Processing Lease Commencement for Balance Sheet Lessee Accounting
Once the lease terms are complete, you can then set the Lease Liability status for each asset line on the lease to 10 (Lease Terms Complete), which signifies that the line is ready for the lease commencement process. The lease commencement process includes:
Creating the lease liability and ROU asset amortization schedules for the assets that you want to process.
Amortization schedules show you the monetary amounts associated with each month of the lease term. The lease commencement date can be defined on each asset on the lease, or the system calculates the lease commencement date by determining when the recurring billing starts for the asset. Note that the lease commencement start date cannot be greater than the recurring billing start date.
If the payment method is In Advance, the lease commencement date is displayed in amortization schedule line 0 (zero). If the payment method is In Arrears, there is no date in line zero of the schedule. Line 0 (zero) includes the beginning balance, and no calculations are done in line 0. Amortization schedule line 1 uses the lease commencement date (whether entered on the lease, or calculated using recurring billing) as the begin date. Each subsequent line uses the first day of the month as the begin date.Note:- Amortization schedules for non-property lease generated with payment method set to In Advance deduct the payment from the beginning balance, then calculate interest on the remaining balance for each period. In the last period, the payment made on the first day equals the beginning balance, so after deducting the payment, there is no remaining balance on which to calculate interest. As a result, zero interest is applicable for the last period.
- Amortization schedules for non-property lease generated with payment method set to In Arrears calculate the interest based on the beginning balance. After the interest and balance payment, the remaining balance in the last period is zero. (Release 9.2 update)
Additionally, if you enter an ROUA End Date on the lease, the system uses this date to determine how many periods to create in the ROU asset schedule, and uses the recurring billing end date to determine how many periods to create for the lease liability schedule. If the ROUA End Date is greater than the recurring billing end date, it is possible that your ROU asset amortization schedule includes a greater number of periods than the lease liability amortization schedule.
If you have a multicurrency lease, the amortization schedules are created in the currency of the lease. When reviewing the amortization schedules, the full schedule is shown as the foreign schedule. The domestic schedule is created as each month's transaction is created.
Generating lease commencement journal entries for those assets.
After schedules are created, you can generate lease commencement journals to debit the ROU asset account, and credit the lease liability account. The system uses the beginning balance from the lease liability amortization schedule for these journal entries.
Amortization schedules must be created before you can generate lease commencement journal entries. Depending on your business process, you can either create the schedules in one step, and then generate journal entries in a separate step, or you can process both steps at the same time.
You can create amortization schedules and generate journal entries using these programs:
Lease Information program (P1501)
You can use row exits to process lease commencement tasks by selected lease, or by selected asset.
Lease Commencement program (R15170)
Use this program to complete these tasks for a batch of leases or assets. You can set the processing options to create only the schedules, create only the journal entries, or to complete both steps in a single run.
Work With Amortization Schedules program (P15171)
You can create schedules and then generate commencement journal entries for selected assets.
If the schedules are created successfully, the system then updates the Lease Liability Status to 20 (Amortization Schedule Created) for each line on the lease for which amortization schedules were successfully created. If it does not complete successfully, the system either issues a pop-up error telling you that the schedules did not complete (if you are generating schedules interactively), or updates the status to 05 (Lease Terms Incomplete) if you are using the R15170 to create the schedules.
If you are using the R15170 to create schedules and journal entries at the same time, the system first attempts to create the schedule. If it is successful, the status is updated to 20. If it is not, the status is updated to 05. The system then attempts to create journal entries for those assets at status 20.
Review the Messages column on the report generated by the R15170 to determine if the lease commencement processes completed successfully for each included asset.
Additionally, you can set up the R15170 to require the amortization schedules to be reviewed before lease commencement journal entries are processed. If you set up the program to require review, you cannot process both tasks at the same time. You must generate schedules, review them, and then manually change the status to 30 (Amortization Review Complete). You can then generate lease commencement journal entries.
If there are issues with a schedule, you can delete the schedules for a selected lease and asset, update the lease terms, and then regenerate the schedule. When you delete schedules, the system deletes the associated records from the F1517, and updates the Lease Liability Status for the associated line on the lease to 10 (Lease Terms Complete). You can then make any necessary changes and regenerate the amortization schedules.
Alternatively, if you need to make changes to the lease terms after the schedule is created, you can use the change lease terms feature, and remeasure the lease as necessary. See Changing Lease Terms After Schedule Creation for additional information.
If you want to review the schedules before generating commencement journal entries, you can use the Work With Amortization Schedules program (P15171) to complete your review. When you access the Work With Amortization Schedules form, the system displays all lessee accounting assets that have an Operating or Finance lease classification. You can narrow the number of records the system displays by using a query or specifying a lease classification status, or by selecting one of these options:
Display All Assets
Display Assets With Schedules
Display Assets Without Schedules
Display Assets With Alternate Schedules
Display Assets Without Alternate Schedules
Understanding Amortization Schedule Calculations
This section provides details on how the system calculates the present value of lease payments (PVLP) and the other amounts on the amortization schedules.
PVLP Calculation
This is the equation for calculating PVLP:
PVLP = p/(1+r)^n, where:
p: Monthly payment from recurring billing, adjusted for billing frequency.
Recurring lease payments are defined in recurring billing.
r: Monthly interest rate.
This is the lease borrowing rate divided by 12.
n: Monthly payment number.
This value increments each month. In the first month, the value is 1. In the second month, the value is 2, and so on.
The system performs this calculation for each month of the lease term, and totals the amounts to get PVLP. The number of payments in the lease term is the number of months from the begin date through the ending date in recurring billing.
Note that if you are generating payments in advance, the system does not use this formula to calculate PVLP for the first period of the amortization schedule. In this case, PVLP during the first period is equal to p, the monthly payment from recurring billing, adjusted for billing frequency, since no interest is calculated during the first period. All other periods use the formula.
ROUA Calculation
This is the calculation for the right of use asset (ROUA):
ROUA = PVLP + lp + idc + li, where:
lp: Lease payments made to the lessor at or before lease commencement.
idc: Initial direct costs
li: Lease incentives
Lease payments, initial direct costs, and lease incentives are defined in manual billing.
ROUA Expense Calculation
The calculation for ROUA expense differs, depending on the type of lease.
Operating Lease ROUA Expense Calculation:
topp / nom, where:topp: Total amount of all payments, which include future recurring billing payments and current manual billing payments for initial lease payment, initial direct cost, lease incentives.
nom: Number of months, which is determined from lease commencement date through the ROUA ending date, which could be greater than the recurring billing ending date.
Finance Lease ROUA Expense Calculation:
ROUA / nom
In addition to these standard calculations, there are other scenarios that can impact the calculations, and the amounts and information on the amortization schedule. These include:
Remaining Balance Adjustment Limits
When creating amortization schedules, the system makes slight rounding adjustments (if needed) on each monthly calculation to ensure that the journal entries for that month balance correctly.
Due to these small rounding amounts, it is common to end up with a small remainder on the last line of both the lease liability and the right of use asset schedules. For example, you might end up with a remaining balance of $2.58 USD.
A processing option on the R15170 controls how the system handles these amounts. You can define an acceptable adjustment limit, and have the system automatically adjust remaining balances in the last record of the amortization schedules if they fall within the acceptable limit.
If the absolute value of the remaining balance is within the specified limit, the system adds the remaining lease liability balance to the interest amount on a lease liability amortization schedule, and adds the remaining right of use asset balance to the ROUA expense on an ROUA amortization schedule to ensure the remaining balance is zero on the ROU asset schedule. For example, if you enter 5.00 in this option, and the remaining balance is equal to, or within the range of -5.00 to 5.00, the system automatically adjusts the balance.
If the remaining balance is outside of the defined limit, the system leaves the remaining balance as is. You can also leave the processing option blank if you do not want the system to make automatic adjustments.
If you do not choose to automatically adjust the remaining balance, or that balance falls outside of the defined limit, at the end of a lease term you can manually create journal entries to clear the remaining lease liability and ROUA balances.
You can also define the adjustment limit and whether you want the system to automatically create the adjustment journal entries in the processing options of the R15180. The system then uses that information, along with the accounts for L4 and L5 AAIs, when generating journal entries for the final line on the amortization schedule.
Free Rent
If your lease begins with a period of free rent, you can enter a date in the Lease Commencement Date on the lease detail for that asset. The period between the lease commencement date, and when recurring billing for that asset begins, is the period of free rent. When the system generates the amortization schedules, the Free Rent Included message appears at the top of the schedule to notify you that your setup for this asset includes a period of free rent.
For example, if you begin your lease on January 1, and you are given 3 months of free rent, you would enter January 1 in the Lease Commencement Date for that asset on the lease. Your recurring billing start date would then be April 1. The amortization schedule would begin on January 1, but no payment is displayed until April.
Note: If you are paying rent in arrears, (Payment Method is set to In Arrears), the amortization schedule includes the payment in the schedule periods covered by the payment. For example, if billing is quarterly in arrears, and the recurring billing start date is entered as April, February and March are included and a full payment for the quarter is displayed in April. There may be periods at the end of the schedule that are blank. However, these periods are not considered free rent.Fixed Stepped Payments
In some leases, the payment amount changes as the lease progresses. For example, the monthly lease amount in year 1 is 10,000, the amount in year 2 is 11,000, and year 3 is 12,000. In these cases, the actual payment amount is reflected on the amortization schedule, and will show the amounts for each month of the 3-year lease term, meaning months in year 1 of the lease will show a 10,000 payment, year 2 will show 11,000 payments, and year 3 will show 12,000 payments. The stepped payments are set up in recurring billing.
Note that each set of payments for each step can have a different billing frequency. For example, in year one, you might pay monthly, but in year 2 and 3, you might pay quarterly.
Also, when using payment steps, any period of the schedule can be based on prorated amounts. This occurs when the recurring billing start date is not the first day of the month or the end date is not the last day of the month. The system prorates the amounts based on the monthly amount for each step and then accumulates the amounts from both steps.
See Understanding Recurring Billing for Balance Sheet Lessee Accounting (Release 9.2 Update) for additional information.
Suspending Recurring Billing Lines
See Changing Lease Terms After Schedule Creation for additional information about remeasuring a lease.
Processing a Multicurrency Lease
Multicurrency leases are contracts in which assets are leased to a company with a currency that is different from the lessor's currency. A US company leasing equipment from a Canadian company is an example of a multicurrency lease. The financial reporting for the lease will be done in the US dollar whereas the lease payments will be made in Canadian dollar. In this case, the recurring and manual billing for the lease will be in Canadian dollar. As the accounting for the lease is based on the amortization schedules that are based on the recurring and manual billing entries, currency processing is required for the lease.
According to lease accounting standards, the lease liability account is considered a monetary account because it is tied to the lease payments. This account is subject to currency gains and losses due to fluctuation in exchange rates. The right of use asset account is not a monetary account and is not subject to currency gains and losses. However, a material shift in the exchange rate may trigger a revaluation of the right of use asset based on the exchange rate difference.
A processing option on R15170 allows you to retrieve the exchange rate from the lease header, use the system date to retrieve the exchange rate from the Currency Exchange Rates table (F0015), or enter a specified date to use for the retrieval of the exchange rate.'
Use the following steps to process a multicurrency lease:
Create Amortization Schedules
Use the foreign currency amounts from recurring billing and manual billing to create an amortization schedule.
The system creates a foreign lease liability schedule and a right of use asset schedule.
Process Lease Commencement
Create journal entries using the currency of the lease and the exchange rate to be used for the lease.
The system creates the AA and CA ledger records. The CA amounts are available in the foreign schedule and the AA amounts are calculated using the specified exchange rate.
Select the exchange rate from one of the following:
The override exchange rate in the lease header.
The exchange date effective on the system date when the commencement is executed.
The exchange rate effective on the date specified by the user.
Add a line to the domestic lease liability and right of use schedules to include the domestic amounts that are calculated during journal entry creation.
Lease commencement processing establishes the historic exchange rate that is used in the calculation of right of use asset amounts for the AA ledger.
Process Monthly Journal Entries
Lease Liability
Specify the exchange rate in the same way it is specified for lease commencement processing.
The system calculates a currency gain or loss for the lease liability if the exchange rate varies from the rates used in the previous transactions.
Create monthly journal entries based on the amounts in the foreign amortization schedule and the exchange rate used during journal entry creation.
The system creates the AA and CA ledger records. The CA amounts are available in the foreign schedule and the AA amounts are calculated using the specified exchange rate.
Add a line to the domestic lease liability schedule to include the domestic amounts and any gain or loss amounts that are calculated during journal entry creation.
Right of Use Asset
Use the current historic exchange rate as the exchange rate.
Create monthly journal entries based on the amounts in the foreign amortization schedule and the historic exchange rate used during journal entry creation.
The system creates the AA and CA ledger records. The CA amounts are on the foreign schedule and the AA amounts are calculated using the historic exchange rate.
Add a line to the domestic right of use asset schedule to include the domestic amounts that were calculated during journal entry creation.
Remeasurement
Lease Liability
Specify the exchange rate in the same way it is specified for lease commencement processing.
The system calculates a currency gain or loss for the lease liability if the exchange rate varies from the rates used in the previous transactions.
Create remeasurement journal entries based on the amounts in the foreign amortization schedule and the exchange rate used during journal entry creation.
The system creates the AA and CA ledger records. The CA amounts are available in the foreign schedule and the AA amounts are calculated using the specified exchange rate.
When the next monthly journal entry is created, add a line to the domestic lease liability schedule to include the domestic amounts and any gain or loss amounts that are calculated during journal entry creation.
Right of Use Asset
Use the current historic exchange rate as the exchange rate.
Create remeasurement journal entries based on the amounts in the foreign amortization schedule and the historic exchange rate used during journal entry creation.
The system creates the AA and CA ledger records. The CA amounts are on the foreign schedule and the AA amounts are calculated using the historic exchange rate.
When the next journal entry is created, add a line to the domestic right of use asset schedule to include the domestic amounts that were calculated during journal entry creation.
Note: When running a remeasurement, the system does an automatic revaluation of the right of use asset and establishes a new historic exchange rate. These values will be used when monthly journals are run for the start remeasurement period.
Revaluation
Right of Use Asset
The system retrieves the exchange rate from the Revaluation of Right of Use Asset table (F15173).
Create revaluation journal entries based on the amounts in the foreign amortization schedule and the historic exchange rate used during journal entry creation.
The system creates the AA ledger records and deletes any journal entry lines for CA ledger records that have a zero amount.
When you create the next monthly journal entry, add a line to the domestic ROU asset schedule to include the domestic amounts that were calculated during revaluation journal entry creation.
The system displays the revalued amount and the new historic exchange rate from the ROU asset schedule for the domestic currency.
Existing multicurrency leases that are used for balance sheet lessee accounting must be set up appropriately to avoid integrity issues. For recurring billing records having an effect on lease liability and manual billing records having an effect on ROUA, the Lessee Accounting Multicurrency Integrity program will detect and report the following issues:
Any lease in which the currency code is different between the lease header (F1501B), lease details (F15017), recurring billing (F1502B), or manual billing (F1511B)
Any lease in which the exchange rate is different between the lease header (F1501B), lease details (F15017), recurring billing (F1502B), or manual billing (F1511B)
Apart from the above issues, the program also reports if an amortization schedule exists and if manual or recurring billing has been processed for the lease.
Validating Lessee Accounting Multicurrency Integrity for additional information.
Lease Commencement Journal Entry Processing
When you complete the review of the schedules, you can then update the Lease Liability Status to 30 (Amortization Review Complete) before creating the lease commencement journal entries.
The batch and associated journal entries have the following values:
Batch Type: LA
Document Type: LA
Ledger Type: AA
Subledger: Asset number
Subledger Type: E
Purchase Order: Lease number
To create the lease commencement journal entries, the system uses the value in the Beginning Balance field on the first line of the lease liability amortization schedule to generate a debit entry for the ROU asset account, and a credit entry to the lease liability account. The system uses the LR AAI to determine the account number for the debit entry, and LL AAI to determine the account number for the credit entry.
For a multicurrency lease, the lease commencement process will establish the historic exchange rate for the ROUA amounts currency conversion in the Monthly Journal processes going forward.
If the lease commencement journal entries are successfully created, the system updates the Lease Liability Status to 40 (Lease Commencement Complete). Once a lease line is at status 40 or higher, you can no longer delete or change a schedule. You must change the lease terms and run the remeasurement or early termination process if you want to make changes to the schedule.
See Changing Lease Terms After Schedule Creation for additional information.
A processing option determines whether the system automatically approves the batch if there are no errors, or if the system uses the G/A Constants to determine whether the batch of journal entries is approved. If there are errors when creating the amortization schedule, the system updates the status to 05 (Lease Terms Incomplete). If there are errors generating commencement journals, the system updates the status to 35 (Commencement Error). The system also prints a report that lists the errors. You can set the program to print in summary or detail mode, or just to print the errors. If you select detail mode, the system lists the errors in the detail, but also lists all of the errors together at the end of the report to facilitate identifying them.
After the lease commencement journal entries are created, you can then use the Balance Sheet Lessee Accounting Batch Review program (P150911) to review, approve, delete, and post these batches. Use the processing options on the P150911 to specify the versions of the Journal Entry program (P0911) and the General Ledger Post program (R09801) to use. The system uses default version ZJDE0046 to process lessee accounting journal entries if you leave that option blank.
The Journal Entry form is read-only, and does not allow you to change the journal entries. If there are issues or errors, you can delete the batch if it has not yet been posted, or void the batch if it has already been posted, fix the issue, and regenerate the journals. If you attempt to delete a batch after it has been posted, the system voids the batch instead of deleting it. Note that while you can review these batches of journal entries in other journal batch review programs, such as the P0911, you can only delete or void these batches using the P150911. The system issues an error if you attempt to void or delete LA batch types from other journal review programs.
See Working with Batches and Posting Financial Transaction in the JD Edwards EnterpriseOne Applications Financial Management Fundamentals Implementation Guide for additional information.
Transitioning Existing Leases to the Balance Sheet Lessee Accounting Standard
You can process lease commencement activities to create amortization schedules and journal entries for a lease that is already in progress before you begin using the balance sheet lessee accounting standard.
To do this, you must first update the lease to include lessee accounting information. When you have entered all pertinent lessee information, you can then update the Lease Liability Status to 10 (Lease Terms Complete).
You then update the processing options of the R15170 with the following information:
Enter an as-of balance date.
This is the date on which you want to begin using the new lessee accounting standard.
Specify whether to use the beginning or the end balance for the period associated with the as-of balance date.
Specify whether you want the system to create ROUA adjustment entries if the balances on the ROUA and lease liability schedules are different.
Note that the schedules will be different if there are manual billing records that have an effect on ROUA. The system can create adjustment journal entries to account for the difference between the balances on the ROUA schedule and the lease liability schedule.
Specify how to retrieve the exchange rate for leases in which the transaction currency is different from the base currency.
Enter the exchange rate date.
This is the date used to retrieve the exchange rate from the Currency Exchange Rates table (F0015) for leases in which the transaction currency is different from the base currency. Note that this processing option is enabled only if the Exchange Rate Method is set to Exchange Rate Date.
After you have set the processing options, generate amortization schedules and commencement journal entries.
When you create commencement journal entries using an As-Of Balance Date, the system populates the Batch Number, Document Number, G/L Date, and Document Company fields, and selects the As-Of Balance option for each month on the amortization schedules that occurs before the date specified (if set to use the beginning balance) or the As Of Balance option for each month on the amortization schedules that occurs up to and including the date specified (if set to use the ending balance) in the As Of Balance Date processing option. Because these fields are populated for these periods, they will be excluded from monthly lessee accounting journal entry processing in the future.
The system also generates all necessary balance sheet lessee accounting journal entries.
Using an Alternate Ledger for Retrospective and Other Reporting
You use the Lessee Alternate Ledger Journals program (R15181) to write journal entries for lessee assets, for a specified period of time, to an alternate ledger. You can then use these journal entries to meet the accounting standard requirement for retrospective and historical reporting of lease liability and ROU Asset balances. By putting these balances in an alternate ledger, you can easily identify these balances when creating retrospective financial statements.
The R15181 processes leased assets with a Lease Liability Status of 20 or greater. The amortization schedules must exist for the asset before you run the R15181. The program generates journal entries using the specified alternate ledger for lines on the amortization schedule that fall within the date range specified in the from and through month and year, as defined in the processing options.
You also use the processing options to specify general ledger information, such as GL date and versions to use when creating and posting the journal entries. The version of the G/L MBF (P0900049) that you specify must have a value of Blank in the Zero Amounts processing option on the Zero Amounts tab.
Using the R15181 to create journal entries in an alternate ledger is different than using the Lessee Alternate Schedule Journals program (R15182) to create journal entries in an alternate ledger.
The R15181 is typically run once for each leased asset that had a lease that was in progress when you converted to the new standard, and the journal entries for that asset need to be included in retrospective reporting. You typically run the R15181 one time after the amortization schedules are created, and before the lease commencement journals are created.
The R15182 is typically run on a monthly basis using the same or similar schedule as creating monthly balance sheet accounting journal entries. The R15182 is intended to maintain the alternate ledgers on an ongoing basis as the lease is processed, and can be run over the alternate schedule, or over the primary schedule if no alternate schedule exists.
See Creating Alternate Ledger Journal Entries for Lessee Leases for additional information.