This chapter contains these topics:
The Financial Accounting Standards Board (FASB) controls the accounting standards in the United States for financial statements to be in accordance with Generally Accepted Accounting Principals (GAAP). FASB 13, which is ruling 13 from that board, states that the revenue from rent (recurring billings) must be recognized evenly (as a straight line) over the life of the lease. For example, suppose you have a lease that is active from January 1, 2017 to December 31, 2019, and the actual base rent is the following:
| Time Period | Actual Rent |
|---|---|
| 1/1/17 - 12/31/17 | $15,000 |
| 1/1/18 - 12/31/18 | 20,000 |
| 1/1/19 - 12/31/19 | 25,000 |
According to FASB 13, the total revenue from rent for the lease, which is $60,000 ($15,000+$20,000+$25,000), must be recognized evenly or $20,000 per year ($60,000 / 3 years).
| Time Period | Actual Rent | Straight-Line Rent | Difference* |
|---|---|---|---|
| 1/1/17 - 12/31/17 | $15,000 | $20,000 | $5,000 |
| 1/1/18 - 12/31/18 | 20,000 | 20,000 | 0 |
| 1/1/19 - 12/31/19 | 25,000 | 20,000 | - 5,000 |
*Difference = straight-line rent - actual rent
For each new period, FASB 13 requires that you calculate the difference between the straight-line and actual rents. If the difference is positive, it is an accrual. An accrual is a revenue (or an expense) that gradually increases with the passage of time. GAAP states that accruals must be recognized in the financial statements. In the example, you received $15,000 in cash the first year, but you earned $20,000 based on FASB 13. The system uses an accrual entry to debit the account for accrued assets and credit the account for rent revenue.
If the difference is negative, it is a deferral. A deferral postpones the recognition of a revenue that has been received (or an expense already paid). GAAP states that deferrals must also be recognized in the financial statements. In the example, you received $25,000 in cash the third year, but you earned $20,000 based on FASB 13. The system uses a deferral entry to debit the account for rent revenue and credit the account for unearned revenue, which is a liability.
You must then add the deferral or accrual entry that includes the difference for the new period. As a result, the sum of the accruals and deferrals offsets to zero over the life of the lease.
You can do this manually from the Recurring Billing Entry screen or the system can do it automatically. The automatic process involves the following tasks:
Convert the manual FASB 13 Entries.
Generate the FASB 13 differences.
Revise the FASB 13 differences.
Generate the FASB 13 recurring billing entries.
Report on the FASB 13 information.
Before the first time you use the automatic process, one of the following is assumed:
You are initially converting to the JD Edwards World Real Estate Management system from a prior system.
You have already manually entered FASB 13 differences (accrual and deferral entries) on the Recurring Billing Entry screen.
In either case, you must run the FASB 13 Generation/Conversion program to generate new FASB 13 adjustment entries. Therefore, it is only necessary to run this global update once. The program, which is based on the Tenant/Lease Master file (F1501), updates the Recurring Billings Master and FASB 13 Lease Control files (F1502 and F1513, respectively).
The manual entries should be based on the logic that the total straight-line rent is reconciled against the total actual rent so the difference is zero at the end of the term.
Before the system can generate FASB 13 differences, set up the following:
Facility information
Tenant and lease information
Recurring billing information
The first task in the FASB 13 process is to run the FASB 13 Generation program. For a lease with recurring billings, the system does the following to calculate the effect:
Creates a batch for processing and gathers the information necessary for the generation.
Calculates the straight-line rent for the time periods.
Compares the straight-line rent to the actual rent and calculates the difference by month for the duration of the lease.
During the generation, the system does one of the following based on how the processing option are set:
Places the information into the FASB 13 Lease Control file (F1513) as the current generation and prints a report.
Rolls back (restores) the batch from a previous (inactive) generation and makes it the current (active) generation. This function lets you make corrections to a lease or its recurring billings and then regenerate the FASB 13 information.
Prints a report, but does not update the FASB 13 Lease Control file. This lets you preview the information before you generate it.
The FASB 13 Revisions screen lets you display and work with the information created by the FASB 13 Generation program. A revision is necessary if you find an error or change the FASB 13 information in a lease and its recurring billings subsequent to the generation.
You use the FASB 13 Recurring Billing Generation program to automatically create the bill code lines for accrued rent, deferred rent, and adjustments in the Recurring Billings Master file. This information is then included in the normal recurring billing cycle to create the appropriate billings.
The following reports let you print the actual recurring billings and straight-line rent for a lease and the related FASB 13 information (differences, adjustments, and net effect) in a variety of formats.
FASB 13 Register - Month
FASB 13 Register - Year
FASB 13 Detail Listing
For a graphical overview of the FASB 13 process, see Appendix C, "FASB 13 Graphical."