Scenario 4: Reassessment of a Purchase Option

In this example, a 10-year lease contract is created for one asset. The monthly rent payments are CU 10,000 payable at the beginning of every day (i.e., advance payments) on the 1st day of the month. The Lessee’s nominal discount rate at the commencement date is 2.0705% per annum. Additionally, there are Initial Direct Costs at commencement, as well as an Early Buyout option that is exercised after the commencement date.

To set up the contract, the following inputs must be entered during contract inception. For detailed information on the contract inception process, refer to About Contract Inception.

  1. Create the contract and enter the following inputs on the contract Accounting page:
    • Contract Rate: 2.0705
    • Compounding Frequency: Monthly
    • 360 Convention: Selected
    • Payments in Arrears: Unselected
  2. Set up the lease component and create the following terms on the Terms & Conditions page:
    1. Add the Base Rent term:
      • Lease Amount: 10,000
      • Amount Frequency: One Time
      • Payment Frequency: Monthly
      • First Payment Date: 2018-01-01
      • Last Payment Date: 2027-12-31
      • Term (months): 120
      • Expected T&C Start Date: 2018-01-01
      • Expected T&C End Date: 2027-12-31
    2. Add an IDC term:
      • Lease Amount: 50,000
      • Amount Frequency: One Time
      • Payment Frequency: One Time
      • First Payment Date: 2018-01-01
      • Last Payment Date: 2018-01-01
      • Expected T&C Start Date: 2018-01-01
      • Expected T&C End Date: 2018-01-01
    3. Add a Purchase Option term:
      • Lease Amount: 950,000
      • Amount Frequency: One Time
      • Payment Frequency: One Time
      • First Payment Date: 2018-05-01
      • Last Payment Date: 2018-05-01
      • Early Buyout: Selected
      • Expected T&C Start Date: 2018-05-01
      • Expected T&C End Date: 2018-05-01
  3. Complete the contract inception process and activate the activation group with the Activation Date set to "2018-01-01". Note that the Purchase Option term must remain unexercised at inception.
  4. Once the activation group is activated, the following entries must be posted:

    Dr. Right-of-Use Asset

    1,134,945.91

     

    Cr. Lease Liability

     

     

    1,084,945.91

At the beginning of the fifth month in the lease term (i.e. May, 2018), the Lessee and Lessor agree to terminate the lease, by exercising the Early Buyout option.

To reflect this in the application, perform a reassessment event and enter the following parameters:

  1. Set the following fields in the reassessment pop-up:
    • Amendment Date: Set this date to the date of the amendment (i.e. today's date).
    • Reason Code: Set the field as required.
    • Modify Contract Rate: Unselected

  2. On the activation group Terms & Conditions page, exercise the Purchase Option by selecting the "Likely to Exercise" checkbox on the term.
  3. Complete the reassessment event with the Effective Date set to "2018-05-01".
  4. Once the event draft is merged, the following entries must be posted:

    Dr. Lease Liability

    102,280.41

     

    Cr. Right-of-Use Asset

     

    102,280.41

Finally, post any unposted payment, accrual, or asset depreciation amounts and follow the lease end process to close the lease. The ROU Asset will become an Owned Asset, with the following resulting entries:

Dr. Acc. Depr. ROU Asset   37,831.53  

Dr. Owned Asset

1,032,665.50

 

Cr. Right-of-Use Asset

    1,032,665.50
Cr. Acc. Depr. ROU Asset     37,831.53

Nakisa Lease Administration 2022.R2-SP © 2023

 

 

Nakisa Inc. All rights reserved worldwide.