Indexation

When you perform an indexation event on an activation group, it only applies to terms that have "Apply Indexation" set. The rate is calculated by dividing the new Referenced Index Rate by the Base Reference Rate (i.e., the original rate at inception), and is applied to the term amount. This indexed amount is recorded under different columns in the financial schedules, depending on settings and accounting standards:

  • IFRS 16: The indexed amount is capitalized and recorded under Index Lease Payment.
  • ASC 842: When you perform the first indexation event, you must select the accounting treatment: 
    • Standard: The indexed amount is recorded under Index Non-Lease Payment. When a subsequent non-indexation event occurs, any remaining non-lease payment amount is capitalized and shifted to a payment under the Index Lease Payment column.
    • Enforce non-lease: The indexed amount is recorded under Index Non-Lease Payment, and does not shift if there are subsequent events.
    • Enforce lease: The indexed amount is immediately capitalized and recorded under Index Lease Payment (similar to the IFRS treatment).

    Note: After the draft is merged, the schedules for ASC 842 will not display a highlighted event line if the indexed amount is recorded under Index Non-Lease Payment because differences due to indexation rate changes are considered to be expenses, and the liability schedules are not changed.

When indexation events are performed, the Referenced Index Rate is also updated for any existing unexercised term. If this term is then exercised in a reassessment event, the term is immediately indexed because there is a difference between the original Base Reference Rate and the updated Referenced Index Rate.

When performing an indexation event with conditional indexation, the increase between the Current Index Level set in the indexation event and the Applicable Current Index Level from the active revision should fall in the range of the Minimum Percentage Change and Maximum Percentage Change fields. If the increase is above or below these values, the adjusted value appears in the Applicable Current Index Level of the indexation draft. Note that if required, the Minimum and Maximum Percentage Change fields can be edited in the same indexation event or in a separate terms and conditions reassessment.

Nakisa Lease Administration provides you the option of splitting the recognition by selecting an Indexation Date that is different from the Modification Date. The Indexation Date determines the first payment affected by the new rate, whereas the Modification Date determines when the ROU liability impact is recognized. Note that no other indexation event can occur between the Modification Date and the Indexation Date. If a reassessment event is performed to add a term in between these dates, that term will not have the split indexation retroactively applied to it (but an indexation may occur if the term has different Base Reference Rate and Referenced Index Rate).

When the modification date occurs between payments, and payments are in arrears with any Amount Frequency other than "One Time", the new rate is applied on the portion of the amount from the Indexation Date to the following payment date. The new rate is then applied to the next whole payment amount. If the recognition is split, the new rate is applied on the portion of the payment amount from the Indexation Date to the following payment date. When payments are in advance or the Amount Frequency is "One Time", regardless of whether the recognition is split, the new rate is applied on the next whole payment amount.

If an indexation event needs to be performed on an activation group that was activated without a CPI type defined, you must first perform a separate reassessment event to set the CPI type.

Note: Indexation is not available for short term leases or low value leases, unless the contract uses indexed currencies. In the case of contracts with indexed currencies, see Indexation with Indexed Currencies for more information on how these particular indexation events work.

To enter an indexation event:

  1. Open the required activation group.
  2. Click Event in the activation group header.

  3. In the Create Event pop-up:
    1. Enter an Event Name.
    2. Select a Modification Date, which is the effective date of the event. The ROU liability impact is recognised as of this date.
    3. Set the Modification Reason to "Indexation".
    4. Select one or both of the following options: 
      • Apply Indexation on Lease Terms
      • Apply Indexation on Non-Lease Terms
    5. If the activation group is classified under ASC 842 and this is the first indexation event for the activation group, you must set the field USGAAP Indexation Treatment Type to one of the following values: 
      • Company Default: Use the setting configured in the Company Financial Setting "Default Indexation Treatment Type for GAAP" in Financial Organization Structure.
      • Standard: The application records the index amount under Index Non-Lease Payment, and only capitalizes index payments in subsequent non-indexation/non-impairment events.
      • Enforce Non-Lease: The indexed amount is recorded under Index Non-Lease Payment, and is never capitalized.
      • Enforce Lease: The indexed amount is immediately capitalized and recorded under Index Lease Payment.
    6. For the fields Lease Indexation Date Type and/or Non-Lease Indexation Date Type, select one of the following options. In both cases, the Indexation Date determines the first payment affected by the increase or decrease, but the ROU liability impact is recognized as of the Modification Date.
      • ROU Anniversary Date: The first payment that is indexed is on the next yearly anniversary of the ROU Start Date. If this option is selected, the Lease Indexation Date and/or Non-Lease Indexation Date are automatically populated.
      • User Defined: Specify the first payment that will be indexed in the Lease Indexation Date and/or Non-Lease Indexation Date fields.

      Note: These fields are not available if the contract uses indexed currencies. In this case, the Indexation Date is always equal to the Modification Date.

    7. Click Submit.
  4. Go to the activation group Accounting page.
    1. If the CPI type is CPI Global, the following CPI fields have updated:
      • The Reference Date fields for lease and/or non-lease terms have automatically been set to the Modification Date of the event. Change the date if required.
      • The Current Index Level fields for lease and/or non-lease terms show the index level configured for the updated Reference Date.
    2. If the CPI type is set to CPI Local, enter a new value for the field Current Index Level.
    3. If required, check the Conditional Indexation (Lease) and/or the Conditional Indexation (Non-lease) checkboxes to apply conditional indexation. For more information on configuring conditional indexation, see Activation Group Accounting.
  5. On the Terms & Conditions page, click an indexed term to review the following fields:
    • Base Indexation Rate: The original indexation rate used when the term was first created in the lease component.
    • Base Indexation Date: The original indexation Reference Date used when the term was first created in the lease component.
    • Reference Indexation Rate: The updated indexation rate used for this indexation event. Note that if you are using conditional indexation, this field contains the Applicable Current Index Level.
    • Reference Indexation Date: The updated indexation Reference Date used for this indexation event.
  6. At any time, click Delta to review all the changes. You can use the Select Revision drop-down to view the details from previous revisions.
  7. Click Generate Schedules to view the change in the schedules.
  8. Click Send to Assessment, which will also automatically regenerate the schedules.
  9. Click Journals to view the recognition journal entries that will be posted for this event.
  10. Click Approve and review the changes in the Event Modifications Summary pop-up. Click Approve Modifications to approve the changes.
    • Send the draft back for changes by clicking Rework.
  11. Click Confirm Classification.
  12. Click Activate to make this draft the new active version of the activation group, or click Rework to send the draft back for changes.

See also:  

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