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

Concept: Lease Costs and Option Costs

When calculating the ROU Asset value and the lease liability, the Lease Classification Wizard includes both costs from the cost tables and costs from the Options table. You should record a cost for a lease in only one of these locations.

Recurring Costs

Use recurring costs to specify exact amounts and schedules for dates. For instance, the Base Rent costs have the exact timing of the payments due. You can also enter Cost records for payments (e.g. first and last month) that were due in advance, for partial payments, etc.

Costs and Scheduled Costs

Use costs to specify multiple costs and exact timing of costs for a right-of-use option.

For example, if you have a Tenant Improvements allowance that you will draw $50,000 on the first day of the lease and $50,000 three months later, you can enter in two cost records to indicate that the Tenant Improvement allowances should be applied to different fiscal periods.

As another example, suppose you have unamortized Initial Direct Costs that FASB 842 allows you to add to the ROU Asset value upon transition. You can add a cost record representing this initial direct cost to occur on the Commencement Date (that is on the date you apply the new lease treatment).

Estimated Costs in Option Records

Use right-of-use options to specify good faith estimates on costs that are reasonably certain. When establishing your lease, you typically enter right-of-use options in the Options table. Later, when the option is exercised, you can set Reasonably Certain to be Exercised? to Yes. For your convenience, the Lease Classification Wizard's Step 3 tab provides access to the Options records so that you can enter or edit right-of-use options directly from the Wizard. You can then recalculate amortization to see if the adjusted option costs affect the ratio of initial liability.

When completing the Option records, follow these guidelines for entering the option's cost information:

If it is a one-time, single cost, then enter the cost in the Option record.
If it is not a one-time cost, complete the Option record the details of the option but use the Recurring Costs or Scheduled Costs tables to record the cost.

Consider the following examples:

Suppose you have an option to expand that is reasonably certain. You add Base Rent cost for the additional lease costs to define a monthly schedule of additional lease costs. However, you also expect the expansion to include fees that can be amortized over the term of the loan. You can enter these fees as a cost with a Cost Category of LEASE - OTHER AMORTIZED COSTS or as the Estimated Cost in the Option record.
If the cost for the option (e.g. an extension) is a recurring cost (e.g. a monthly rental cost) then you must enter the cost portion as a recurring cost (although the other option details will be in the Option record).
If the cost for the option (e.g. Initial Direct Costs) is really a collection of smaller costs (e.g. brokerage, fees) then you need to enter these separate costs in the Recurring Cost or the Scheduled Cost table.

Entering Costs

Using the Costs tables:

Costs. You can record Costs and Scheduled Costs by entering the Amount - Income, Amount - Expense and Date Due. For costs that are amortized over the term of the lease, the program will apply the cost in the fiscal period in which the Date Due falls.
Recurring Costs. You can record Recurring Costs by entering the Amount - Income, Amount - Expense, Period (i.e. Year, Quarter, Month), the Start Date (i.e. the date due of the first payment), and End Date.
Currency Considerations. If you have the Extended Global Feature Set enabled, you will have cost fields for currency, VAT tax and other conditions. Enter your Costs, Scheduled Costs or Recurring Costs in the payment currency – that is the Amount Income Base (Payment) or the Amount Expense Base (Payment). Doing so records the lease costs in the currency in which the transaction occurred.

Using Option records:

Contractual Details. You always use an Option record to record the contractual terms of the option, such as whether the option exercise "Is Reasonably Certain?", the Date Option is Available, and so on.
Cost Details. If the option has a one-time cost and you have not recorded the cost with the Cost records, you can add the option cost. Edit the "Cost - Estimated" value and the "Date Exercise Available." If the option is marked "Is Reasonably Certain?," the program amortizes the cost. For option costs that are amortized, the program applies the cost in the fiscal period during which the "Date Exercise Available" falls. See the below table for information.

Reference

The program applies all costs in a consistent fashion. If you are familiar with the standard ARCHIBUS cost features, you see that accounting for different lease conditions is a matter of changing the Cost Category and the Date Due. For Recurring Costs, you can also change the recurrence period (e.g. to generate yearly or monthly costs) and apply an index (e.g. CPI). No special features are needed to enter costs for the Extension for Lease Accounting.

Type of Cost	Option Type	Recorded as a Cost with a Cost Category of	Can this type of cost be Estimated with an Option Record?
Base Rent for Lease	<N/A>	RENT - BASE RENT	No (as there is no associated option)
Initial Direct Costs	<N/A>	LEASE - INITIAL DIRECT COSTS	No (as there is no associated option)
Tenant Improvements	IMPROVEMENTS	LEASEHOLD IMPROVEMENT	Yes (but the Cost table is recommended, as it is more flexible for recording improvement costs).
Automatic Transfer of Ownership	AUTOMATIC TRANSFER OF OWNERSHIP LEASE - OTHER	AMORTIZED COSTS (e.g. for transfer fees)	Yes (as an alternative for fees)
Non Amortized Costs (Security, Taxes, Maintenance, etc.) for gross leases	<N/A>	Cost with any other Cost Category	No (since there is no option and these costs are not amortized)
Lease Renewal	RENEWAL	RENT - BASE RENT for additional periods of lease	No (because a recurring rent schedule is needed for capturing the different payments and fiscal periods)
Option to Buy	OPTION TO BUY	LEASE - OTHER AMORTIZED COSTS	Yes (for the cost of the buyout option)
Reassignment	REASSIGNMENT	LEASE - OTHER AMORTIZED COSTS for fees	Yes (for any fees to owner for reassignment)
Renew Longer Term (ad-hoc extension of current lease)	RENEW LONGER TERM	RENT - BASE RENT, for additional periods of lease	No (because a recurring rent schedule is needed for capturing the different payments and fiscal periods)
Expansion or Contraction	EXPANSION CONTRACTION	RENT - BASE RENT – for adjusted rent to cover new area and payments LEASE - OTHER AMORTIZED COSTS - for fees or other costs that can be amortized over the entire term of the lease.	No (for the rent since a schedule is required) Yes (for any fees, but it's recommended to keep all costs together in the Costs table)
Early Termination	EARLY TERMINATION	RENT - BASE RENT – for adjusted rent to cover shorter lease period LEASE - OTHER AMORTIZED COSTS - for fees or penalties	No (for the rent since a schedule is required) Yes (for any fees, but it's recommended to keep all costs together in the Costs table)