CPI adjustments

CPI adjustments for ASC 842 and GASB 87

If a lease agreement includes a CPI adjustment clause, stating that future rents will be adjusted based on whatever the CPI is at a future date, those adjustments are considered variable lease payments. They do not affect the calculation of the asset and liability; instead, they are expensed as incurred. In EZLease, you enter variable lease payments on the Variable tab.

On the other hand, if the rent changes are specified as a particular amount, even if intended to cover future inflation, they are base rent and included in the Rent schedule (on the Main Data tab), affecting the asset and liability. When a CPI adjustment includes a minimum, such as "minimum of 1%, maximum of 3% per year," the minimum increase is base rent, while the actual beyond the minimum is variable.

Then, if a lease agreement is modified, such as an extension of the term or renegotiation of the rent, then as part of the modification, the base rent needs to be updated to include all CPI changes that have already taken place. Any future CPI changes are treated as variable payments from the updated base rent.

Example

Say your lease goes for 5 years starting 1/1/2021, with rent starting at 5000/month and a CPI adjustment clause. At the start of the second year, you are informed that the rent will go up 3%.

1. Go to the Variable tab
2. Click on Multiple Payments.
3. Enter 1/1/2022 as the start date, 12/31/2022 as the end date.
4. In the CPI box, enter 5000 * .03 = 150.
5. Click Create, EZLease will create 12 payment records, one for each payment date during year 2 of the lease, which are an additional expense recognized as incurred. The asset and liability are unaffected.
6. If the rent the following year goes up 2%, the total variable payment for 2023 is 5000 * 1.03 * 1.02 - 5000 = 253.

CPI adjustments for IFRS 16

A CPI change or other change based on an index or rate must be treated as a revision to the lease. The new rent level is assumed to the end of the lease.

Example

Say your lease goes for 5 years starting 1/1/2021, with rent starting at $5000/month and a CPI adjustment clause. At the start of the second year, you are informed that the rent will go up 3%.

1. Change the step end date on the first rent step from 12/31/2025 to 12/31/2021.
2. Create a new rent step: Gross rent $5150, step end 12/31/2025.
3. Save the lease, choosing Revise.
4. If the CPI change for year 3 is 2%, create another revision: Gross rent $5150 * .02 = 5253.

Related links:

Revisions (Modifications) | Variable lease payments | Variable payments bulk upload |