Decrease in Asset

To decrease the carrying amount of the right-of-use asset and the carrying amount of the lease liability in the same proportion (yet with different absolute adjustment amounts), you can use the activation group event with the Modification Reason “Decrease in Term” or “Decrease in Asset”. These types of events allow you to enter asset decrease amounts that are independent of the lease liability decrease amounts that result from changes in the Terms & Conditions.

Note: This event cannot be entered for short term leases or low value leases because no assets were created.

To properly perform a proportional decrease in asset and lease liability, changes must be done in two parts:

  • You must add a new base rent term in the lease component that will decrease the carrying amount of the lease liability in the same proportion as the decrease in carrying amount of the right-of-use asset.
  • You must decrease the asset value via an activation group event and exercise the new base rent term, which then generates three adjustment postings (for liability, asset, and gain/loss) for finance leases under all standards and for ASC842 operating leases.

Note: Any other changes required (e.g., change in the Contract Rate or IBR or a change in the base rent) must be performed in a separate event. The same modification date can be used for the second event.

To perform a decrease in asset value:

  1. Open the required lease component and create an event. Use the regular event procedure, but you must add the following:
    1. On the Terms & Conditions page, enter a new Base Rent term. The carrying amount of lease liability must be decreased in the same proportion as the decrease in carrying amount of the right-of-use asset entered at the beginning of the event. For example, if the asset must be decreased by 40%, the new base rent term must be 60% of the original base rent.
    2. If you will be subsequently increasing the lease payments, you can create a second base rent term for the additional amount in this same event.
  2. Open the required activation group and create an event. Use the regular event procedure, but note the following:
    1. In the Create Event pop-up, enter the required fields as usual, as well as the following specific settings:
      • Set the Modification Reason to "Decrease in Asset".
      • Based off of the closing NBV value of the period preceding the Modification Date, calculate the decrease in asset value for each accounting standard and enter the values in the ROU Asset Decrease Amount field. Use the tabs to navigate between accounting standards. Note that if there is a Salvage Value, this ROU Asset Decrease Amount cannot be greater than the the closing NBV value of the period preceding the Modification Date minus the Salvage Value.

      Note: Do not add the Modification Reason "Contract Rate Change". Any rate change must be done in a separate event.

    2. On the Terms & Conditions page, make the following changes:
      • The existing base rent term has been split in two (based on the Modification Date). Unexercise the old base rent that continues after the Modification Date.
      • Exercise the base rent term that was added in the previous lease component event, which represents the proportional decrease in asset value and liability.

      Note: Do not exercise the second term that was added for the base rent increase.

  3. Create another activation group event with the same Modification Date as the previous event. Make any changes required, such as changing the contract rate and exercising the term to increase the base rent.

See also:  

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