Decrease in Term

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 decrease in lease term, changes must be done in two parts:

  • You must add a new base rent term in the lease component that has an earlier end date.
  • You must exercise this new term in an activation group event and change the ROU End Date, which generates the following postings:
    • For IFRS16, the application generates three adjustment postings (for liability, asset, and gain/loss).
    • For ASC842, the application generates two adjustment postings (for liability and asset).

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

To perform a decrease in term:

  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 that is identical to the existing one, but with a shorter term that reflects the decrease in asset value that will be entered in the next 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 Term".
      • Calculate the value that the asset must be decreased by and enter the value in ROU Asset Decrease Amount (IFRS). No value is required for ASC842.

      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 (with the shorter term).
    3. On the Definition page, update the ROU End Date to reflect the decrease in asset value entered at the beginning of the event. Note that the ROU End Date cannot be set for before the last payment date of any term (other than Expected GRV) in the activation group. If an Expected GRV term exists, the GRV Payment Date is automatically updated based on the new ROU End Date.
  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.

See also:  

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