Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Lease Classification Wizard

Re-evaluate a Classified Lease

Once you classify a lease, you might need to re-evaluate it during its term. There are two reasons for re-evaluating a lease during its term:

You initially entered incorrect information and want to correct it.
You are exercising a right-of-use lease option or changing the details of a right-of-use option. This can potentially affect the Ratio of Initial Lease Liability Over Fair Market Value of Asset and change the classification.

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.

For a lease that has already been classified and has a FASB/IASB Review Status of Approved, the Wizard presents re-evaluation buttons so that you can update information.

The Wizard presents these buttons under these conditions:

You are a member of RPLM-LEASE-AUDITOR group (In the HQ sample database, user AFM is member of this group.)
The lease's FASB/IASB Review Status is Approved

When a lease is under re-evaluation, the value for FASB Review Status follows one of these paths:

Approved ->Under Re-Evaluation ->Approved
Approved ->Not Yet Submitted ->Submitted for Approval ->Approved

Changes in Right-of-Use Options

If you decide to exercise an option in the middle of the lease term, you must re-evaluate the lease classification. This is necessary because exercising the option may effect the Ratio of Initial Lease Liability Over Fair Market Value of Asset

For example, suppose you have a 10-year lease with a renewal option with "Is reasonably certain?" set to No at the time you work through the Wizard to classify the lease. At year 7 in your lease term, you decide to exercise the lease renewal option for an additional three years: this is, years 11, 12, 13.

To document this change:

You enter the agreed-to rental rate for the additional 3 years term as a cost.
You change the lease with a RENEWAL right-of-use option and set "Is reasonably certain?" to Yes. You can do this either in the Lease Portfolio Console or the Lease Classification Wizard. If using the Lease Classification Wizard, you will set the options to re-evaluate the lease.
Regardless of where you make this change, the system changes the FASB/IASB Review Status from Approved to Re-evaluate.
In the Lease Classification Wizard, review the change or update other information. Choose the Step 3 Done button, and Wizard recalculates the adjusted lease liability based on remaining lease term and update the classification if necessary.

Note: For any approved lease classification, you can submit the lease for re-evaluation as described below. Additionally, the system can automatically set a lease classification for re-evaluation. This occurs when you use the Lease Portfolio Console to edit the lease options for a lease that has a FASB/IASB Review Status of Approved . In this case, the system sets the FASB/IASB Review Status to "Under Re-evaluation" and the Lease Portfolio Console presents a message alerting you to this. The system also logs this change in the Lease Classification Audit Log table. When you open the Lease Classification Wizard, the Re-Evaluate button will be active.

Procedure

If you are assigned a role that is a member of the RPLM-LEASE-AUDITOR group, follow this procedure to submit a lease for re-evaluation. (In the HQ sample database, user AFM is member of this group and can access these buttons.)

Load the Lease Classification Wizard view, located on the Process Navigator at Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Lease Classification Wizard.
Select the lease you want to re-evaluate.
Choose one of these buttons:

Button	Description
Verify Evaluation Status	Checks the current lease information to see if anything has changed by creating a temporary amortization schedule and comparing it to the current schedule. If it finds changed information, asks if you want to resubmit the lease for re-evaluation. Choose Yes, and the Wizard presents the form (described below) for entering the reason for the re-evaluation.
Submit for Re-Evaluation	Presents a form prompting you to enter a reason for the re-evaluation. You can then continue and re-evaluate the classification.

Button

Description

Verify Evaluation Status

Checks the current lease information to see if anything has changed by creating a temporary amortization schedule and comparing it to the current schedule.

If it finds changed information, asks if you want to resubmit the lease for re-evaluation. Choose Yes, and the Wizard presents the form (described below) for entering the reason for the re-evaluation.

Submit for Re-Evaluation

Presents a form prompting you to enter a reason for the re-evaluation. You can then continue and re-evaluate the classification.

Enter the reason for the re-evaluation on the form.
Select the Restart Wizard button. The fields become editable.

Note: The Wizard also offers the Submit for Approval button at this point. This is useful you submitted for re-evaluation erroneously. In this case, you can use the Submit for Approval button to resubmit the lease classification for approval without making any changes to the data.

Work through the Wizard's tabs as outlined in the below topics, updating the current values as needed. The Wizard will recalculate the Ratio of Initial Lease Liability Over Fair Market Value of Asset and reclassify the lease if necessary.

The Wizard records any changes you make, along with the re-evaluation reason you provide in step 5, in the Lease Classification Audit table so that you have a history of changes in lease classification.
When through with the Wizard, submit the re-evaluated classification for approval. Once the re-evaluated classification is approved, the changes will be included in financial reports and accounting feeds.