ASC 842 Test - Equipment Contract Module

If you selected a value from the Accounting Method override field on the ASC 842 Accounting Assumptions page, run the ASC 842 test, and the ASC 842 Test result is different from the value of the Accounting Method override field, the system will not save the ASC 842 Test. This is because the value of the override field takes precedence over the value of the ASC 842 Test result.

To run an ASC 842 lease classification test:

1. Click Add Item.

   This displays in the Actions menu on the right side of the page.

   The page becomes editable.

2. Select the asset type from the Asset Type field.

3. Select the schedule type from the Schedule field.

   Important!

   Do not select the Locked? check box until you have completed the classification test. Selecting this check box will prevent you from editing the classification test.

4. Enter notes in the Notes field.

5. Test 1: Select the check box if the ownership of the asset reverts to the tenant at the end of the term.

6. Test 2: Select the check box if the lease contains a purchase option that the tenant is likely to exercise.

7. Test 3: Complete the following fields:

   • Remaining Economic Life Threshold: The fraction of the economic life of the underlying asset that amounts to “a major part” of that remaining economic life. This value is usually set to 75%.

   • Year Useful Life Began or Year Built

   • Remaining Economic Life: Enter the value of the remaining economic life using the field and the field provided.

   • Test Begin Date / Test End Date

     Note:

     This test compares the Remaining Economic Life of the lease to the Test Begin and End Dates. If this value is below the Remaining Economic Life Threshold, your lease will pass this test.

   • Is the lease commencement at or near the end of the economic life of the asset?: If selected, Test 3’s outcome changes to Pass regardless of whether the value the Test Term Length to Remaining Life is greater than the Remaining Economic Life Threshold field.

8. Test 4: Complete the following fields:

   • Fair Value Threshold: The fraction of the fair value of the underlying asset that amounts to “substantially all” of its fair value. This value is usually set to 90%.

   • Discount Rate: The discount rate should automatically populate. The Discount Rate is also known as the Interest Rate or Internal Borrower Rate (IBR).

     To learn how to select a different discount rate from the Manage Discount Rates table, see our Search for Another Discount Rate article.

   • PV Of Structuring Costs: Enter any fees paid to the owners of a special-purpose entity for structuring the transaction.

   • PV Of Other Adjustments: Enter any other miscellaneous costs that should be accounted for in the schedule.

   • Portion of Asset Controlled: Enter the portion of the asset that you control.

   • Fair Value of Asset: FASB 842. 10. 20 defines fair value as 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.

   • Fair Value Source: Enter the name of the person who assessed the fair value of the asset. You can also attach a document by clicking the Attach Document .

     Note:

     This test determines whether you are paying more for the asset than the percentage of the asset you control, or whether the initial liability balance is less than or greater than the threshold fair value controlled.

9. Test 5: Select the check box if the asset has a specialized use, such as that the lessor will have no alternative use for it.

10. Click Run and Save.

    This displays in the Actions menu on the right side of the page.

    The page refreshes, and the results of the test appear in the ASC 842 Test List table at the top of the page. The test results also appear in the ASC 842 Test table above the Locked? check box.

11. Review your rest results. If your results are not what you expected, review the data you entered.

12. If you want to re-run the ASC 842 Test:

    1. Make your changes.

    2. Click Run and Save.

       This displays in the Actions menu on the right side of the page.

13. Once you are certain the results are correct, select the Locked? check box in the upper-right corner of the ASC 842 Test table.

    Important!

    Locking the test ensures that the test cannot be modified. You cannot delete a classification test once it has been locked, but you can create another test as necessary.

14. Click Run and Save to confirm that you want to lock the classification test.

    This displays in the Actions menu on the right side of the page.

15. If at any point you need to run a new classification test, click Add Item.

    This displays in the Actions menu on the right side of the page.

    A new classification test opens. Follow steps 1 - 10 to run a new classification test.

To delete an ASC 842 test:

1. Select the test you want to delete from the ASC 842 Test (Equipment Contract) List.

   A dialog opens, asking you to confirm your choice.

2. Click Yes.

   The test is deleted. It no longer appears in the ASC 842 Test (Equipment Contract) List.

To generate an ASC 842 contract schedule:

1. Click Calculate Schedule.

   This displays in the Actions menu on the right side of the page.

   A window opens.

   Note:

   The Begin Date, End Date, and Discount Rate automatically populate. Steps 8 – 13 refer to fields that will automatically populate with data entered on the Contract Accounting Assumptions page. This is the last place where you can edit these fields prior to generating your schedule.

   To learn how to select a different discount rate from the Manage Discount Rates table, see our Search for Another Discount Rate article.

   Note:

   The default value of the Schedule Begin Date is the later of the Accounting Begin Date or the first day of the first unposted period for the schedule. You can override the value of the Schedule Begin Date in the Create Schedule window, provided the date you choose is on or after the first day of the first unposted period.

2. Select the schedule type from the Type field.

3. Select the accounting method from the Accounting Method field.

   If you select Finance, two new fields appear: Remaining Asset Balance and Date to Amortize to. These fields will also appear if you select Operating and then enter a value in the Impairments field.

4. Select the reason for creating the schedule from the Creation Reason field.

   Creation reasons are either user-generated or generated at the company level. However, all creation reasons created at the user level will also be available at the company level.

5. If you want to specify a percentage or amount of the total asset balance that should remain after the schedule end date, enter the value in the Remaining Asset Balance field.

   There are two option buttons: Currency and Percentage. If you enter a value between 0-100, the system will default the option setting to Percentage. If you enter a value of 100.01 or above, the system will default the option setting to Currency. You can override the default option setting.

6. If you want to select a date beyond the schedule end date to amortize to, enter the date in the Date to Amortize to field.

   By default, the value of this field is the schedule end date.

   To learn more about asset amortization, see the Amortization of the Asset in Contracts article.

7. Enter any other miscellaneous costs that should be accounted for in the schedule in the PV Of Other Adjustments field.

8. Enter any fees paid to the owners of a special-purpose entity for structuring the transaction in the PV Of Structuring Costs field.

9. Enter the amount paid towards the lease payment prior to the commencement date, minus any incentives that have reduced the cost of the lease in the Payments Before Commencement (Less Incentives) field.

10. Enter the incremental costs of a lease that would not have been incurred if the lease had not been obtained in the Initial Direct Costs field.

    For example, costs for originating the lease agreement, and legal fees and commission.

11. Enter any incentives that have reduced the cost of the lease in the Lease Incentive Amount field.

12. Enter any deductions related to the diminished value of the asset in the Impairments field.

    Important!

    Impairments should be entered as a negative value.

    The Remaining Asset Balance and Date to Amortize to fields appear if you selected Operating from the Accounting Method field. See steps 5 and 6 to learn how to complete these fields.

    If you enter a value in the Impairments field, two read-only fields appear:

    • Prior Accumulated Amortization Balance: Accumulated Amortization Balance of the accounting period prior to the impairment.

    • Total: Sum of the impairment and the Prior Accumulated Amortization Balance.

13. Enter notes in the Notes field.

14. Click Create Schedule.

    The page refreshes, and the schedule appears on the page.

Creating an asset schedule generates a schedule for all assets assigned to that schedule type for the contract. For example, if you have 100 assets with separate expenses that are all tied to the same schedule type, 100 asset schedules would be generated.

In order to calculate an equipment schedule for ASC 842, you must first meet one of three prerequisites:

• You must populate the Accounting Method Override on the Equipment Assumptions / ASC 842 Tests page.

• You must populate the Fair Value of the Asset, the Portion of Asset Controlled and Remaining Economic Life/Units on the Equipment Assumptions / ASC 842 Tests page.

  If the system finds the proper values, it will generate a locked test. The system generates a locked test to prevent you from editing the test and causing the test to be out of sync with the lease accounting schedule.

• You must run and LOCK an Equipment Classification Test.

If none of these three prerequisites are met, a message appears in the log file of the event in the Job Log that says: Unable to find current, locked ASC 842 test result. Cannot generate schedule.

To generate an asset schedule:

1. Click Calculate Schedule.

   This displays in the Actions menu on the right side of the page.

   A window opens.

2. Select the Create Equipment Schedules tab.

   The Create Equipment Schedule page of the window opens.

3. Select the schedule type from the Type field.

   If you want to create a new schedule type, follow the Add an Accounting Schedule Type procedures.

   You must select the schedule type associated with your equipment.

4. Select the creation reason from the Creation Reason field.

   Creation reasons are either user-generated or generated at the company level. However, all creation reasons created at the user level will also be available at the company level.

5. Enter the discount rate in the Discount Rate field.

   The discount rate is also known as the Interest Rate or Internal Borrower Rate (IBR). To learn how to select a different discount rate from the Manage Discount Rates table, see our Search for Another Discount Rate article.

6. Click Create Schedule.

   The page refreshes, and the schedule is created. You will receive an email confirmation.

   Note:

   If more than one of your assets have had the value of their Operational Status change to something other than Active, a dialog box will open, with a message that reads: Since last schedule creation, some assets have changed to non-Active status. Do you want to terminate the asset schedules for them? To learn more about bulk termination, see the Asset Schedule Termination > Bulk Termination section below.To learn more about bulk termination, see the Lease Accounting Schedule Termination article.

7. Select ASC 842 Equipment Schedules from the field to the left of the Actions menu.

   The ASC 842 Equipment Schedules page opens. The schedule data appears on the page.

Re-measurement is the process by which an entity will adjust the right of use asset and lease liability due to a change. Generally, re-measurement occurs if something has changed in the contract. Maybe the termination option was renegotiated, or maybe additional costs came up that needed to be added to the contract.

When an active schedule is recalculated or terminated, the Inactive Date of the previously active schedule will automatically populate with the date of recalculation or termination.

To re-measure a lease accounting schedule:

1. Click Calculate Schedule.

   This displays in the Actions menu on the right side of the page.

   The Create New ASC 842 Rent Schedule window opens.

2. Enter the dates that your re-measurement should begin and end in the Begin Date and End Date fields.

   You can also click Calendar to open the Date Picker and select the appropriate date.

   Note:

   The default value of the Schedule Begin Date is the later of the Accounting Begin Date or the first day of the first unposted period for the schedule. You can override the value of the Schedule Begin Date in the Create Schedule window, provided the date you choose is on or after the first day of the first unposted period.

3. Select the schedule type from the Type field.

4. Select the creation reason from the Creation Reason field.

   Creation reasons are either user-generated or generated at the company level. However, all creation reasons created at the user level will also be available at the company level.

5. Select the accounting method from the Accounting Method field.

   The data from the existing schedule populates. If there are any posted periods between the Begin Date and the End Date, the Re-measurement Balance Forward will automatically calculate the re-measurement balance forward for those posted periods.

6. Make any changes necessary to the discount rate, the liability values, and the right of use asset values prior to re-measurement.

   To learn how to select a different discount rate from the Manage Discount Rates table, see our Search for Another Discount Rate article.

7. Enter notes in the Notes field.

8. Click Create Schedule.

   The window closes, and the Create New ASC 842 Rent Schedule page refreshes. The re-measured schedule appears in your ASC 842 Rent Schedule List.

Re-measurement is the process by which an entity will adjust the right of use asset and lease liability due to a change. Generally, re-measurement occurs if something has changed in the contract. Maybe the termination option was renegotiated, or maybe additional costs came up that needed to be added to the contract.

When an active schedule is recalculated or terminated, the Inactive Date of the previously active schedule will automatically populate with the date of recalculation or termination.

In order to calculate an equipment schedule for ASC 842, you must first meet one of three prerequisites:

• You must populate the Accounting Method Override on the Equipment Assumptions / ASC 842 Tests page.

• You must populate the Fair Value of the Asset, the Portion of Asset Controlled and Remaining Economic Life/Units on the Equipment Assumptions / ASC 842 Tests page.

  If the system finds the proper values, it will generate a locked test. The system generates a locked test to prevent you from editing the test and causing the test to be out of sync with the lease accounting schedule.

• You must run and LOCK an Equipment Classification Test.

If none of these three prerequisites are met, a message appears in the log file of the event in the Job Log that says: Unable to find current, locked ASC 842 test result. Cannot generate schedule.

To re-measure your ASC 842 asset schedules:

1. Click Calculate Schedule.

   This displays in the Actions menu on the right side of the page.

   The Create New ASC 842 Rent Schedule window opens.

2. Select the Create Equipment Schedule tab.

3. Select the schedule type you want to re-measure from the Type field.

4. Select the creation reason from the Creation Reason field.

   Creation reasons are either user-generated or generated at the company level. However, all creation reasons created at the user level will also be available at the company level.

   Note:

   The Discount Rate pre-populates with the default discount rate. Modify the value in the Discount Rate if necessary. To learn how to select a different discount rate from the Manage Discount Rates table, see our Search for Another Discount Rate article.

5. Click Create Schedule.

   The page refreshes, and the schedule is created. You will receive an email confirmation.

   Note:

   If more than one of your assets have had the value of their Operational Status change to something other than Active, a dialog box will open, with a message that reads: Since last schedule creation, some assets have changed to non-Active status. Do you want to terminate the asset schedules for them? To learn more about bulk termination, see the Asset Schedule Termination > Bulk Termination section below.

6. Select ASC 842 Equipment Schedules from the field to the left of the Actions menu.

   The ASC 842 Equipment Schedules page opens. The schedule data appears on the page.

When you re-measure or terminate a lease and you are going to recalculate your accounting schedules, you can allocate appropriate portions of the Remeasurement Balance Forward to remain on the balance sheet or to be counted as a capital gain/loss (profit & loss impact). This change applies to real estate contracts and lease-level schedules for equipment contracts. A common use case is a change in square footage, the closure of a store, or the retirement of some fraction of equipment assets.

When an active schedule is recalculated or terminated, the Inactive Date of the previously active schedule will automatically populate with the date of recalculation or termination.

The system prorates your termination schedule as of the day prior to the day of termination. For example:

• If you terminate your schedule as of January 15th, the system will include accounting values for all days in the period up to the 14th.

• Likewise, if you terminate your schedule as of January 21st, the system will include accounting values for all days in the period up to the 20th.

Partial Lease Termination

Full Lease Termination

Important Note About Full Lease Termination

Single Asset Termination

Bulk Termination