Guidelines for Calculating Monthly Lease Interest for Nonmonthly Lease Payments

Each lease you create has a specified payment frequency, most commonly monthly, quarterly, semi-annual, or annual. Normally, the Calculate Lease Expenses process accounts for interest on lease liability or operating lease expense on each interest due date on the amortization schedule.

Let's say your lease has a payment frequency of quarterly, meaning the Calculate Lease Expenses process accounts for interest on lease liability every three months. Now suppose you want the accrued interest to be calculated monthly, even though your lease has a payment frequency of quarterly. You can enable the Calculate monthly accrued interest option and the process calculates interest monthly rather than quarterly.

When you enable the Calculate monthly accrued interest option, the Generate Schedules process:

Calculates the present value based on the lease payment frequency, and then allocates the calculated interest evenly for each month in the quarter, half year, or year. The amortization schedule includes the interest amount and liability for each month.
Divides the calculated quarterly interest equally among the months in the payment period and accounts for the interest in the respective month.

To clarify, suppose you create a lease with a lease start date of 01-Jan-2019 and a payment frequency of quarterly. The lessee makes lease payments for 2019 on 31 March 2019, 30 June 2019, 30 September 2019, and 31 December 2019. The Generate Schedules process calculates the present value for quarterly frequency and generates either a quarterly or monthly amortization schedule, depending on whether you enabled the Calculate monthly accrued interest option.

Enabled: The process divides the interest amount for the first quarter by three and accounts for it on 31 January, 28 February, and 31 March.
Not enabled: The application accounts for interest on finance lease liability for the first quarter on 31 March 2019 and there is no interest expense in the January and February periods.

Convert Existing Leases

You may have many leases with quarterly, semi-annual, or annual frequency that were created before this option was available. What if you want to convert them to use a monthly accrued interest amortization schedule? You can perform a Change Financial Term or Reassessment transaction in the Change Financial Terms page or you can use the Fixed Asset Lease Import file-based data import template to enable this option.

Keep in mind that when you enable the option by performing a reassessment transaction:

The amortization schedule starts from the current lease quarter. For example, if you perform a reassessment transaction in May 2020, the amortization schedule starts in April and the Calculate Lease Expenses process accounts for catch-up interest expense for April.
When you run the Calculate Lease Expenses process for the period, the process begins calculating monthly interest from May.