Penny Rounding - Product Advisory

May 2023

Business Summary

LeaseAccelerator does lease accounting at the asset level. When a minimal value needs to be allocated over multiple assets within the same lease schedule, the penny rounding can accumulate to differences of a penny or several pennies. In extreme cases, it may be more than a dollar.

For example, splitting a $1,000 monthly payment across three equal-valued assets results in a rounded payment amount of $333.33 per asset. But if these assets are allocated to different cost centers, the Payables Export will reflect a total payment of $999.99, based on the aggregation of the three separate lines of $333.33.

Similarly, amortization of small amounts, such as a $1 purchase option liability, can result in accretions of less than $0.01, regardless of whether it is spread across multiple assets or not. This, in turn, can result in small hanging balances in accrued interest or liability accounts since the amount written off at the end may exceed the recognized accretion based on aggregating the journal entries which exceed $0.01.

With 22R1, the penny rounding logic was augmented to systematically adjust the penny rounding up or down for certain assets within a lease schedule to prevent the accumulation of the rounding error impacting any single asset by more than the fraction of a penny.

After the 22R1 release, some customers encountered a large number of adjusting entries. With 23R2, we have enhanced the penny rounding functionality to reduce the large quantity of tiny journal entries.

What Was Done

22R1: All payments are distributed across assets in whole pennies. This ensures that, in aggregate, the payment reported matches the payment recorded, both for initial contractual term, renewal terms, and payment adjustments. In the example above, the rent allocated to each asset would be $333.33, $333.33, and $333.34.

For each type of journal entry leg, cumulative fractional portions are captured and recorded when they add up to at least $0.005. Accretion of $1 over 36 months may appear as sporadic recognition of a penny here, a penny there, but it also ensures that the ending liability before clearing is $1.00.

23R2: In an effort to reduce the large number of entries experienced by some users after the 22R1 release, changes were made to suppress asset-level adjusting entries below a certain threshold (typically 0.40 in the transactional currency). This applies to both correcting and backdated entries.

In rare circumstances, this may result in suppression of minor backdated corrections that are not associated with penny rounding.

Below are two examples from a single environment for two separate schedules comparing the number of penny entries before and after the 23R2 code deployment:

Expense Pattern

22R1: With the rounding augmentation in place, small fluctuations in the monthly straight-lined depreciation and straight-lined expense may occur. This "wobble" will be most prevalent in lease schedules that contain a large number of assets and is particularly common for Capitalized-Operating lease treatment, where expense is comprised of multiple journal entry legs, each of which is subject to cumulative fractional adjustments. Even so, the variance between the calculated straight-line expense and the actual posted straight-lined expense does not exceed pennies.

The worst-case tolerance can be calculated as the number of assets divided by 2. Ex: A lease that contains 40 assets could have, at worst, $0.20 of swing in either direction on a monthly basis.

23R2: The previous version of penny rounding sometimes resulted in an additional “wobble” between the ST/LT reclassifications during the final 12 months of lease life. This has been corrected to ensure that the LT liability account nets to zero at month end for each of the last 12 months of the reasonably certain holding period. The correction consists of an adjustment made to the reversal entry on the first day of the period during the last 12 months of lease life.

Important: The ‘wobble’ will only be corrected up to a certain threshold (typically 0.40 in the transactional currency) per asset; therefore, hanging balances in the LT liability account above that threshold will be considered a system error and left uncorrected.

Timing and Posting of Cumulative Rounding Entries

22R1: The posting date for cumulative fractional adjustments is determined by schedule attributes such as remeasurements, mid-term, or end-of-term events. In general, rounding entries are posted on the first day of the final fiscal period and are usually grouped with the same lease classification.

The example below shows how the system generates and posts the rounding entries for a schedule with a contractual end date of 09/30/2021 and the event it is subject to the following (assuming a Gregorian fiscal calendar):

Default end-of-term option is Evergreen, and while the schedule is still on Balance Sheet, the system will generate and post the rounding activities on 09/01/2021, the first day of the final month before it goes into Evergreen on 10/01/2021.

If this schedule is being renewed or modified to lengthen or shorten the term (as opposed to automated Evergreen), the system will post the rounding entries in the final month of the new term.

23R2: These small adjustments to eliminate tiny hanging balances are now deferred until the end of the lease. As a result, you may see small journal entries upon either termination (posted as an adjusting entry for backdated terminations) or the reasonably certain end-of-term for leases that have not yet been terminated. These entries have a Posting Code between 2500 and 2503 as well as a JE Short Desc of “Cumulative catchup for penny rounding”.

These entries transfer any small hanging balances to the base expense account related to the asset’s final classification. Small hanging balance will be transferred to the following expense accounts by lease classification:

Interest expense - Finance leases
Operating expense - Non-lease treatment
Lease rental expense - Operating and Capitalized-Operating leases

The cumulative catchup entries will not exceed a threshold of 0.40 in the transactional currency per asset. In the event periods are open between the reasonably certain end date and actual termination, the termination event takes precedence regarding the entries’ posting date.

Examples below:

Note: Schedules with a large number of assets may incur schedule-level cumulative catchup entries exceeding the 0.40 transactional currency threshold.

Scope of Impact

To the extent that previously terminated schedules are subject to recalculation (typically due to upstream modifications on an active lease), you may see adjusting entries with the 23R2 release to clear any hanging balances resulting from penny rounding. Similarly, partial terminations may produce cumulative catchup adjusting entries to clear any small hanging balances associated with the terminated assets.

Related accounting reports may include these previously terminated schedules to the extent adjusting entries are created. Likewise, in the event the adjusting entries are related to a time period in which the schedule had a different classification (as in pre-transition), a secondary row of data may appear on reports such as the Quantitative Analysis Report. This additional row would include the values from journal entries posted within the reporting period and may appear as pennies.

Additionally, reports that were not part of the initial modernization effort may reflect differing lease classifications due to the adjusting entries. When the most recent entries represent activity related to the life of the lease when it was a different classification, reports such as the Payment Schedule may switch to that earlier classification. (No payments by fiscal month are affected.)

Example: Capitalized-Operating schedule is in evergreen status (Operating classification). Most recent entries are adjusting entries related to the time the lease was on balance sheet, so the Payment Schedule shows Capitalized-Operating as opposed to Operating. However, in subsequent months – after evergreen entries have been posted – the classification will switch back to Operating on the report.

Note: The outstanding issue related to Translation Adjustments on schedules where the transactional and functional currencies are the same – but different from the reporting currency – has been exacerbated with the penny rounding update. This will be addressed in a future release.

Additional Notes

When an account has a prior month true-up and cumulative rounding activities, both recorded on the same date, the system may misattribute the true-up portion to "Rounding” as the "Triggering Event". Reports utilizing "Triggering Event" include the Adjusting Entries Analysis Report, Accounting Roll Forward, and Deal Analysis Report.

Penny rounding is not applicable to split allocations. If split allocations are causing unacceptable penny discrepancies, coarser-grained allocations are advised. Rounder (coarser-grained) allocations will have less risk of penny rounding. For example: If 1.7% is causing penny rounding issues, the recommendation is to change it to 2%.

Leases with split classifications, as in a mix of non-lease and lease components, may still result in penny discrepancies.

In order for the Net Book Value to equal zero at the natural reasonably certain end date (prior to termination), a single true-up entry may be required. In cases where tiny cumulative penny rounding entries are now being suppressed, a single true-up entry is needed to prevent regressions related to hanging balances on assets for schedules that may not have previously been affected by penny rounding entries. These entries will carry the penny rounding posting code (between 2500 and 2503) for easier identification.

The Capitalized-Operating Lease example in the Timing and Posting of Cumulative Rounding Entries examples reflect this scenario with the entries to Operating Asset and Accumulated Depreciation-Operating Lease.

Penny rounding can still be applied to current open and future periods.

In very unusual circumstances, the sum of the AP Clearing entries may be slightly off when comparing to the payment schedule in Deal Summary in the UI during the life of the lease but would be the same in total once the deal has been terminated.

Minimal differences related to DR/CR balancing in Functional currency will hit Gain/Loss on FX Remeasurement while minimal differences related to DR/CR balancing in Reporting currency will hit Translation Adjustment.

A slight “wobble” between the ST/LT liability accounts may be visible in schedules with non-monthly payments in advance during the 13th, 14th etc. months before the reasonably certain end date, as the liability will be fully relieved aside from that portion being paid in the next 12 months. The “wobble” correction described in the Expense Pattern section is applied only to the last 12 months of the RC term.

Schedules affected by a balance adjustment loaded in a period that has since been closed will continue to generate tiny adjusting entries to address any fractional (less than a cent) portion of the balance adjustment. This is to ensure there is no hanging balance associated with the rounding of the adjustment as applied at the asset level. The reason for this is that balance adjustments are applied to only one standard account while the other leg of the entry is applied to the Adjusting Entry account.

Purchase Option Liability and Guaranteed Residual Liability may have hanging penny balances until the purchase option or GRV has been exercised. If the GRV crosses classification events (such as transition) it is possible that a penny hanging balance may remain after the GRV has been exercised.

Examples:

For future dated Lease Incentives that have undergone a remeasurement in which the lease classification changed, the Lease Incentive Receivable account may have a penny hanging balance.

Example:

As a result of finer corrections to adjusting entries made with the 23R2 release, some entries are now reflecting corrected FM/FY adjusting dates. This may further result in a different level of aggregation than what previously existed. It is possible for these differences in aggregation to manifest in closed periods. While the number of entries may be different, the debit/credit totals by account will not change.