Modifying Lease Records
To modify lease records, make sure that the Allow Lease Modifications preference is enabled in the FAM System Setup page. For more information, see Setting Up the Fixed Assets Management System.
Modifying lease records allows you to make changes to the original terms and conditions of the lease. The Modify Lease Record button is available on Lease records with associated assets, except if the depreciation period is set to Annual Depreciation, Monthly Posting.
The lease term for assets with a quarterly or semiannually rental frequency is converted to months or years to match the depreciation period, which only supports monthly and annual options. The lease term should be equal to the asset lifetime after the conversion.
For example, when a lease contract with a quarterly rental frequency and a lease term of 4 is proposed for an asset with a monthly depreciation period, the asset lifetime is converted to 12 months. Conversions for annual depreciation are rounded up.
A Lease Contract record will be generated every time you create a new lease or modify an existing lease. The Lease Contract record contains the lease details and links to the Lease record and the Journal.
You can also modify leases from the Lease Modification page.
Watch the following help video for a brief overview and demo of the Lease Modification feature in Fixed Assets Management:
To modify lease records:
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Go to Fixed Assets > Leases > Lease Modifications.
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On the Lease Modifications page, provide the following fields:
Primary Information:
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Lease – Select the lease record that you want to modify.
Note:You can modify lease records with associated assets, if the asset life is equal to the Lease Term and its depreciation period is equal to the Rental Frequency. If you want to modify a lease record after a journal has already been created, you must first reverse the lease journal. For more information, see Reversing a Lease Journal.
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Effective Date – Set the date when the lease modification is approved by both the lessee and the lessor.
Lease Modification Details:
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Modified Lease Term – Enter the new term of the lease.
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Modified Annual Interest Rate – Enter the new implicit rate of the lease.
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Modified Lease End Date – The modified lease end date is automatically computed based on the modified lease term and start date.
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Click Process to update your lease records.
Note:You cannot process lease modifications simultaneously using multiple browser tabs.
Asset adjustment will be applied to the accounting method only. You can manually adjust the tax methods through asset revaluation. For more information, see Revaluation of an Asset.
The Lease record status will be updated to Pending Process and a link to the Process Status page will be displayed. The Process Status page shows the Deactivate Payment process. This process sets the payment records associated with the modified lease record where the payment date is greater than or the same as the effective date, or inactive.
The following processes will be triggered when you apply the modifications to your lease:
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A lease modification journal entry will be created to record the adjustments to the Lease Liability and Right-of-Use Asset accounts.
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A reversal interest journal entry will be recorded to reverse the interest expense recorded to lease payments after the effective date of modification
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The lease modification journal entry will be associated to the newly created Lease Modification DHR. The Asset Current Cost and Net Book Value will then be updated.
Note:You should use Straight Line Remaining Depreciation Method since the depreciation after modification is computed based on the current net book value or remaining life. If you use other depreciation methods, for example, Straight Line method, the depreciation after modification is computed as Current Cost divided by the Asset Life.
Calculating the Lease Modification Adjustment
Sample Scenario
To show how the lease modification adjustment is calculated, the following sample lease information will be used:
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Original lease term: 3 years
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Annual payment: 150,000
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NPV: 408,487.20
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Interest rate: 5%
At the end of the second year, a modification is made to extend the lease for another year. The annual lease payments remain unchanged but a new incremental interest of 8% is applied to the lease.
Calculating the Adjustment Value
The first step to calculate the adjustment is to identify the balance at the period of the modification. Using the details in the sample scenario, this would be the balance on the second year.
|
Period |
Date |
Lease Payments |
NPV of Lease Payments |
Balance |
Interest |
Principal |
|---|---|---|---|---|---|---|
|
1 |
12/31/2020 |
$150,000.00 |
$142,857.14 |
$278,911.56 |
$20,424.36 |
$129,575.64 |
|
2 |
12/31/2021 |
$150,000.00 |
$136,054.42 |
$142,857.14 |
$13,945.58 |
$136,054.42 |
|
3 |
12/31/2022 |
$150,000.00 |
$129,575.64 |
$0.00 |
$7,142.86 |
$142,857.14 |
|
|
|
NPV |
$408,487.20 |
|
|
|
The new NPV is then calculated using the modified terms of the lease. The following table shows the payment details for the modified lease and the new NPV:
|
Period |
Date |
Lease Payments |
NPV of Lease Payments |
Balance |
Interest |
Principal |
|---|---|---|---|---|---|---|
|
1 |
12/31/2022 |
$150,000.00 |
$138,888.89 |
$138,888.89 |
$21,399.18 |
$128,600.82 |
|
2 |
12/31/2023 |
$150,000.00 |
$128,600.82 |
$0.00 |
$11,111.11 |
$138,888.89 |
|
|
|
NPV |
$267,489.71 |
|
|
|
If the first lease payment is dated between the 1st to the 15th of the month, it falls under Period 0. No interest should be computed and principal amount should be equal to the lease payment amount. For more information, see Lease Amortization Schedule Subtab.
The lease modification adjustment is the difference of the new NPV and the balance at period of modification.
New NPV: $267,489.71
Balance: $142,857.14
Lease modification adjustment: $124,632.57
If the new NPV is greater than the balance, the resulting difference is a positive adjustment value. This value is added to the lease liability. If the new NPV is less than the balance, the resulting difference is a negative adjustment value. This value is subtracted from the lease liability.
Calculation of the write-down adjustment from a modification is the same for both operating and finance lease. The write-down adjustment is calculated as the difference between the lease liability balance at the effective date of modification and the new NPV using the modified terms of the lease.
Viewing Lease Modification Details
If you have modified your lease, the Lease Modification subtab will be available on the Lease record. You can view the modified terms of the lease from this Lease Modification subtab.
To view the lease modification details:
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Go to Fixed Assets > Leases > Lease.
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Select the lease record that you want to view.
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On the Lease page, click the Lease Modification subtab. The following information is available in the Lease Modification subtab:
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Contract ID — This columns shows a link to the Contract record.
Note:You cannot edit the Contract record. The Lease Payments subtab on the Contract record will show the amortization schedule of the contract, total lease payments, total NPV, total lease liability, total interest, and total principal.
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Effective Date — This column shows the effective date of the lease modification. For the original contract, the effective date is the same as the lease start date.
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Journal ID — This column shows a link to the journal record.
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Annual Interest Rate — This column shows the modified implicit rate of the lease.
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Term — This column shows the modified lease term.
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End Date — This column shows the modified end date for the lease.
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