Inception Tab

Field

Definition/Format

Incremental Rate

Required unless lease is user-classified. Your company’s incremental borrowing rate, as of the inception of the lease: “the rate that … the Lessee would have incurred to borrow over a similar term the funds necessary to purchase the leased asset.” This information is typically available from your company’s treasurer’s or controller’s office. Enter the rate as a percentage (for example, 8 percent is 8.000).

Implicit Rate

The interest rate implicit in the lease, based on both the rent stream and the unguaranteed residual. This is often not known by the Lessee. This is calculated by EZLease if you enter the Unguaranteed Residual (next) and a Fair Value.

Under ASC 842/IFRS 16/GASB 87, the Lessor's Initial Direct Costs are also part of the calculation of the implicit rate, and if they are unknown, the implicit rate is not calculated or used. If the implicit rate can be calculated, it is used as the discount rate for the lease.

Unguaranteed Residual

This is the Lessor’s expected value of the asset at the end of the lease and is often not known by the Lessee. If known, enter this to have EZLease calculate the Implicit Rate for the lease. If you have a combined land and building lease, enter the residual for the building only. Under FAS 13, the lower of the Implicit and Incremental Rates is used for the ¶7(d) present value test when a lease is classified. All other standards use the implicit rate if known.

Fair Value of Building/Equipment

Required unless the lease is user-classified operating or finance. If the lease is a building or equipment, enter the fair market value of the leased property. If it is part land and part building, enter the building portion of the fair value here. See Fair Value in chapter 2 for more information on determining the proper fair value. If a lease is partly for real estate (land and/or building) and partly for equipment, the real estate and equipment portions must be accounted for separately under two different leases.

If you usually capitalize sales tax charged on purchased assets, then sales tax on a lease should be capitalized (if the lease is finance) by adding it to the equipment’s Fair Value and excluding it from executory costs.

If you initially set up a lease and later need to “true up” the asset value (such as after construction is complete), change the fair value and then choose Revision

when saving the lease (see Revision/Replace, later in this chapter). The revised fair value is used from that point forward without changing previously booked activity; this means that the receivable can increase and/or the interest rate may change. You should not change the fair value in this field to reflect an unaltered but differently valued asset at the time a lease is renegotiated or extended; that fair value should be entered in the “Values at time of revision” box below.

Fair Value of Land

Required unless the lease is user-classified operating or finance. If the lease is partly or completely land, enter the fair value of the land portion of the leased assets. For FAS 13, if this is 25% or more of the total fair value (i.e., 1/3 or more of the value of the building), the land portion is always operating (unless there is an ownership transfer or reasonably certain purchase option), and the Annual Land Rent Portion is calculated automatically by EZLease. If there is an ownership transfer or reasonably certain purchase option on a part land/part building lease, you must enter the lease as two separate records in EZLease, because the land should not be depreciated while the building should.

If a lease has an entry in the Fair Value of Land and no entry in Fair Value of Building/Equipment, the lease is considered “land only” and is always operating (unless there is an ownership transfer or reasonably certain purchase option, which is extremely rare).

If the land is less than 25% of the total value, the lease is considered as a unit, and is fully finance or fully operating based on the combined value. While FAS 13 does not explicitly state so, some accountants interpret it to allow splitting up the land and building portions for all leases, even those with small land values; they consider that combining land and building components is offered to simplify the process, but not required. If you wish to treat the land portion as operating when less than 25% of the whole fair value applies to the land (and the overall lease is finance), you must enter two separate leases in EZLease, one for the land and one for the building.

For ASC 842 reporting, you must set up two separate leases if you want the land portion treated as operating, no matter what percentage the land is.

How Classified

Normally, you should allow the system to classify the lease. However, in some circumstances, you may want to explicitly classify the lease one way or the other. If you specify the classification, How Classified is set to User; otherwise, it is System.

To change a user-classified lease to system-classified, set the Classification box to To Be Classified. When you save the lease, EZLease will determine the proper classification for the lease, and change How Classified to System.

Lease Type

Required. This is always “Lessee lease.”

Original Booking Date

Required. By default, this is the same date as the Begin Date. You may enter a different date to cause the lease to be recognized for reporting purposes as of a different date. Use a date later than the Begin Date if you didn't receive the information on the lease until later, and reports were run for intervening periods. Use a date earlier than the Begin Date if the lease is signed but use of the asset is delayed to a later date. If the Booking Date is later than the Begin Date, then the lease is first reported in a report that includes the Booking Date, at which time all activity from the Begin Date to the present is booked (“catch-up accounting”). If the Booking Date is earlier than the Begin Date, and the system option “Include future leases in future minimum rent commitments” is checked (see chapter 5, System Options), then a report that ends on a date between the Booking Date and the Begin Date will include the lease in the future minimum rent commitments, but not on the income statement or balance sheet.

Initial Direct Costs

“Incremental costs of a lease that would not have been incurred if the lease had not been obtained.” [842-10-20] This specifically excludes overhead costs and legal fees that would be paid if the lease was prepared but not completed [842-10-3010]. Costs envisioned include commissions and incentive payments to terminate another lease [842-10-30-9].

If IDC is entered for a lease that starts before the new standard effective date, IDC is first recognized as of the transition date.

Asset Adjustment

You can enter an amount to be added to or subtracted from the Right-of-Use asset at initial setup. This is most useful for setting up a different asset and liability when taking over a lease as part of a business combination, such as to recognize favorable or unfavorable lease terms. The adjustment is amortized over the depreciation life of the lease (lease term or economic life).

Transitional Incremental Borrowing Rate

Applies only to leases that are operating under FAS 13/IAS 17. This is the incremental borrowing rate at the transition date (the date the lease transitions from the old standard to the new, usually 2017 for U.S. preparers and 2018 for IFRS preparers). The lease will be capitalized using this rate as the discount rate for the lease (the Right-of-Use asset and initial liability will be the present value of the rents at this rate, with possible adjustments to the asset for rent leveling, prepaid or accrued rent, and initial direct costs).

Fair Value Not Determinable

Required. In some cases, it may not be possible to determine a fair value for an asset. FAS 13, ¶28, particularly envisions a lease of a part of a building (such as a suite of offices, a floor, or a store space in a mall). In such a case, check this box and leave the Fair Value fields blank. If this box is not checked and nothing is filled into either of the Fair Value fields for a system-classified lease, you will get an error.

Combine Land & Building for Classification (US Only)

Usually, land should be classified as operating, while a building may be either operating or finance depending on the lease terms. EZLease requires finance building and operating land leases to be entered as two separate records. However, ASC 842-10-15-29 permits combining the land and building if “the accounting effect of doing so would be insignificant.” To do so, check this box.

Ownership Transfer

Required. Check the box if the lease agreement conveys ownership to you at the end of the lease term. If you check this box, the lease is finance (and if not a land- only lease, is depreciated over its economic life). If you user-classify the lease operating, this box cannot be checked. For GASB 87, a lease with ownership transfer is considered a financing, rather than a lease, and is to be reported with owned assets.

Reasonably Certain Purchase Option

Required. In ASC 842/IFRS 16, whether the Lessee has an option to purchase the underlying asset that the Lessee is reasonably certain to exercise, not limited to reasons of option price.

In FAS 13, this was called a bargain purchase option, which was defined as “A provision allowing the Lessee, at [the Lessee’s] option, to purchase the leased property for a price that is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable that exercise of the option appears, at the inception of the lease, to be reasonably assured.”

If such a provision exists in the lease, check the box on the lease input form. If this box is checked, you must enter the purchase price in the Guaranteed Residual field (and if the lease starts under ASC 842/IFRS 16/GASB 87, enter the same amount in the Expected Guaranteed Residual Payment). Any lease with a reasonably certain purchase option is capital/finance [842-10-25-2b].

Last 25% of Economic Life

Required. If you are renewing a lease, or leasing a used asset, and previous use of the asset has covered 75% or more of its original economic life, check the box. The lease is then operating unless the Ownership Transfer or Reasonably Certain Purchase Option boxes are checked.

This box is set automatically for an extension of a finance lease when it is considered operating under the lease accounting rules, but a straight application of the rules without considering the original lease would make the extension lease seem to be finance.

Level Operating Rents

Required; this field is ignored if the lease is classified finance (unless it is part operating and has a rent holiday; see below). Under normal circumstances, if differing amounts of rent are paid at different times during an operating lease, the total rent is accrued and expensed on a straight-line basis over the life of the lease, and a deferred asset or liability is carried on the balance sheet for the difference between the rent expense and the actual cash paid. If this lease should be handled the normal way, check this box (which is the default).

However, scheduled rent increases can be accrued and expensed as paid if this “is more representative of the time pattern in which use benefit is derived from the leased property,” for instance because the increases reflect availability of more property for you to use. (Note that according to FASB Technical Bulletin 88-1, if “the Lessee takes possession of or controls the physical use of the property at the beginning of the lease term, all rental payments, including the escalated rents, should be recognized as rental expense … on a straight-line basis” [FTB 88-1, even if not all the property is being used at first.) If you do not want to level the rents (if they are operating), uncheck the box.

A lease that is part finance and part operating because it is a combined land and building lease does not normally have rent leveling, because the operating rent applied to the land is constant over the life of the lease (see Annual Land Rent Portion below). However, if there is a rent holiday or a highly concessionary rent period when the rent paid is less than the calculated land rent, rent leveling is calculated (if this field is checked).

If you are a government entity, rent does not need to be leveled “when the pattern of the payment requirements, including the increases, is systematic and rational.” Increases due to anticipated increases in costs (inflation) or appreciation in property values, for instance, are considered systematic and rational. In such cases, uncheck the box. However, if some of the rental payments are artificially low (for example, a rent holiday offered as an inducement or to reduce short-term cash flow requirements), rent should be leveled over the life of the lease. See Appendix E, Governmental Accounting, for more details.

Payments in Advance

Required. Check this box (the default) if the rental payment is made at the beginning of each payment period (the usual situation); uncheck the box if the payment is made at the end of the period (payments in arrears, much less common but used for some leases, primarily real estate).

Short-term Lease

Under ASC 842/IFRS 16/GASB 87, if the lease term (including recognized options for ASC 842, or all options for IFRS 16/GASB 87) is 12 months or less, the lease is considered Short Term, and is treated like a FAS 13 operating lease: rent expense recognized straight line over the lease life, no recognition on the balance sheet, except for deferred rent due to leveling. (For GASB 87, rent leveling is not required.) EZLease sets this automatically.

Specialized Asset (US Only)

IAS 17 has, and ASC 842 introduces, a fifth test for whether a lease should be capitalized: "The underlying asset is of such a specialized nature that it is expected to have no alternative use to the Lessor at the end of the lease term." While one would normally expect such a lease to meet other criteria as well, check this box if appropriate. Any lease with this box checked is considered a finance lease.

Low-value Asset

IFRS users need not recognize as finance leases contracts for low-value assets. According to the Basis for Conclusions of IFRS 16, “the IASB had in mind leases of underlying assets with a value, when new, in the order of magnitude of US$5,000 or less.” Specify your threshold in System Options, New Standard tab. If the combined land and building fair values are less than the threshold, the low-value asset box is automatically checked, but you may change it if appropriate. Note that the criterion is intended to apply to the value of an asset when new. If the lease has an original economic life greater than the current economic life, EZLease prompts you to confirm that the asset should be considered of low value.

Low-value asset leases are treated like IAS 17 operating leases, with rent recognized on a straight-line basis.

ASC 842 and GASB 87 users can choose in System Options to use the Low Value classification to track immaterial leases.

Retrospective Asset Calculation (IFRS Only)

If you have chosen the cumulative catch-up transition option (where operating leases are converted to finance as of the implementation date of IFRS 16), you may choose, on a lease-by-lease basis, for IAS 17 operating leases, to calculate the asset at the implementation date as if the lease had been finance from inception.

This normally results in a lower asset than liability at transition, with the difference an immediate charge to retained earnings (shown in EZLease as an addition loss). This is not relevant if you have chosen full retrospective application of IFRS 16.

Transfer transaction

A transfer transaction is intended to permit you to stop recognizing a lease’s activity in one department or account and start recognizing it in a new entity, while leaving prior activity untouched. You might use a user-defined field, asset class, financial group, or an account number to specify where activity for a lease should be booked, but now the lease’s responsibility is moved someplace new.

To accomplish this transaction, transfer terminate the original lease in the current reporting period (enter an early termination type of Transfer and specify the date). Next, copy the lease (Lease menu/Copy), creating a new lease (typically with a similar number, so the two leases are listed next to each other in reports). All of the financial information on the lease remains the same (begin & end date, rents, etc.). Change the appropriate code on the lease to indicate the new group it belongs to. Then check the Transfer Addition box on the Transfer/MTM tab; for the Effective Date, enter the same date as the early termination date on the original lease.

Change the booking date to a date in the current reporting period.

The new lease will add the asset and liability that the old lease had at the date of termination and will carry on from that point. The old lease will typically have a termination gain; the new lease will have a loss of an inverse amount. (In the rare event of a termination loss, there will be an addition gain.)