Same Day Partial Terminations and Payment Adjustments - Product Advisory
December 2018
Introduction
LeaseAccelerator has noted an area of operation within the application causing user confusion and resulting in potential accounting errors. This Product Advisory is being distributed to describe the best practices for entering these scenarios:
Partial termination with a reduced payment on the surviving assets.
Partial terminations and payment adjustments that have the same effective date.
LeaseAccelerator application displays a slightly different resulting payment for a partial termination than actual amount used within the LeaseAccelerator accounting calculations.
Scenario 1: Partial Termination with Reduced Payment on Surviving Assets
A typical occurrence in the life cycle of a lease includes a partial termination (return) of an asset where the payments for the remaining term are reduced for the returned assets. This is NOT a payment adjustment but rather an asset event. The new payment is entered on the Record Asset Event window when recording the termination on the selected assets. A future LeaseAccelerator enhancement will rename this button, and the associated message, to better reflect the actual process associated with its use. The proposed label is "Auto-Record Default EOT Event" and new wording for the message is "This deal is missing an implied default EOT event, which will result in incorrect or misleading reports until nightly maintenance is run. You should Auto-Record the missing event before leaving this page."
To Record a Partial Termination Follow These Steps:
Navigate to the schedule through the application using the Search function.
Select Record Event from the Left NavBar and then select Record termination.
Select the correct asset from the asset list.
Review the auto-populated Resulting Payment field based on the effect of the return. If this amount is not correct, enter the correct amount before saving the EOT event.
Review the recorded activity on Deal Summary.
SCENARIO 1 EXAMPLE:
Facts: 36-month lease with 3 assets and an original payment of $1000 per month. There is a partial return of single asset at month 33 which reduces the monthly payment to $650 for the remaining term.
Action: Record return of single asset with correct effective date that is three months prior to original lease end date, verifying that the resulting payment is $650 before clicking Save.
Scenario 2: Partial Terminations and Payment Adjustments with Same Effective Date
Another common activity may occur at the payment date where there are both asset events (such as a partial return) and a change in the underlying index per the original contract or resolution of a contingency on the same day.
In this case, the expected behavior is that the termination is recorded before the payment adjustment. However, LeaseAccelerator cannot properly sequence these actions when the ledger date is the same. The multiple events may be recorded in an unexpected sequence causing incorrect accounting activity.
To Record a Partial Termination and a Payment Adjustment that Occur on the Same Day:
Enter the partial termination using a ledger date one day prior to effective date.
Record the payment adjustment with ledger date equal to the desired effective date.
Note: If the payment adjustment is actually a resulting payment that can be entered on the Record Asset Event while recording the termination, see Scenario 1.
SCENARIO 2 EXAMPLE:
Facts: Partial return of single asset accounting for 5% of the periodic payment and payment adjustment from $1000/month payment to $960/month, both effective December 1, 2020.
Action: Record return of single asset that accounts for 5% of the periodic payment with an effective date of November 30, 2020. Record payment adjustment reducing payment to $960/month with an effective date of December 1, 2020.
Scenario 3: Application Displays Slightly Different Result
The LeaseAccelerator application may display a slightly different resulting payment for a partial termination than actual amount used within the LeaseAccelerator accounting calculations.
When recording a partial termination from the Record Asset Event workspace, LeaseAccelerator automatically calculates and displays the resulting payment from within the application as a convenience to allow for reasonable response times. However, due to limitations of some browsers, the displayed amount may not be exactly the same as the actual database calculation, primarily due to rounding.
LeaseAccelerator considers the “entered” amount from the application as the correct amount and therefore performs a “remeasurement” (which is more like a reset). If there is a Deferred Rent or SPTA balance, this unintended inflection results in a change in the straight-line expense.
To Apply the Correct System-Calculated Payment Amount (Not the Potentially Incorrect Generated by Some Browsers):
Confirm that there is no specified amount by the lessor as part of the termination; if there is, then this amount should be entered in the Resulting Payment field.
Clear the Resulting Payment field prior to submitting your termination event. This will force the system to use the database-calculated resulting payment, and there will be no accounting change for the assets not being terminated.
SCENARIO 3 EXAMPLE:
Facts: Lease schedule with 100 assets where original monthly payment is $3353.14 and customer records a partial return of five assets where the resulting payment displayed in the application on the Record Asset Event window is $3185.47. When reviewing the resulting reporting and payment schedule, the resulting payment is actually $ 3185.48.
Action: Clear the system displayed Resulting Payment as seen below, then Save event.