Lease Accounting Software Modification and Termination

1. Processing is done on a quarterly basis.

2. Journal entries are passed on a monthly basis always. All entries will be dated the end of each month. Exception is the payment of lease rental and other payments which will be the actual date of such payment.

3. There may be some modifications in the lease term when we receive the data for the next quarter.

4. So every time we process the data, the first job is to check the following:

  1. New leases
  2. Existing leases with no modification
  3. Existing leases with modifications

For a. New leases, the entire process mentioned in this document will be carried out.

For b. Existing leases with no modifications – nothing needs to be done. Those records will simply be ignored as we have already prepared all the entries for such leases till the entire life of the lease.

For c. The following items will be recalculated with the start date as the date of the quarter for which the new data is received.

  1. Right to Use Valuation
  2. Right to Use
  3. Liability

Fields checked for any change between the previous quarter processed and the current quarter which is under processing:

Modificationsscheme

Data Validation for Modifications

In the Lease Accounting Software the Rent Effective date field is checked with the previous quarter’s Rent Effective date. If it is different, then it means there are some lease modifications. However, an important data validation check should be performed. The new rent effective date should match with the original effective date and the Escalation tenure. For example, if the original lease effective date is 1-6-2016 and the lease frequency is quarterly, it means that the new lease effective date could only be 1st Sep, 1st Dec, 1st March or 1st June. If it is any other date then the system would throw an error message that the lease start date and lease payment frequency do not match.

For example, if the original lease start date is 1-8-2016 and the payment frequency is half-yearly, then the modified lease date if any should only be 1st Aug or 1st Feb. Any other date would trigger an error message.

Another example, original lease start date is 1-6-2016, payment frequency is monthly, then the new effective date could be 1st of any month. If it is any other date then the system would throw an error message.

Journal entries

After computing the above the following calculation is performed and two journal entries as given below is generated.

For Monthly end period the following is computed:

Modification Journal

Two journal entries are passed as shown above.

Step 1. Right to use balance as on the effective date of lease modification is computed as the original balance less the amount amortized till that date. This is compared with the Right to use computed after modification. Net increase in Right to Use = 2,72,606.

Step 2. Lease liability as on the effective date of lease modification is computed as the original balance less the amount paid till date plus the finance charges till date. Net increase in Liability = 20,572.

Journal entry 1: If the amount as per step 2 is positive then Debit Right to Use and Credit Lease Liability; If negative the entry is reversed.

Step 3: Compute the difference between the amount as per step 1 and the amount as per step 2, if it is positive then Debit Right to Use and Credit Amortization; if it is negative then entry is reversed.

All the journal entries which are generated in the tabs mentioned above, are replaced with the earlier journal entries passed for those days. The way it is implemented is the existing journal entries will be reversed and new journal entries will be passed.

When a lease is modified, the modified calculations from the lease effective date is computed by the system.

1. Right to Use Valuation – Lease Liability & Bank:

The existing entries will be replaced with the new entries generated from the lease effective date (1-6-2020). The status of the existing entries should be changed to ‘Omitted. The status of the new entries would be ‘Valid’.

Modificationruv

2. Lease Liability & Interest Expense:

The existing entries will be replaced with the new entries generated from the lease effective date (1-6-2020). The status of the existing entries should be changed to ‘Omitted. The status of the new entries would be ‘Valid’.

Modificationliability

3. Asset right to use & Depreciation – Right to Use:

The new entries generated from the lease effective date (1-6-2020) are provided in addition to the existing generated entries. The status the existing entries will continue to be ‘Valid’. The new entries will be ‘Additional’.

Modificationdepreication

Termination of Lease

Termination Of Lease
Termination 1

Lease Accounting Software

Terminate Lease

Termination 1 1

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