Lease Accounting Rules and Logic in Lucernex

To ensure compliance with lease accounting standards, the system will determine the Accounting Begin Date as follows:

• The default value for the Accounting Begin Date for ASC 842 Schedules is the later of the following two dates:

  • ASC 842 Adoption Date

  • Possession Begin Date

• The default value for the Accounting Begin Date for IFRS 16 Schedules is the later of the following two dates:

  • IFRS 16 Adoption Date

  • Possession Begin Date

• The default value for the Accounting Begin Date for GASB 87 Schedules is the later of the following two dates:

  • GASB 87 Adoption Date

  • Possession Begin Date

• You can override the value of the Accounting Begin Date on the Accounting Assumptions page of your contract or equipment contract.

Lucernex ignores terms with a status of Declined or Expired when calculating dates for terms in the Contract Terms Wizard. For example:

In the scenario above, if the user ran the Contract Terms Wizard, Lucernex would ignore terms 2 and 3, because they have either expired or they have been declined. However, since term 4 is currently available, it would be included in the wizard’s calculations.

This means that the Begin Date of the next term in the Contract Terms Wizard would be calculated as 01/01/2026. This calculated value appears in the New Term Coverage Begin Date field, which is in the upper-right corner of the Contract Terms Wizard window.

This New Term Coverage Begin Date does not appear if there is not an existing contract term.

The system searches for a configured discount rate from several sources to serve as the default discount rate. The system searches in the following order:

1. Locked Accounting Assumptions discount rate (within schedule date range)

   Please see the section below about how Lucernex uses accounting assumption records in the discount rate lookup process.

2. Contract-level discount rate

3. Manage Discount Rate table

   If you want to see the currently selected discount rate in this table, click Magnifying Glass next to the Discount Rate field. The currently selected rate has a gray background.

4. Portfolio-level discount rate

5. Firm-level discount rate

For discount rates on the Manage Discount Rates table, Lucernex will search for a discount rate that most closely matches the contract and is closest to the current date.

For example, imagine there are two discount rate records that are effective until the same date, but one is specific to the Marketing portfolio.

• Discount rate 1

  • Effective Through: 12/31/2020

  • Rate: 10%

  • Portfolio: All

• Discount rate 2

  • Effective Through: 12/31/2020

  • Rate: 12%

  • Portfolio: Marketing Portfolio

If you wanted to generate a lease accounting schedule for a contract that belonged to the Marketing portfolio, and there was no contract-level discount rate, Lucernex would select Discount rate 2.

Discount rates are also applied using a time range parameter. For example, one discount rate can be applied for contracts where the term length is between 31 and 60 months, and a second discount rate can be applied for contracts where the term length is between 61-120 months.

However, this raises the question—how does the system interpret partial months? In the example above, what if the term length was 60.25 months?

In the scenario described above, the system will use the discount rate that applies after rounding down—in our scenario, the system would not apply discount rate 2 unless the term length was greater than or equal to 61.00. The logic appears in the list below:

• Discount rate 1 is applicable between 31.00 and 60.99 months

• Discount rate 2 is applicable between 61.00 and 120.99 months

Using this logic, the 60.25-month term would use Discount rate 1.

Discount Rate lookup behavior in relation to Accounting Assumptions records

In addition to the logic listed above, the system handles discount rates on accounting assumptions records in the following manner:

• If there is an unlocked Accounting Assumption record with a discount rate and dates, if you create a schedule, the Discount Rate DOES NOT populate from the Accounting Assumption record.

• If there a locked Accounting Assumption record with a discount rate and dates, if you create a schedule that is outside the date values of the Accounting Assumption record, the system DOES NOT populate from the Accounting Assumption record.

• If there a locked Accounting Assumption record with a discount rate and dates, if you create a schedule that is within the date values of the Accounting Assumption record, the system DOES pick up the Discount Rate value from the locked Accounting Assumption record.

As part of their lease, lessees (typically sub-lessees) may sometimes receive a discount if payments are made within a certain period before the payment due date. For example, a 2|10 Net 30 term is interpreted as, “the lessee can take a 2% discount if they pay within 10 days of the invoice date, or they can pay the entire invoice without penalty or discount after the 10 days and up to the payment due date.”

To support this use case, there are three optional fields on employer records:

• Early Pay Discount: Percentage discount if the balance is paid in the “early pay days” period.

• Early Pay Days: Number of days that the discount percentage applies.

• Net Pay Days : Number of days until balance is due in full without discount or penalty.

When these fields are populated on the employer record, Lucernex uses this logic:

IF the expense setup has the A / R Flag check box selected,

AND the user does not override the payment due date,

AND the expense setup has a vendor,

AND that vendor has Net Pay Days set and greater than ONE,

AND the user generates rent payments for RE or Equipment Contracts,

THEN the Transaction Payment Due Date will be Payment Due Day + (Net Pay Days -1)

To populate these fields on a vendor record, see the Manage Employers article.

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."

The Extend Contracts tool makes the following changes:

• Updates the following dates:

  • Contract Payment End Date

  • If you select Extend Key Dates Fields, the system extends these dates:

    • Key Date End Date

    • Notice End Date

    • Action Date

    • Tickler Date

  • If you select Extend Contract Expiration Date, Possession Date, and Obligation Date, the system extends these dates

• Updates the end date of the following records:

  • Expense Schedules

    The system will also recalculate the payment amount.

  • Expense Allocations

  • Vendor Allocations

  • Percentage Rent

  • Percentage Rent Breakpoints

  • Sales Exclusions

  • Sales Exclusion Caps

  • Percentage Rent Offsets

  • Accrual Schedules

    The system will also recalculate the payment amount.

  • Scheduled Offsets

  • Alternate Rent Schedules (RE Contracts only)

When a CPI adjustment is made, two values are pulled from the associated CPI table:

• The base CPI index, which is from the month and year of the expense setup if there has been no ASC 842 re-measurement done; or from the month and year of the ASC 842 re-measurement if that's been done.

• The current CPI index, which is from the month and year of the retro date of the CPI adjustment being made.

Then the ratio of the two values is calculated. The CPI increase is calculated from this ratio, based on the base rent as of the retro date and the ratio calculated in the previous step.

Finally, the ratio in the previous step is multiplied against the CPI Multiplier, if there is one entered at the expense-setup level.

A CPI increase will never be below 0, even if the current CPI index is lower than the base CPI index. This way, the total CPI-indexed rent will never be lower than the fixed base rent. However, as the CPI index fluctuates up or down, the amount of the CPI expense above base rent may either increase or decrease.

If there are catch-up payments due, they will be calculated by taking the difference between the new and previous CPI-increase schedule amounts.

The FASB guidance for the impairment of Operating leases is that when the asset becomes impaired—that is, there is a decrease in the asset value due to an onset of an impaired condition—then:

• The ROU Asset portion of the accounting schedule is recalculated as though you were recalculating the schedule as a Finance schedule. This means that the remaining asset is evenly amortized across the remaining term.

• If there is an Operating lease with an impairment that needs to be recalculated, the Single Lease Expense portion of the accounting schedule is calculated by summing the interest on the liability and the asset amortization expense.

• Any operating lease that has a nonzero value for the Impairment amount in the schedule recalculation window is considered as impaired and subject to this treatment.

  Important!

  Impairments should be entered as a negative value.

  Note:

  The type of the schedule is still an Operating schedule. More specifically, in reporting, this schedule should be included as an Operating lease and not as a Finance lease, even though it has been recalculated in the manner described.

In some cases, there needs to be an adjustment to the rent schedule in the middle of the current period. In such cases, a mid-period calculation is needed.

When remeasuring mid-period, you will need the partial interest and single lease expense from the start of the period to the remeasurement date. These values are provided to you using the Interest Before Mid-Period Remeasurement (SLSummary.InterestBeforeMidRemeasure) and Straight Line Expense Before Mid-Period Remeasurement (SLSummary.SleBeforeMidRemeasure) fields, which can be placed in the appropriate Rent Schedule page.

To add these fields to your Rent Schedule page, make a copy of the page using the Add a List Layout procedures and then add the fields using the Page Layout Editor.

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.

If the value of the Payment Due Day is left blank, then:

• If the Pay in Arrears check box IS selected, the system will assume payment on the last day of the payment period—for example, if the frequency is set to Monthly, payments will be due on the last day of the month.

• If the Pay in Arrears check box IS NOT selected—also known as paying in advance—the system will assume payment on the first day of the payment period—if monthly, then the first of the month.

  The formula for pay in advance is:

  = (PV of Lease Liability - Cash Payment) * ((1 + the annual interest rate/12)^(days to discount / total days in the month)) - (PV of Lease Liability - Cash Payment)

However, if the Payment Due Day is populated, then:

• For monthly payment schedules, the payment due day will always be that day, regardless whether the Pay in Arrears check box is selected.

• For other frequencies:

  • If the Pay in Arrears check box IS selected, the payment due day will be the populated date in the last month of the payment period.

  • If the Pay in Arrears check box IS NOT selected—also known as paying in advance—the payment due day will be the populated date in the first month of the payment period.

    For example, if your schedule had a quarterly frequency where Q1 is January – March, and if the payment due day was the 5th, schedules paying in advance would be due on January 5 and schedules paying in arrears would be due on March 5.

The following percentage rent breakpoint types are supported in Lucernex:

• Natural Breakpoint: Used when the tenant will not pay percentage rent until they know they have enough sales to cover base rent. The payment rate is the amount of sales that is allocated for paying Base Rent.

  See our Percentage Rent Breakpoint Examples article for an example of a natural breakpoint.

• Artificial Breakpoint: Used when the landlord sets a sales amount that, when exceeded, the tenant must pay percentage rent. The breakpoint amount is a set amount specified in the contract. The payment rate is how much the tenant will need to pay when sales exceed the breakpoint.

  See our Percentage Rent Breakpoint Examples article for an example of artifical breakpoints.

• Count Based Rate: Used when the tenant bases their breakpoints on the number of units sold, rather than the dollar amount. An example of this scenario could be a movie theatre basing their percentage rent on number of tickets sold.

The percentage rent calculation method you select will impact the values displayed in the Lease YTD and Breakpoint columns on the Percentage Rent Schedule pages.

• Annual: The annual breakpoint is compared against the annual sales. Percentage rent is paid in the final month of the year.

• Annual Gross-Up: The Year-to-Date (YTD) sales are compared against a YTD breakpoint. Percentage rent is paid according to the payment frequency specified.

• Cumulative: The YTD sales are compared against the annual breakpoint. Percentage rent is paid according to the payment frequency specified.

• Per Period: Period sales are compared to the prorated breakpoint. Percentage rent is paid according to the payment frequency specified.

• Period Gross-Up: Period sales are compared to the prorated breakpoint for the first 11 months of the year. In the final period, the total annual sales are compared against the annual breakpoint. Percentage rent is paid according to the payment frequency specified. Potential credits will only be generated in the final period of the term.

There are several proration methods you can choose from on the Expense Setup page of a contract or an equipment contract. The proration method you choose impacts how the system calculates your expenses.

• Proration is disabled in the first period of a re-measured Straight Line schedule, because doing so changes the total obligation.

• If you are using Daily Rent, the Proration Method field does not appear on the page.

The available proration methods are listed below:

• Annual (actual): When calculating a partial period, the system will use the annual amount divided by the actual number of days in the year. Then, it will multiply by the number of days in the period.

  Normal years use 365 days and leap years will use 366 days.

• Annual 360: When calculating a partial period, the system will use the annual amount divided by 360 days. Then, it will multiply by the number of days in the period.

• Annual 365: When calculating a partial period, the system will use the annual amount divided by 365 days. Then, it will multiply by the number of days in the period.

  The system uses 365 as the denominator even if it is a leap year.

• Monthly (actual): When calculating a partial period, the system will use the period amount. For example, the monthly or quarterly expense amount divided by the number of days in that period. Then, it will multiply by the number of days in the partial period.

The table below displays the default proration method for an expense setup depending upon the payment frequency and whether the expense setup is using custom payment coverage. Please note: Quarterly (Any) includes English, Irish, and Scottish quarters.

*In this scenario, the proration method is not defined.

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.

See the Mid-Period Remeasurement section for information about how Lucernex behaves when you override the Schedule Begin Date during recalculation.

If there is more than one active schedule on an expense setup and the secondary schedule allocation has been configured, the system will calculate the secondary schedule allocation in the following manner:

• If the allocation is configured to be calculated as a percentage, the allocation is calculated as a percentage of the SUM of the two schedules.

  For example, if there are two expense schedules for the expense setup which have monthly amounts of $6,000 (Expense Schedule A) and $2,000 (Expense Schedule B), the sum of the monthly amount for the two schedules would be $8,000. If the secondary schedule allocation was set to 25%, this would make the total allocation $2,000. This amount is deducted from the expense schedules proportionately, as described in the bullet below.

• Regardless of whether the allocation is a percentage or a fixed amount, the allocation is deducted from the schedules proportionately.

  In the above scenario, Expense Schedule A consists of ¾ of the total expenses, and Expense Schedule B consists of ¼ of the total expenses. Therefore, $1,500 would be deducted from Expense Schedule A, and $500 would be deducted from Expense Schedule B.

• Partial first and last months are prorated.

  For example, if the secondary schedule allocation is set to 20% and the partial month was 17/31 days, then the secondary schedule will receive 20% of the prorated partial month. If the secondary amount is set to $2,000 with a total full-month payment of $10,000, and the partial month prorated payment is $5,483.87 = (17/31) * ($10,000), then the secondary schedule would get an amount for partial month of ($2,000/$10,000) * ($5,483.87) = $1,096.77.

• If the allocation amount or percentage is changed, it will trigger the Recalc? flag on the schedule.

As of the 22.02 release, the calculation logic for the Total Gross Asset and Total Accumulated Amortization fields are as follows.

Total Gross Asset (SLPeriod.GrossAssetBalance)

1. When a schedule is created, the Total Gross Asset equals the Initial Asset Balance and is the same value for each fiscal period.

2. When the schedule is recalculated, the Total Gross Asset is the newly calculated Initial Asset Balance and is the same value for each fiscal period.

3. If the schedule being created is using our Late Amendment functionality, then the recalculated Total Gross Asset is the newly calculated Initial Asset Balance as of the Begin Date and IS NOT affected by any non-postable periods.

Total Accumulated Amortization (SLPeriod.CumulativeAssetAmortBalance)

1. At the creation of a schedule, the Total Accumulated Amortization is zero.

2. After the 1st period has been posted, the Total Accumulated Amortization is equal to whatever the Asset Amortization was in the 1st period.

3. After the 2nd period has been posted, the Total Accumulated Amortization is equal to 1st period’s Asset Amortization PLUS the 2nd period’s Asset Amortization.

4. The logic described in #3 is repeated for each subsequent period.

5. When the schedule is recalculated, the Total Accumulated Amortization continues without resetting.

   For example, if the ending value of the Total Accumulated Amortization in the 1st schedule was $100 and the Asset Amortization in the 1st period of the new schedule was $15.96, then the Total Accumulated Amortization at the end of the 1st period of the new schedule would be $115.96.

6. If the schedule being created is using our Late Amendment functionality, then the recalculated Total Accumulated Amortization continues from the prior schedule’s last posted period. Its Total Accumulated Amortization and the values from the new schedule’s non-postable periods are added to the total for each non-postable period.

7. EXCEPT: If there is ever an impairment in the recalculated schedule, whether a regular recalculation or Late Amendment, then the Total Accumulated Amortization is reset to $0 at the start of that schedule.