6 Absolute Facts About Type A Leases Under the New Lease Accounting Rules
This blog post summarizes – in plain English – Type A leases under the new proposed lease accounting rules. In less than 3 minutes, you will learn all you need to know about type A leases under the new lease accounting rules.
1) Type A leases = Capital Leases: This is the first (and probably most important) thing to understand about Type A leases. Type A leases under the new lease accounting rules are treated virtually the same way as capital leases are today. There are slight differences, but they are minor. So if you know how to account for capital leases under today’s guidance, then you know how to account for Type A leases under the new lease accounting rules.
2) For most leases, the ROU asset and the lease liability will be equal upon lease commencement: If you have a lease without initial direct costs, prepaid rent, and without a tenant improvement allowance (or some other lease incentive), then the ROU asset and the lease liability will be equal on the lease commencement date. The entry will simply be a debit to the ROU asset and a credit to the lease liability.
3) Initial Lease Liability Calculation: The initial Lease Liability for Type A leases under the new lease accounting rules is calculated as the present value of the minimum lease payments discounted using the borrowing rate of the lessee. To learn how to use excel to calculate the present value of minimum lease payments, click here.
4) Initial ROU Asset Calculation: The initial ROU (Right of Use) asset for Type A leases under the new lease accounting rules is the initial lease liability as calculated above, plus any prepaid lease payments and initial direct costs, less any lease incentives (for instance, tenant improvement allowances) received prior to the lease commencement date.
5) Subsequent Lease Liability Calculation: Subsequent values of the lease liability are determined via accretion using the effective interest method; just like any other financial liability. So just like any other loan amortization schedule, a portion of the payments each period goes to principal reduction, and the remainder goes to interest.
6) Subsequent ROU Asset Calculation: The ROU asset is depreciated straight-line through the lease term, just like owned PP&E.
There you have it. That’s basically a summary of Type A leases. In a subsequent post, I will give a comprehensive example of a Type A lease under the new lease accounting rules using actual numbers. If you have questions, please leave comments below.
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About LeaseQuery: LeaseQuery is lease accounting software that helps companies manage their leases. Rather than relying on excel spreadsheets, our clients use LeaseQuery to get alerts for critical dates (renewals, etc), calculate the straight-line amortization of rent and TI allowances per GAAP, provide the required monthly journal entries (for both capital and operating leases) and provide the commitment disclosure reports required in the notes and the MD&A. Visit us at www.LeaseQuery.com