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Revenue Lease: Accounting Standard

Use this page for revenue leases that have regular charges that use the lease accounting standard functionality (e.g., use ASC 842/IFRS 16).

Set Up

When setting up Property Lease Management, ensure you complete the following setup:

On the Lease Accounting Standard FastTab of the PLM Property Lease Management Setup page set up the default values.

Note: Throughout the documentation, the general term Lease accounting standard will be used in place of the specific lease accounting standard name (e.g., ASC 842/IFRS 16).
On the PLM Charges page, ensure that Lease Component is set to Yes, and then set up the default accounts on the Lease Components Revenue/Expense FastTab.

Create a Revenue Lease

When creating a revenue lease on PLM Lease page, consider the steps from creating a lease while following the steps below:

In the header, set the Lease Type to Revenue and then select the additional type: Sales Type Lease, Direct Financing Lease, Operating Lease, or Exempt lease.
When adding a PLM lease charge, select Charge Details > Charges Components to review the lease component accounts for the charge. The default accounts are based on the setup.
Next, open the Charge Details page and select Accounting Standard.
On the Accounting Standard page, you can specify any direct costs or incentives, change some of the header values, and review various details of the lease including the amortization schedule.

When you are ready, you can create the initial journal entry. After the initial journal entry is created and if any changes are made to the lease, you can remeasure the lease by creating a remeasurement journal.

Use the PLM Invoice Creator to create the invoices for the lease.

Create the Initial General Journal Entry

To create the initial journal entry, do the following:

On the PLM Lease, go to Lease Charges > Charge Details > Accounting Standard.
Enter values into the available fields. Depending on the lease type, there are required fields for you to enter values. For example, for a direct finance lease, you must enter values into the Asset Cost and Asset Fair Value fields.

The fields on the Accounting Standard, including the fields in the Amortization Schedule form are automatically updated with the values you entered.
After you have entered your lease values, select Actions > Create Initial Journal.

It is necessary for all finance leases to create a journal entry so that any generated invoices display the updated lease details. For operating leases, if there is no direct cost then you do not need an initial journal entry to generate invoices.
Select the Posting Date and enter a comment if you want. Then, select OK.

After you have created the initial journal entry for your lease you can then generate and post an invoice. Lease lines only appear as an option to invoice after the initial journal entry is created.

Create a Remeasurement General Journal Entry

After you create your initial journal entry, you can modify the same billing line by creating remeasurement journals.

You cannot modify the fields on the Accounting Standard form until after the initial journal entry is created and posted. If an initial journal entry is not posted or an invoice is only partially posted or not posted at all, you are not able to modify any values. You might see this message – Cannot create a Remeasure Journal Entry. There is at least one Invoice that is not posted prior to the remeasurement date – if you have not fully posted your journal entry.

To create a remeasurement journal, do the following:

Ensure that you have created the initial journal entry.
Adjust the values you want to change in the available fields. You can also change the lease type.
After you have adjusted your lease values, select Actions > Remeasure.
Select the Posting Date and enter a comment if you want. Then, select OK.

After you have created your remeasurement journal, you can see the initial journal entry and your modified journal entry under the Audit tab.

Add Incentives

For each incentive line you add, follow these steps:

Select the Type and select the Amount Type for applying the incentive.
Specify the Start date, and for a recurring incentive, specify the End date.
Specify the Amount.

The lines in the Amortization Schedule FastTab are updated based on the incentives added.

Rules for Remeasurement Journal Entries

When you are working with revenue leases, you can make adjustments to the leases by creating remeasurement journal entries. Any modifications you make to your leases are determined by the lease accounting standard and the type of lease you use. Review these rules and limitations of revenue leases.

Options for Changing the Type of Lease

The following options are possible when you want to change the type of lease using the ASC 842 accounting standard:

Operating Lease becomes a sales type lease
Operating Lease becomes a direct finance type lease
Sales Type Lease becomes a direct finance type lease
Sales Type Lease becomes an operating lease
Direct finance lease becomes an operating lease
Direct finance lease becomes a sales type lease

Note icon. Note: When you have created an exempt lease and are changing its type to an Operating type lease, then you must confirm that you are remeasuring the lease values.

The following options are possible when you want to change the type of lease using the IFRS 16 accounting standard:

Operating Lease becomes a sales type lease
Operating Lease becomes a direct finance type lease
Sales Type Lease remains a sales type lease, with Substantial turned on or off
Sales Type Lease becomes an operating lease
Direct finance lease becomes an operating lease
Direct finance lease remains a direct finance lease, with Substantial turned on or off

Note icon. Note: When you have created an exempt lease and are changing its type to an Operating type lease, then you must confirm that you are remeasuring the lease values.

Note icon. Note: Under IFRS 16, it is not possible to change a sales type lease to a direct finance type lease or for a direct finance lease to change to a sales type lease.

Rules for Modifying Values of Leases: ASC 842

You can modify an existing lease or charge.
You can only modify the lease at the beginning of a new billing period.
Proration for partial periods is not available.
Ensure all billing periods and invoices prior to the remeasurement date are posted.
You can adjust the following fields when you are creating a remeasurement journal:
- Lease type: Defaults to the current lease type.
- Fair Value: Required for direct finance and sales type leases, and defaults to the current Fair Value.
- Cost of Asset: Defaults to the ending balance in the Net investment account at the time of the remeasurement. Non-editable.
  - If you also select an operating lease at the time of the remeasurement, the default cost of asset is zero, and you can enter a new value.
- Unguaranteed Residual Value: Defaults to the current value. Optional.
- Guaranteed Residual Value: Defaults to the current value. Optional
- Residual Value: The sum of guaranteed and unguaranteed residual values. Non-editable.
- Lease End Date (or remaining lease term): Defaults to the current value. Required
- Payment amount: Defaults to the current value. Required.

Rules for Modifying Values of Leases: IFRS 16

You can modify an existing lease or charge.
You can only modify the lease at the beginning of a new billing period.
Proration for partial periods is not available.
Ensure all billing periods and invoices prior to the remeasurement date are posted.
You can modify the same lease fields described under the ASC 842 rules, with the following exceptions:
- Cost of Asset: You can enter any amount here.
- Fair Value: If you change the lease type from operating to direct finance, calculate the Asset fair value as the Cost of Asset plus the balance in the Deferred Rent Receivable account. You can change the amount.
- When you change the lease type to a sales type lease or direct finance type for the modified lease, you can select if the new lease remeasurements are Substantial or Not Substantial.
  - Substantial: Recalculates the implicit rate.
  - Not Substantial: Uses the old implicit rate and does not calculate a new implicit rate.
If the original lease is a direct finance or sales type lease and the type of the lease doesn’t change after the remeasurement:
- Set up the Gain/Loss on Modification GL account. This account is required for the direct finance and sales type leases.
- If the modified lease has Substantial turned off, you cannot change the Direct Cost at the time of the remeasurement.
If the original lease is the direct finance or sales type lease and you change the lease type to an operating lease:
- Create the remeasurement journal entries to clear all balances of the original lease and enter the Asset Clearing amount, which should equal the balance in the Net Investment account.
- Continue with the modified lease as if this is the new lease.

The header fields that appear depend on the type of lease that you are using. The following fields are available in the header:

Header (tab) fields
Lease classification	Fields
ASC 842 Fields
Available fields for: Sales Type Lease Direct Financing Lease	Lease Type: Displays the lease type. Asset Cost: Displays the value from the net investment of the last invoice after the journal is created and invoiced. Modified Asset Cost: Displays the original asset cost that was modified. Asset Fair Value Payment Option: Select the payment option: Advanced: Payment is received at the start of the lease period. Arrears: Payment is received at the end of the lease period. Direct Cost: Displays the value from the Operating Unamortized direct cost balance of the last invoice after the journal is created and invoiced. Modified Direct Cost: Displays the original direct cost that was modified. Direct Cost at Modification: Enter direct costs incurred at modification. Guaranteed Residual Value Unguaranteed Residual Value Implicit Interest Rate Implicit Rate Carrying Value: Direct Financing Lease only
Available fields for Operating Lease	Lease Type: Displays the lease type. Straight Line Calculation: If switched on, then straight line income is calculated. Initial Direct Cost
IFRS 16 Fields
Available fields for: Sales Type Lease Direct Financing Lease	Lease Type: Displays the lease type. Asset Cost: Displays the value from the net investment of the last invoice after the journal is created and invoiced. Modified Asset Cost: Displays the original asset cost that was modified. Asset Fair Value Payment Option Direct Cost: Displays the value from the Operating Unamortized direct cost balance of the last invoice after the journal is created and invoiced. Modified Direct Cost: Displays the original direct cost that was modified. Direct Cost at Modification: Enter direct costs incurred at modification. Guaranteed Residual Value Unguaranteed Residual Value Implicit Interest Rate Market Rate: Sales Type Lease only Implicit Rate Carrying Value: Direct Financing Lease only
Available fields for Operating Lease	Lease Type: Displays the lease type. Straight Line Calculation: If switched on, then straight line income is calculated. Initial Direct Cost

Incentives

Use this section to specify the incentive amounts for the lease. Theses values can be changed in one of following situations:

The initial journal entry has not been created.

When the amount is changed, the initial journal entry is recalculated.

The initial journal entry has been created, but the invoice or stub for the period has not been created.

When the amount is changed, a warning message appears. If you choose not to change the amount, all values remain as is. If you choose to change the amount, the initial journal entry is reversed with the same date, initial journal entry is recalculated, and a new remeasurement journal entry is created.

If the invoice or stub for the period already exists, this amount cannot be edited.

The following field boxes are available:

Incentives Table
Field	Description
Type	Select the type. Incentive is the only option
Amount Type	Select how the incentive is applied: Lump Sum or Recurring.
Start date	Specify the start date for the incentive. Required. The default date is the term date.
End date	Displays the end date of the incentive. The end date is required for a recurring incentive.
Amount	Specify the incentive amount.

Amortization Schedule

The following section describes the available columns under the Amortization Schedule tab for three types of leases under the ASC 842 and IFRS 16 accounting standards.

Amortization schedule (tab) fields
Lease classification	Fields
ASC 842/IFRS 16 Fields
Available fields for: Sales Type Lease Direct Financing Lease	Period Start Date End Date Amount Present Value Interest on Lease Receviable Interest on Unguaranteed Residual Value Interest on Investment Net Investment Balance Unguaranteed Residual Value Balance
Available fields for Operating Lease	Period Start Date End Date Amount Straight line income Deferred Rent Receivable Deferred Rent Receivable Balance Direct Cost Expense Unamortized Initial Direct Costs

Audit

The following section describes the available columns under the Audit tab for three types of leases under the ASC 842 and IFRS 16 accounting standards.