Accounting Flexibility with PeopleSoft Lease Administration – Part I

If your lease inventory contains only straightforward leases then you are all set to go with Lease Administration, but if your lease inventory requires additional flexibility, Lease Administration has you covered as well.

Most leases are typically very straightforward and consist solely of paying a recurring rent amount each month over the entire length of the lease.  With these leases your cash flow and accounting entries are consistent each month.  This also would include lease escalations as rent increases typically on a consistent schedule using the same percentage increase(s) over the life of the lease

However, it is common to see leases that contain payments other than the recurring amounts and these leases require additional accounting entries to support those payments.  In this two-part blog, we will illustrate a handful of these examples and discuss how Lease Administration has the flexibility to create the necessary accounting entries.

Here are some the examples that we will cover in this two-part blog on Accounting Flexibility with PeopleSoft Lease Administration: 

Part I

1. Pre-Paid Amounts

2. Lease Incentives

3. Initial Direct Costs

4. Free Rent Periods

Part II

5. Interest rate changes/restructuring

6. CPI Adjustments

7. Lease Impairment

8. Delay Depreciation Start Date

First, let’s discuss pre-paids.

1. Pre-Paid Amounts

Some leases require a pre-paid amount up front at the beginning of the lease and this amount will not be discounted.  It will be added to the ROU asset balance in-full, but it will not be added to the liability balance.  The resulting accounting entries with Lease Administration will be to debit the ROU asset balance to reclassify the pre-paid amount and amortize the pre-paid amount over the life of the lease.

2. Lease Incentives

Some leases may contain an incentive amount.  The incentive may be a lump sum amount received upfront that will not be discounted or the incentive may be a monthly amount that is discounted using a NPV formula.  Either way Lease Administration has the accounting entries to keep you covered with both lease incentives examples. 

A. For the lump sum incentive amounts received upfront at the beginning of the lease, Lease Administration will decrease the ROU asset balance by the full incentive amount, and it will then amortize the incentive balance over the life the lease.  Additionally with lump sum incentives, the liability balance is not impacted.  Only the ROU asset balance reflects the incentive amount. 

B. For monthly incentives, the amounts will be discounted each month over the life of the lease and the net present value of the incentives will decrease ROU asset balance.  Additionally with monthly incentives, the liability balance will also be reduced by the net present value of the incentives since the incentive is lowering the monthly payments.

Either way, Lease Administration can create the accounting entries that you need.

3. Initial Direct Costs

In addition to the monthly payments, some leases may require an outlay of cash up front, Initial Direct Costs (IDC’s).  The accounting for IDC’s is very similar to the accounting for pre-paid amounts.  The ROU asset balance will be increased by the full IDC amount and then amortized over the life of the lease.  Additionally, and just like with pre-paid amounts, the liability balance will not be impacted.

4. Free Rent Periods

Some leases may contain free rent periods or rent abatement periods.   The free rent periods may be in the beginning of the lease, the middle of the lease or at the end of the lease.  Regardless of when the free rent periods occur, the expenses for the lease need to be straight-lined over the entire life of the lease with the straight-line amount being expensed for each and every month, including the free periods.

This concludes Part I of Accounting Flexibility with PeopleSoft Lease Administration.  Look for the next blog installment, Part II next week.

You might also be interested in a whitepaper I authored, DEEP DIVE ASC 842 ACCOUNTING LEASE STANDARDS

Thank you for reading – Steven Brenner, CPA, Senior Principal Consultant