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:

New leases
Existing leases with no modification
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.

Right to Use Valuation
Right to Use
Liability

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

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 1^st Sep, 1^st Dec, 1^st March or 1^st 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 1^st Aug or 1^st 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 1^st 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:

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’.

2. Lease Liability & Interest Expense:

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’.

Termination of Lease

Lease Accounting Software

Terminate Lease

Statement on Auditing Standards-SA 265

May 17, 2023

The scope and objective of the auditing standards related to the auditor’s responsibility to communicate deficiencies in internal control to those charged with governance and management. The SA 265 applies when the auditor identifies deficiencies in internal control during the audit of financial statements. The auditor is required to obtain…

What is the difference between operating lease and finance lease?

March 8, 2023

An operating lease is a short-term lease in which the lessor (the owner of the asset) rents the asset to the lessee (the user of the asset) for a specific period of time, usually less than the useful life of the asset. At the end of the lease term, the…

Ind AS Accounting Standards

June 29, 2022

Ind AS (Indian Accounting Standards) are a set of accounting standards developed by the Institute of Chartered Accountants of India (ICAI) and adopted by companies in India for preparing their financial statements. These standards are based on the principles of International Financial Reporting Standards (IFRS) and are intended to improve…

Lease accounting, lease period extended after year 1 – Journal entries

January 10, 2022

Lease accounting, lease period extended after year 1 – Journal entries Details for lease accounting for lease extension Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Payment frequency: Annual – payable at the end Incremental borrowing rate:…

Lease accounting, interest-free deposit lease period extended after year 1

January 9, 2022

Lease accounting, interest-free deposit lease period extended after year 1 Details for lease accounting for lease extension When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of such modification. This would result in…

Lease accounting Journal Entries for Modification

August 12, 2021

Lease accounting Journal entries for Modification Details for lease accounting with modification When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of such modification. This would result in amortising an additional amount and…