrowing rate, and other factors that might affect the Ratio of Initial Lease Liability Over Fair Market Value of Asset. You need to reclassify only it there is a change in right-of-use options.