Entering Lease and Non-Lease Components - Product Advisory

October 2018

The following document provides additional information with respect to entering Non-Lease Components.  

There are a number of operational decisions and subsequent actions and outputs which are impacted by how Lease and Non-Lease Components are entered in LeaseAccelerator.  This document explains these key issues and provides a summary in Exhibit 1 at the end of the document.  The headings in the exhibit are explained below. 

Exhibit 1: Rows: The key operational decisions that drive the method for entering details into LeaseAccelerator are:

• Does the lease contract contain detail line items with specific payment amounts for each line or are the payments combined into a single lump-sum rent amount? Note that the individual line items may be lease or non-lease components or they may be outside of the lease (from an accounting perspective.)  (Exhibit 1 Row Header: Contract Amounts Delineated; Contract Amounts Not Delineated)

• Is the Accounting Policy to Separate or Not to Separate Lease and Non-Lease Components (Exhibit 1 Row Header: Policy Election = Do Not Separate Components (i.e. Bundle); Policy Election = Separate Components (i.e. Do NOT Bundle)

• Regardless of the accounting policy election, does the company want to track details regarding the individual components for portfolio management, asset tracking, budgeting, lessor management or other internal management reporting and analysis needs.  (Exhibit 1 Row Header: Mgmt wants to Track Details, Mgmt Does NOT Want to Track Details

• For Accounting purposes, the elements of the contract are grouped as follows (Exhibit 1 Row Headers): o     Lease Components: the right of use assets 

  • Non-Lease Components: goods and services provided by the lessor or other 3^rd parties as part of the contract

  • Not a component of the Lease: administrative tasks to set up or initiate a lease that do not transfer a good or service to the lessee, reimbursement or payment of lessor’s costs incurred in its role as a lessor or owner of the underlying asset. 

Exhibit 1 Columns: The accounting considerations and output related to the consideration included in the contract include the below items.  Note that the treatment varies whether the payments are fixed (or in-substance fixed) and variable payments:

1. Are the payments included in the allocation of consideration used to value the ROU Assets using the standalone observable price (Exhibit 1: Column Header: ROU Asset Valuation (SOP))

2. How each of the detail components are entered into LeaseAccelerator (Exhibit 1: Column Header: How to Enter in LA)

3. The general accounting measurement business rule (Exhibit 1: Column Header: Accounting (Both Standards - ASC842 Exception Noted))

4. Treatment in Quantitative Analysis Disclosure (Exhibit 1: Column Header: Disclosure in QA)

Section A: Accounting Policies and Elections

Lease and Non-Lease Policy Elections

Accounting standards require that, for each asset type, a lessee designate and separate lease components from non-lease components. However, the standards allow a customer to elect to apply a practical expedient by asset type so that they do NOT have to separate non-lease components.  This may sometimes be referred to as

“bundling” the components for accounting purposes.  This election is found in paragraph 842-10-15-37 and 15 in ASC842 and IFRS16, respectively.

LeaseAccelerator’s standard product election is that customers do not elect the practical expedient for each asset type and will choose to separate components for ALL asset types (not bundle). This election is noted on the Transition: Policy Election screen in the Ongoing Policy Elections section. 

• The standard product feature enables a customer to track and record each asset type separately. Each asset type represents a lease component and therefore a customer must choose the accounting treatment for each - Lease Component or Non-Lease Component.  o     Non-Lease Component means “Non-Lease” treatment (for fixed payments) in LeaseAccelerator. o     This decision is entered on the Asset Types Tile in Settings.  o     Exhibit 1: Policy Election = Do Not Separate Components (i.e. Bundle); Policy Election = Separate Components (i.e. Do NOT Bundle)

• If a customer chooses NOT to separate components (or bundle), then LeaseAccelerator users may enter a lease’s combined asset to include both the lease component and non-lease components as a single asset line item. 

  • This election is recorded in the application on the Policy Election screen. 

    Customer OPTION: For Management reporting and portfolio management purposes, Customers may still choose to enter the different components as individual line items.  This is accomplished using the ParentChild feature. In this case, all line items must reference the parent asset’s product category. See Exhibit 1:

    Company wants to track details, Company does NOT want to track details.  It is important to use the same Product Category to ensure that default settings which impact the calculation of accounting output is consistent for each line item since they are “bundled” with respect to lease accounting.  Customers may  opt to use different Product Categories for each of the line items and  should carefully consider the risks in using this method since different configurations may be applied resulting in inaccurate accounting output. 

General Accounting Concepts

• Accounting for Lease Components is governed by the Accounting rules set in ASC840, ASC842, IAS17 and IFRS16 including classification, asset and liability valuation, remeasurement, modification, etc. 

• Non-Lease Components are treated using normal expense recognition guidelines defined in other accounting standards (within LeaseAccelerator this is the Non-Lease classification.) 

• The accounting standards require that Lessees value the lease and non-lease components based on the relative percentage of the standalone observable prices.  This means that the individual payment amounts specified in the lease may not be the basis for the actual accounting.  (Note: If the practical expedient to NOT separate components (i.e. bundle) is taken then this requirement is no longer operative.)

• The accounting standards require that Lessees treat Land as a separate lease component unless the accounting results are materially the same if not separated.  Customers may note that Land is not Separated on a specific schedule by using the standard Deal Tag. Customers should carefully consider whether to separate the Land component of a Real Estate Lease if the Reasonably Certain End of Term option is to BUY the assets. 

• Fixed Payments are known at the lease inception whether they are defined as the same amount or whether they change solely based on the passage of time.  This includes Step Payments or payments that change based on a specific known percentage at known intervals.  

  • Variable payments are not typically known at lease inception and change due to something other than the passage of time.  This includes payments that change due to a change in an underlying index or payments that change because a defined contingency in the contract is resolved.

    ▪ When a payment changes because a contingency is resolved and the change is on an ongoing basis, the new payment becomes a “fixed” payment at that point. Regardless of whether the payment is specifically identified for a lease or non-lease component, the adjusted total consideration of the contract is re-distributed to the lease and non-lease components.  The original relative percent of the standalone observable price is used in this re-distribution (or the appropriate rule if not entered..)

Section B: NOT Separating Components (Bundling)

Entering Lease Components: 

Lease and Non-Lease Components may have fixed and variable portions of the payments.  In this case, only the Lease Components are entered in LeaseAccelerator.  This method is sometimes referred to as “bundling” the components.  

Note that this method only applies to bundling (or NOT Separating) Lease and Non-Lease Components; the accounting standard still requires that each lease component is accounted for separately.  See Section B; Entering Components: Separating Components: Entering Lease Components below for more details. 

Entering Non-Lease Components:

Under this scenario, Non-Lease Components are included in the Lease Component and no separate entry is required.

•     Customer OPTION: For Management reporting and portfolio management purposes, Customers may still choose to enter the different components as individual line items.  This is accomplished using the ParentChild feature. In this case, all line items must reference the parent asset’s product category. See Exhibit 1: Company wants to track details, Company does NOT want to track details.

Section C: Separating Components (not Bundling)

Entering Lease Components:

Lease Components may have fixed and variable portions of the payments

• Fixed Payments: are incurred for the right to use the underlying asset provided by the lessor. 

  • Lease Component Fixed Payments are entered using the Schedule, Detail, and Option tabs of the PIW (and when appropriate the Step Payment and Interim Rent tabs) or the corresponding screens in the User Interface.

    • The associated Product Category (and Lessee, Geo combinations) should be assigned Lease Component treatment on the Settings: Asset Types tile. 

    • ASC840/ASC842 and IAS17/IFRS16 Accounting rules are applied to create the ROU Asset and

      Liability and all ongoing activity throughout the lease’s lifecycle 

  • Changes to Payments: The Payment Adjustment feature is used when the fixed payment changes due to a change in the underlying index or because a contingency is resolved. This feature is best used when the change impacts all future payments.  (NOTE: for a Capitalized Operating lease this results in an adjusted Single Lease expense.)  

    • Payment Adjustments are applied to both Lease and Non-Lease components based on the relative percent of Standalone Observable Price (or appropriate rule if not entered). 

      Accounting will subsequently follow the accounting treatment for each component.

    • Changes due to a change in the underlying index:  These changes typically change all future payments rather than a single period’s payment on the payment schedule. (Note: The invoicing itself may create a new line item for the amount due to CPI Change.)

• Under ASC842, the change will be expensed equally throughout the remaining term of the lease, and there will be no impact to the ROU Asset or Lease Liability, effectively increasing the single lease expense.   

• Under IFRS16, the change will result in a remeasurement of the Lease Liability with the difference in the resulting obligation applied to the ROU Asset.  

  ▪     Changes due to the resolution of a contingency (i.e. something other than the passage of time.)  These changes can change all future payments or only impact a single period.

• Under both ASC842 and IFRS16, when a change affects all future payments, the change causes a remeasurement of the Lease Liability with the difference in the resulting obligation applied to the ROU Asset 

• See variable payments for changes that impact a single period.

• Variable Payments: are incurred for the right to use the underlying asset but vary based on something other than the passage of time.  These are typically associated with a resolution of a contingency defined in the contract.

• Examples of contingencies may be: 

  • Rent based on gross sales or building occupancy

  • Use of an asset over defined utilization metric or in specified locations

  • Actions completed by a lessee or lessor (i.e., a lease incentive given when certain construction milestones are met or certain amount of expense incurred)

• Lease Component Variable Payments are entered using the Related Expense feature using the Expense Type = Variable / Performance.  For Non-Lease Component variable payments, see Entering: Non-Lease Components, Variable Payments below for further information. 

Entering: Non-Lease Components

Non-Lease Components may have fixed and variable portions of the payments.  

• Fixed Payments: are incurred for the goods and services provided by the lessor or a 3^rd party as part of the lease contract. 

  • Non-Lease Component Fixed Payments are entered using the Schedule, Detail, and Option tabs of the PIW (and when appropriate the Step Payment and Interim Rent tabs) or the corresponding screens in the User Interface. (Example: CAMS fixed portion in a Modified Gross Lease)

    • The associated Product Category (and Lessee, Geo combinations) should be assigned NonLease Component treatment on the Settings: Asset Types tile. 

    • The accounting for Non-Lease Components is outside the scope of ASC840/ASC842 and IAS17/IFRS16 and are accounted for using other applicable standards. 

  • Changes to Payments: The Payment Adjustment feature is used when the fixed payment changes due to a change in the underlying index or because a contingency is resolved. This feature is best used when the change impacts all future payments.

    • As noted above, Payment Adjustments are applied to all components of a lease and distributed to the detail line items based on the relative percentage of the standalone observable price. The accounting for each component is applied to the respective amounts. Please see discussion above. 

• Variable Payments are incurred when the cost for the goods and services (i.e. the non-lease component) incurred is different than the fixed amounts. These are typically associated with one-time changes (rather than ongoing changes to a base payment).  (Example: True up of CAMS in a Modified Gross Lease.) o     The change from the fixed payment may be higher or lower than the base payment for the goods and services. 

  • In some cases, the structure of a lease may have no base payment associated with the goods and services.  For example, Real Estate leases are often structured such that there is a fixed portion of the

    Non-Lease Component and a ‘true-up’ to that amount based on the actual expenses incurred (Modified Gross Leases) or where the entire payment is not defined in the lease and is the full responsibility of the Lessee (Triple Net Leases).  

  • Non-Lease Component Variable Payments are entered using the Related Expense Feature.  The following features should be used:

    • Scheduled Related Expenses (PIW); Enter Schedule: Expenses (UI):

• The feature captures the terms and conditions of the Non-Lease Component Variable payment denoting the benchmark rates, first payment amounts, timing etc. (The feature also supports capturing the terms and conditions of the Not a

  Component of a Lease items.) o     This applies to the following Expense Types: CAMS, Real Estate Taxes, Property Insurance, Other Related Expenses, Security Deposits, Special Deposits, Late Fees and Variable/Performance. 

    o     This information does NOT generate actual accounting entries.

(EXCEPTION: Security and Special Deposits will be recorded if a 1^st Payment Date and Amount are entered.)

• Note: This feature also captures One-Time Related Expenses which impact either the ROU Asset value of the lease components or require a unique standalone asset and liability (or are directly related to the lease components.)   o     This applies to the following Expense Types – ARO/End of Life, IDC and Lease Incentives

• The accounts and journal entries associated with the feature will be described in a separate Product Advisory for each impacted Expense Type

• Invoiced Related Expenses (PIW): Enter Invoice (UI)

  • The Invoice Related Expense tab is used as a mechanism to record expense accruals when an invoice is received (or expenses incurred) but not yet submitted to an Accounts Payable process for payment.  Customers may have an existing process to record these accruals therefore they may choose not to use this feature. 

  • The accounts and journal entries associated with the feature will be described in a separate Product Advisory for each impacted Expense Type

• Paid Related Expenses (PIW); Enter Invoice (UI)

  • The Paid Related Expense tab is used to record expenses associated with invoices authorized and submitted to an Accounts Payable process for the approval and final disbursement.  

  • When used in conjunction with the Invoiced Related Expense tab this feature reverses the expense accrual and records the approved expense.

  • Customers may choose not to disrupt existing processes and procedures associated with the Related Expenses which do not directly impact the ROU Asset and

    Liabilities. However, customers should consider any disclosure requirements associated with the variable non-lease components to create appropriate reporting and analysis to adjust LeaseAccelerator system generated reports as necessary.   

Entering: Not a Component of a Lease

Not a Component of a Lease payments are typically variable or non-recurring in nature. 

These expenses (when not bundled in the fixed rent for the lease component) should be entered using the Related Expense feature described above.  The appropriate Expense Type and Sub-Type should be used such as Real Estate Taxes or Property Insurance.

Security and Special Deposits are also not components of a lease.  The Related Expense features described above should be used for these items as well.  

Exhibit 1: Lease and Non-Lease Component Summary

Exhibit 1: Lease and Non-Lease Component Summary (continued)