ASC 842 and GASB 87
A CPI adjustment is treated as a variable lease payment and expensed as incurred. It does not affect the asset and liability, so it should not be entered as a change to the base rent, but instead in the Variable tab.
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%.
- Go to the Variable tab
- Click on Multiple Payments.
- Enter 1/1/2022 as the start date, 12/31/2022 as the end date.
- In the CPI box, enter 5000 * .03 = 150.
- 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.
- If the rent the following year goes up 2%, the total variable payment for 2023 is 5000 * 1.03 * 1.02 - 5000 = 253.
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.
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%.
- Change the step end date on the first rent step from 12/31/2025 to 12/31/2021.
- Create a new rent step: Gross rent 5150, step end 12/31/2025.
- Save the lease, choosing Revise.
- If the CPI change for year 3 is 2%, create another revision: Gross rent 5150 * .02 = 5253.