Understanding Straightline Accounting

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 Principles (GAAP). FASB–13 states that the revenue (recurring rent) from operating leases must be recognized evenly (as a straightline) over the life of the lease.

GAAP states that accruals and deferrals must be recognized in the financial statements.

• An accrual is a positive difference when the system subtracts the actual rent from the straightline rent.

  The system generates an accrual entry to debit the account for accrued/deferred rental income and credit the account for rental revenue.

• A deferral is a negative difference when the system subtracts the actual rent from the straightline rent.

  The system generates a deferral entry to debit the account for rental revenue and credit the account for accrued/deferred rental income.

• The net sum of the accruals and deferrals over the life of the lease should be zero.

PeopleSoft Lease Administration enables you to straightline recurring rent and operating expenses during setup and also apply the straightline values and accrual or deferral into the general ledger. When an amendment is created to adjust the term of the lease, you can make straightline adjustments to the unpaid remaining periods of that lease. In the event of an early termination on a lease, the accrual or deferral must be written off during the termination period. A one-time adjustment is made to end the general ledger entry and balance out the lease amounts for all paid periods.

This diagram provides an example of the straightline process flow during lease maintenance

To initiate the straightline accounting process for a lease, you must:

• Create or amend an operating lease with straightline accounting terms.

  If you amend a lease for early termination, the accrual or deferral must be written off during the termination period. A one-time adjustment is made to end the general ledger entry and balance out the lease amounts for all paid periods.

• Activate the lease.

  The system automatically generates the transaction schedule, which is the source information for both the transaction generator and straightline accounting schedule generator.

• Run the Straightline Schedule Generator Application Engine process (RE_FASB_GEN).

  When you run this process, the system builds out the straightline schedule for the lease. The proposed straightline amounts, actual billed amounts, and accrual or deferral amounts are listed for review.

  The proposed straightline values are stored on a staging table and cannot take effect until the lease administrator applies the values to the General Ledger. The total straightline must balance out with the total actual billed. The net accrual or deferral is equal to zero, if not the system generates an error.

• (Optional) Edit or perform manual adjustments.

  You can overwrite the straightline amount. The system provides an error message if the changed straightline amount causes an out of balance between total actual rent and total straightline value.

• Post straightline accounting entries to the General Ledger.

  After reviewing the proposed straightline values, run Post Straightline Entries process to post straightline entries to the journal staging table. General Ledger must run the Journal Generator process to post the entries from the staging table.

• Review posted entries to General Ledger.

  After the entries are posted to the general ledger, you can view the posting status online.

Typically the straightline accounting process is performed as a part of the month-end close process. You can post straightline accounting on a monthly basis because the process of straightline operates only monthly. The system can accept any frequency of recurring rent, such as monthly, quarterly, annually, however, the straightline generator always bring straightline entries back to monthly. The system sums up the total of the recurring rent term for that lease's entire life span, and dividing the total recurring rent term by the total number of months.

From the above schedule, the Actual Rent payment changes within the lease term. At this point, the system must straightline the Actual Rent. The mathematical formulas are as follow:

1. Total Contract Rent Amount = Sum (Actual Rent Amount)

   Total Contract Rent Amount = $51,133.00

2. Lease Period = Total Leased Days/Total Days in a Month.

   In the above example, notice that only 14 days were leased in April-03; therefore, the period is .4667 = 14/30 days

3. Total Periods in the Lease = Sum (Lease Periods)

   Total Periods in the Lease = 12.4667

4. Straightline Amount = Total Rent Amount/Total Periods in the Lease

   Straightline Amount = $51,133.00 divided by 12.4667 = $4,101.58

5. Straightline Amount Per Period = Straightline Amount × Lease Period

   Straightline Amount Per Period for Month 1 = $4,101.58 × .4667 = $1,914.07

6. Accrual or (Deferral) Per Period = Straightline Amount Per Period – Actual Rent Amount Per Period

   For the month of April: $1,914.07 - $1,633 = $281.07 Accrual

   For the month of November: $4,101.58 - $6,000.00 = ($1,898.42) Deferral

   For the month of December: $4,101.58 - $8,500.00 = ($4,398.42) Deferral