What’s New in 24.1 Property & Lease

ARCHIBUS Extension for Lease Accounting

Background

V.24.1 introduces the ARCHIBUS Extension for Lease Accounting. This Extension supports the new guidance for financial reporting defined by financial accounting standards bodies.

 

Both the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB) have issued new guidance concerning how to account for leases. The key driver for the change is transparency of reporting, as the change requires organiSations to account for all debt on the balance sheet in a consistent and systematic way.

Under previous guidance, companies could expense the costs for operating leases and document the presence of leases as a footnote in annual reports. Under the new guidance, organisations must record assets and liabilities on the balance sheet for all of these classified leases.

 

Extension Features

Using the ARCHIBUS Extension for Lease Accounting, users can now fully comply with the new accounting guidelines. The Extension leverages the standard ARCHIBUS Lease Administration and Cost Administration applications, and the core ARCHIBUS features for accounting for capital and expense costs, cash flow projections and analysis, CPI escalations, and multi-currency conversions.

 

What are the two FASB and IASB incorporated into ARCHIBUS?

 

FASB ASC 842


In the February 2016 Accounting Standards Update (ASU 2016-02), the United States Financial Accounting Standards Board (FASB) provided new guidelines for capitalising leases. These guidelines are documented in the Accounting Standards Codification, Leases (Topic 842). "FASB ASC 842" refers to the guidelines and procedures outlined in Topic 842.

In general, FASB ASC 842 requires that previously unrecorded off-balance sheet obligations be brought more prominently to light by presenting lease liabilities on the face of the balance sheet.

 

The FASB ASC 842 guidelines have these goals:

  • eliminate off-balance sheet financing
  • improve comparability
  • better reflect the financial position of the lessee
  • provide fewer opportunities to structure finances to obtain a certain reporting outcome
  • address practice issues for preparers

 

IASB


The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRS), such as IFRS 16.

 

The predecessor of IASB was IASC, which issued International Accounting Standards (IAS), such as IAS 17.

The table below summarizes activities and requirements your compliance teams must consider and describes how ARCHIBUS Extension for FASB ASC 842 helps you meet these requirements.

 

Activity and Requirement

ARCHIBUS Provision


Lease Administration

Provide structured data collection to support new lease decisions.

The Extension contains an interactive questionnaire to gather the specific elements required by ASC 842 in a structured manner that supports stakeholder reports and analyses. These elements include lease term, automatic transfer of ownership, useful life of the asset, a fair market value of the asset, designated parking spaces, and whether the facility is specialised to purpose.

Provide a structured cost collection for capitalised costs.

If a lease meets guidelines for capitalisation, the interactive questionnaire also collects supporting data such as discount rate, incremental borrowing rate, initial direct cost, CPI escalations, lessor allowances, and impairment costs.

Classify leases as finance or operating leases.

The collected lease data provides the basis for classification whether a lease transfers effective control of the asset to the lessee or is a specialised facility. The program calculates key ratios to support the classification – such as the ratio of the present value of applicable lease payments to the fair market value.

Document options and assumptions that determine whether option renewal is “reasonably certain.”

The lease options include structures for documenting purchase options, economic incentives to renew, and comparison of rent to market rate.

Split lease and non-lease components.

Separate costs that may or may not require amortisation.

ARCHIBUS cost categories separate lease cost records that record base rent, escalations and CPI from service elements, such as maintenance. The ARCHIBUS cost categories naturally separate lease and non-lease components, which have different treatment under the regulations. These cost categories include base rent, property taxes, maintenance costs, lessor analyses, and impairment charges.

Calculate the schedule of costs.

The program calculates the monthly and yearly schedule of lease payments, principal, interest, amortisation, lease expense, lease liability, and remaining right-of-use asset value.

Review the financial structure of the lease in an overview.

Summary reports present the schedule of charges, such as the value of the right-to-use asset and lease liability over the lease term.

Analyse the impact of ASC 842 to support leasing and lease vs. buy decisions.

Charts compare the impact of values such as cash and equity value over the life of the lease to express the impact of the change in treatment. Compare key values, such as present value of lease payments against the market value of the asset, or the expected remaining life of the asset versus the term of the lease.

Coordinate with Controller and financial stakeholders for financial and audit reporting.

Portal-style home pages and purpose-designed reports deliver both summary and detailed reports of amortisation of right-of-use assets, interest on lease liabilities, operating lease expenses, as well as principal and interest run out of the lease obligation.

Summaries of leases, their descriptions and classifications are also available, as are ad-hoc reports on the lease and cost data.

Restate leases mid-term, as required.

The lease forms record any lease modifications, such as a change in area amounts and the date, lease renewals that change the term, lessor allowances, impairment charges, or new provisions that change the right-of-use asset value. The program uses these to recalculate cost schedules.


Accounting

Upload right-to-use asset entries and offsetting capital lease obligation liabilities for accounting.

Sub-ledger reports calculate the entries for spreadsheet, flat-file or automatic export to the accounting system, in sync with the organisation’s monthly closings.

Adjust recognised charges if there is a material change in the lease.

Ledger reports provide updated sub-ledger entries recalculated from new conditions, such as economic events that provide a significant economic incentive to exercise or refrain from exercising an option. Entries detail changes in right-of-use asset value, changes in lease liability value, and the gain or loss from the events.


Disclosures

Provide information about the nature of the lease and subleases.

Lease abstract and data elements information include:

  • General description
  • Basic and terms and conditions, as well as conditions determining variable lease payments
  • The existence of options and their terms and conditions

Provide information about future leases that create significant rights and obligations for lessees.

The lease system includes present, historical, and future leases.

Provide information about key judgements and assumptions made in classifying leases.

The centralised registry of lease information includes:

  • Recorded responses to questionnaire questions for each lease document the key assumptions and judgments
  • Cost categories separating leased and non-leased cost components
  • The discount rate assumed in calculations

The information is available in both standard and ad-hoc reports.

 

The ARCHIBUS Extension for Lease Accounting is a set of reports, tables, and tools for classifying leases (either building or equipment) as finance leases and operating leases according to FASB and IASB standards. The Extension is fully integrated into the ARCHIBUS Lease Administration application; however, the Extension does require an additional licence which is sold separately at an additional cost.

 

The ARCHIBUS Extension for Lease Accounting adds the following tasks to the Lease Administration application:

  • Background Data process
    • Define Sub-ledger Rules
  • Lease Portfolio process
    • Lease Classification Wizard
    • Lease Classification Analysis Console
    • Generate Ledger Entries for Leases
    • Lease Expense Recognition
  • Quantitative Disclosures
 

ARCHIBUS Extension for Lease Accounting, the Process Navigator appears as in the image to the right.

 

The main component of the ARCHIBUS Extension for Lease Accounting is the Lease Classification Wizard, which walks you through a series of questions to determine if a lease is classified as a finance lease or an operating lease.

 

Lease Classification Wizard

The Lease Classification Wizard is a component of the ARCHIBUS Extension for Lease Accounting. Users with a license for the Extension for Lease Accounting will find the Lease Classification Wizard available as a view in the Lease Administration / Lease Portfolio process, and also available from a button on the Lease Portfolio Console.

 

The Lease Classification Wizard walks you through the process of classifying a building lease or equipment lease as an operating lease or finance lease in accordance with FASB and IASB standards. The Wizard presents a series of initial questions, and based upon your responses, presents additional questions and generates an amortisation schedule.

 

 

For example, the wizard helps you determine:

  • Is the Ratio of Initial Liability Over Fair Market Value of the Asset less than or greater than 90%? If the Wizard determines that the value is over 90%, you might be able to reduce this value by reviewing and updating your lease right-of-use options. Accordingly, the Wizard includes questions for reviewing and updating your right-of-use options.
  • Does the Lease Term exceed 75% of the asset’s remaining useful life?
    • If so, this is a finance lease.
  • However, this criterion does not need to be considered if the lease commencement date falls at or near the end of the economic life of the underlying asset.
 

You typically use the Wizard to classify leases in these situations:

  • Initial Classification of Existing Leases -- To get started in complying with IASB and FASB ASC 842 regulations, you will want to revisit each existing lease and determine if it is an operating lease or a finance lease by working through the Wizard.
  • New Leases-- As you develop new leases, you will need to determine if they are operating or financial. As part of developing a new lease, you can work through the Wizard and classify the new lease.
  • Changed Lease -- Circumstances. Once you classify a lease, you may find that the situation changes so that you need to verify that the lease is still operating or finance. For example, suppose you used the Wizard six months ago to classify a lease. However, your company has decided to exercise an option to expand the leased space. This change affects your financial situation and could result in a new classification. See Re-evaluating a Classified Lease.
 

Finance Lease

Under FASB and IASB guidance, a lease classified as a finance lease requires the lessee to include lease assets and leases liabilities on the balance sheet.

 

Both operating and finance leases must report amortisation on a right-of-use asset. Finance lease must also report an interest expense. Finance leases are reported similarly to the payment schedule of a loan.

 

A lease is a finance lease if it represents an instalment purchase by the lessee, and if any of the following conditions exist at lease commencement:

  • The Total Lease Payment exceeds 90% of Fair Market Value.
  • The Lease Term exceeds 75% of asset’s remaining useful life. However, this criterion doesn’t need to be considered if the lease commencement date falls at or near the end of the economic life of the underlying asset. Thus, if Building Age exceeds or is near end of Building Status Life; then the system set the Ratio Lease Term Over Remaining Economic Life value to 0.00.
  • The lease provides the lessee with an option to purchase the underlying asset, and that option is reasonably certain to be exercised.
  • The lease transfers the ownership of the underlying asset to the lessee by the end of the lease term.
  • The underlying asset is of such a specialised nature that only the lessee can use it without major modifications.
 

FASB ASC 842 and IASB call for the following to be capitalised in a finance lease. This generally includes base rent plus any fixed increases during the initial and “reasonably certain” renewal terms.

  • your minimum fixed rent payments after free rent, plus any increases in your rent.
  • real estate tax amount included in the base rent (gross lease only)
 

The following expenses do not need to be capitalised for a finance lease:

  • CAM
  • operating costs
  • utility cost
  • services
  • real estate taxes (net leases only)
 

Under FASB ASC 842, the terminology has changed from "capital lease" to "finance lease."

 

Operating Lease


When a lease is classified as an operating lease, the lease expenses are treated as operating expense and the operating lease does not show up as part of the capital of the firm. The present value of the lease expenses is treated as debt, and interest is imputed on this amount and shown as part of the income statement.

 

Under FASB ASC 842 and IASB IFRS 16 guidance, both operating and finance leases must report amortisation on a right-of-use asset. Finance lease must also report an interest expense.

 

Finally, the details behind the Procedure for Recording and Classifying a Lease

This topic outlines the overall procedure for entering, classifying, and analysing lease financial data.

 

Prerequisite: Review these concepts

FASB and IASB Accounting

 

ARCHIBUS Concepts

 

Step 1: Define rules and parameters for classification

A lease manager typically defines the underlying rules governing the classification process according to the procedures at their site.

 

  1. Define Sub-ledger Rules
  1. Review the parameters related to lease classification and adjust the default values as necessary using the System Administration / ARCHIBUS Administrator - Configure Application Configuration / Configure Application Parameters task. See:

Step 2: Enter building information

A staff member, typically a Lease Abstractor, enters the buildings using Real Estate Portfolio Management / Lease Administration / Background Data / Define Locations. See Defining Locations.

  1. Add a building and enter these fields, which the Lease Classification Wizard uses:
    • Building Date Built (bl.date_bl)
    • Building Age (bl.age)
    • Building Value - Building (bl.value_bldg), the fair market value of the building alone, without its land.

Step 3: Enter leases and their options

A staff member, typically a Lease Abstractor, adds a lease using Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Lease Portfolio Console. See Lease Portfolio Console.  To classify a lease, you must enter the recurring costs (properly tagged with their cost categories), options, and option exercise dates.

 

  1. Check that leases to be classified have values for the following fields. Use the Real Estate Portfolio Management / Lease Administration / Lease Portfolio Console view to complete these fields.
    • Lease End Date
    • Lease Start Date
 
  1. Add Base Rent records to describe the rent schedule.
  1. Add Option records to describe right-of-use options.

See these procedures for details:

 

Procedures for initially entering options:

 

Step 4: Classify a lease

  1. A staff member, typically a Lease Administrator, uses the Lease Classification Wizard's automated questionnaire to classify the lease using Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Lease Classification Wizard. See these topics for details:
    • Step 3 tab - Revise right-of-use options, or enter new options.
  1. When finished working through the questions, route the classification for approval.

Step 5: Approve the lease classification

A staff member with appropriate authorization, usually a Lease Manager or Portfolio Manager, use the Lease Classification Wizard's approval actions to review and then accept or reject the lease classification.

  • Use the Reject for Re-evaluation action to comment on an observed deficiency, log the rejection, and send the classification back for review and editing.
 

Step 6: Review reports

The lease information can now be reported to stakeholders or used to create journal entries for accounting. See:

 

Ongoing: Update lease data and re-evaluate classifications

As issues change at your site, you may need to exercise right-of-use options, which might affect the lease classification. See these procedures for re-evaluating a lease and updating right-of-use options that you decide to execute during the lease term.

 

Note Under FASB and IASB guidelines, you do not need to 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.

 


If you would like any more information regarding this blogs topic, please don't hesitate in contacting the MASS Technical Services Team. We are available on 0118 977 8560 or email us at news@mass-plc.com to find out more.


Martin Matt

 



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