Example A: Consumer Price Index - Computation Methods D and C

This example shows how the system calculates the escalation amount using a conventional index such as the CPI.

For this example, review the fields and values that you set up in the Escalation Indices program (P1550):

Escalation Index: CPI
Calendar Year: 2007
January Index: 420.10
February Index: 420.60
March Index: 421.20
April Index: 421.50
May Index: 422.00
June Index: 422.40
July Index: 422.65
August Index: 422.90
September Index: 423.30
October Index: 423.75
November Index: 424.05
December Index: 424.50

Review the fields and values for the setup information in the Escalation Information program (P15016) for Lease 100:

Index Code: CPI
B F (billing frequency): M
Period Length: 12
Next Month: 01
Next Year: 08
Min % Per Year (minimum percent per year): 0.015
Max % Per Year (maximum percent per year): 0.045
Lease Factor: 0.90
Base Index: 416.40
Original Basis: 60,000.00

This table lists the fields and values for the setup information in the Escalation Billing Generation program (R15150):

1. Escalation Generation Date: 03/01/2008
1. Amount Used for Catch-Up Billings: 1 (estimated billings less adjustments)
2. Process Catch-Up Billings: Blank

The system performs these steps to calculate the escalation amount using a conventional index:

Because an override date has not been entered in the processing options of the Escalation Billing Generation program (R15150), the system retrieves the current index value based on the computation method that is entered and the values in the Next Month (NPSM) and Next Year (NPSY) fields in the escalation information:
- If the calculation method is D (direct), the system retrieves the index for the month before the month entered in the Next Month field.
  In this example, the system would retrieve the index for December 2007 (424.50).
- If the calculation method is C (average), the system uses the value in the Next Month field and the period length to determine the average index to use.
  In this example, because the period length is 12, the system uses the average index for 2007 (422.41).
  Note: The computation method dictates only which index amount to use as the current index, so the remaining calculations in this example uses the index retrieved for computation method D.
The system uses the formula (current index − base index) ÷ base index to calculate the gross escalation rate that it multiplies by the basis amount.
In this example, the rate of escalation is 0.01945 [(424.50 − 416.40) ÷ 416.40].
Because the setup information includes a lease factor of 90 percent, the system multiplies the gross escalation rate by the lease factor to derive a new rate of 0.017505.
Because the rate does not exceed either the minimum or maximum percentages, the system ignores them.
If the rate were less than 0.015 or greater than 0.045, the system would have substituted the minimum or maximum rate for the calculated rate.
The system multiplies the escalation rate (.017505) by the basis amount (60,000) to calculate the escalation amount.
In this example, the escalation amount is 1,050.30 for year 08.
Note: Depending on the setting of the Original or Last field (ORLS), the system uses either the original or last basis amount in the calculation. If the system is calculating the escalation for the lease for the first time, the system always uses the original basis amount.
To determine the escalation amount per month (periodic adjustment amount), the system divides the escalation amount (1,050.30) by 12.
In this example, the periodic adjustment amount is 87.53.
Note: The system derives a monthly escalation amount because the billing frequency in the escalation information is set up as monthly. If the billing frequency had been annual or yearly, the system would not have performed this step.
The system determines whether it needs to perform catch-up billings.
To determine this, the system compares the value of the Escalation Generation Date processing option to the values in the Next Month and Next Year fields of the escalation information. If a gap exists between the two dates, then the system performs catch-up billings (unless the processing option is set to bypass generating catch-up billings).
In this example, the Next Month and Next Year fields in the escalation information are set up for 01 and 07, respectively, and the escalation date entered is March 1, 2007. Because the system always uses the month following the date entered in the processing option to start generating the escalation, it actually begins to calculate the escalation as of April 1, 2007. Therefore, it generates a billing record in the Lease Billings Master table (F1511B) for three months of catch-up billings (or 262.58).
Note: The system does not write the recurring billing record for the escalation amount until you run the Escalation Update Without Post program (R15152).