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 lets you update the original lease terms and conditions. The Modify Lease Record button appears on Lease records with associated assets, unless the depreciation period is set to Annual Depreciation, Monthly Posting.
For assets with a quarterly or semiannual rental frequency, the lease term is converted to months or years to match the depreciation period, which only supports monthly and annual options. After the conversion, the lease term should match the asset lifetime.
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 is generated every time you create or modify a lease. This record includes lease details and links to the Lease record and 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, enter values for 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 both the lessee and lessor approve the lease modification.
Lease Modification Details:
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Modified Lease Term – Enter the new lease term.
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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 calculated based on the modified lease term and start date.
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Click Process to update your lease records.
Note:You can't process lease modifications simultaneously using multiple browser tabs.
Asset adjustments apply only to the accounting method. You can manually adjust the tax methods through asset revaluation. For more information, see Revaluation of an Asset.
The Lease record status changes to Pending Process and a link to the Process Status page is displayed. The Process Status page shows the Deactivate Payment process. This process sets the payment records for the modified lease where the payment date is greater than or the same as the effective date, or inactive.
When you apply modifications to your lease, the following processes are triggered:
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A lease modification journal entry is created to record adjustments to the Lease Liability and Right-of-Use Asset accounts.
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A reversal interest journal entry is recorded to reverse the interest expense on lease payments after the effective date of modification
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The lease modification journal entry is linked to the new Lease Modification DHR. The Asset Current Cost and Net Book Value are then 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, like Straight Line, 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 is 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
To calculate the adjustment, first identify the balance at the time of modification. In the sample scenario, this corresponds to the balance at the end of 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 lease terms. The following table shows the payment details and new NPV for the modified lease:
|
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 falls between the 1st and the 15th of the month, it falls under Period 0. No interest should be computed and the principal amount should equal 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 higher than the balance, the difference is a positive adjustment value. This value is added to the lease liability. If the new NPV is lower than the balance, the difference is a negative adjustment value. This value is subtracted from the lease liability.
The write-down adjustment calculation from a modification is the same for both operating and finance lease. The write-down adjustment is the difference between the lease liability balance at the effective date of modification and the new NPV using the updated lease terms.
Viewing Lease Modification Details
If you modified your lease, the Lease Modification subtab becomes available on the Lease record. You can view the modified lease terms from this 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 this subtab:
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Contract ID — This columns shows a link to the Contract record.
Note:You can't edit the Contract record. The Lease Payments subtab on the Contract record shows the amortization schedule, 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 lease end date.
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