Recently the IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board) have made some major changes with respect to accounting standards for leases. Here is a description of Oracle’s solution in Property Manager for changes introduced due to new IFRS 16 and ASC 842(US GAAP). The solution to the new requirements from these accounting standards is planned to be delivered in two phases and this blog covers the features/requirements from GAAP changes addressed in phase I.
Phase I- focuses on application enhancements for performing all calculations needed for “Look Back” period (2017-2019). The calculated values are provided to the user in the form of three reports- one very specific and detailed report for lease level and other two reports at portfolio report. Users can use this information to update their financials and for comparative statement
Phase II- Property manager will generate accounting for various events in the life cycle of lease from tenant’s perspective accounting. Currently tenant accounting is as per existing compliance needed for accounting for the expenses and normalization. Going forward tenant accounting will be enhanced to account for the new balance sheet balances like Right of Use and Lease Liability and the new generated expenses from amortization of right of use and liability (interest expense).
Financial reporting for leasing businesses around the globe are going to be impacted as a result of changes to leasing Accounting Standards under IFRS and US-ASCs (US GAAPs). These new accounting standards will be in force from December 2018 and Jan 2019 and hence leasing applications like Oracle Property Manager need to prepare for the changes. One of the objectives of these accounting standards is to provide information on Financial Obligations and Rights of tenants by bringing the leases onto the balance sheets of the tenants. This will also ease comparability of financial statements of tenants and organizations not leasing property but acquiring them.
The impacts from the standards can be classified under two categories:
a) Changes to Lessor Accounting
b) Changes to Lessee Accounting
Of the two above changes, changes to Lessee/Tenant Accounting are significant and this release notes deals with the primary requirements and solution implemented in Oracle Property Manager for the same. These new standards significantly impact the accounting for lessees for real estate tenants, requiring them to recognize most leases (i.e., rental contracts) on their balance sheets as lease liabilities with corresponding right-of-use-assets.
Users following “Full Retrospective Method” will need comparable financial data prepared as per new standards for the years 2017 and 2018 for US GAAPs and 2018 under IFRS 16. However if the user wants to comply with “Modified Retrospective Method” for IFRS, there is no requirement for preparation of comparable financial information but for US GAAPs, one year comparable financial data is needed. The solution provides user with month end balances starting from Jan-2017 and the user can choose the beginning month.
As per the new accounting standards, tenants have to calculate and report the following in their balance sheets: Lease
Liability: This is the monetary value of tenant’s obligation in a lease. This will be displayed/disclosed in the balance sheet of the tenants as liability. This is computed at the present value of all payments due to the landlord towards rents, option amounts, one time payments etc
Right of Use (ROU): This is the value attributed to the right that the tenant holds in a lease. Users may consider the Lease Liability as the ROU with/without any adjustments
Lease Expense: The total payments (cash expenses) on a lease when calculated per period are called lease expense. For US GAAP purpose, this is the expense that needs to be reported as expense for the period.
Amortization Expense: Amortization expense is the systematic write off of ROU. For IFRS purpose, amortization expense is the calculated on a straight line basis. For US GAAP, Amortization expense is the difference between interest expense and lease expense
Interest Expense: Interest Expense is the financing cost component of lease expense. It is usually calculated by applying the internal rate of return on the outstanding Lease Liability. For IFRS reporting, Interest Expense and Amortization expenses have to be reported as separate lines of expenditure.
Cash: Scheduled outflow of periodical cash to vendors (including landlord)
Three reports are being provided for the “Look Back” reporting needs. The reports will provide user with the period end balances for the above mentioned balances with detailed amortization schedules for Liability and Right of Use
This report provides information on the entire portfolio of leases (OU level) for a particular “As of Date”- month end for example May-17 or Jun-17 until a user provided date
This report provides information on the entire portfolio of leases (OU level) lease by lease on a particular “As of Date”
This report provides the balances for a particular selected contract “As of” date. This report is complimented with detailed amortization schedules which explain the basis of calculations of these balances Users can use the report for look back period reporting or use the amounts to update their financial statements by posting the differences to Retained Earnings
Users will have to run the calculation program Calculate ROU Asset and Liability balances with Streams (PNCLAB) and then the below mentioned programs for the reports
Generate Portfolio Summary Report(PNGPSR)
Generate Portfolio Detail Report(PNGPDR)
Generate Lease Details Report(PNGLDR
Calculation program is expected to be run period end. However the users can run the program in “Draft” mode at any point in time. Users can run the program in “Final” mode only once for a portfolio for a particular period end. When the program is run in “Final” mode, an archival of the calculations and Lease Detail is taken and finalized. Each time reports are run for this period, the reports run on this archived data and not on the production data. This creates auditable/reliable single source of truth for the calculations. Lease Liability and ROU balances are amortized to zero using the rate in the lease (IRR or borrowing rate). Impact of Amendments/additions/contractions/term additions etc initiated in the current period (maybe backdated) are reported as “Differences” as complementary information to the above reports
The following new components have been added/updated in property manager for generating the calculations and reports:
Discount Rate Index:
An index of rates (interest rates) for different dates will need to be created by the user. This index can be created at OU level or for across OU’s. The index will need to be added on the lease header and for calculation of balances applicable interest rate from the index is used.
Additionally user can also add an adder rate on the lease through newly provided field. This adder rate is added/deducted from the index rate to arrive at final rate
2. Accounting Method
Accounting Method will be used to capture lease classification for reporting and as well as categorization of leases. From the drop down of values available, the user can select:-
Finance Lease- If the expense lease needs to be classified as Finance Lease. This lease will be reported if the user uses Finance Lease as a parameter on the reports programs
Operating Lease- If the expense lease needs to be classified as Operating Lease. This is the default value for a new expense lease. This lease will be reported if the user uses Operating Lease as a parameter on the reports programs
Both- If the expense lease needs to be classified both as Finance Lease and Operating
Exclude If the expense lease needs to be excluded from reporting
3. Payment terms check boxes
The users will have to mark payment terms for inclusion into Lease Liability/ROU calculations or for calculation of both balances. Based on this selection, Lease Liability and ROU balances are calculated using the amounts on these payment terms. A payment term may not be included for calculation if either of these check boxes not selected
The values for these check boxes can also from Payment Term Templates and the templates have been enhanced for capturing these values. Hence for Variable Rent terms, these values are defaulted onto the lease from the payment term templates. Similarly, for rent increase terms, these checkbox values will be considered as variable determinants.
Similarly a new checkbox, “Report from Inception” is also provided to the users. If the user check this checkbox then ROU or liability balance will be calculated based on cash flows from lease start date. If this checkbox is not checked then cashflows after 01-Jan-2017 are considered for calculations
Options feature has been enhanced to include options, which are certain to be exercised from tenant’s perspective, into the calculations. Payment term information like amounts, start date, escalation amount, escalation percentage etc have been included to capture information needed for calculations.
On the date of exercise of the options, users are expected to amend the lease and add new payment term for the option. The option has to be updated to “Exercise” in that case and the calculations will thereafter are based on “Payment Term” defined. Options are used to capture information on “Termination”, “Purchase”, “Renewal” or “Residual” options.
Amendments to Renewal and Purchase option will require recalculation using latest interest rate from the index but amendments to other options only require recalculation based on existing rates
Amendments like addition of payment terms, renewals, contracts require recalculation of the lease data. The future balances are re derived and the new balances are re amortized. The differences between earlier calculations of balances for the period and new balances are reported as differences with a statement of difference causing terms.
Some of these recalculations are computed using existing interest rates or the latest interest rates. Latest Interest rates are used for amendments due to Renewals/Lease/Term Contractions/Purchase options.
Archival of Data and calculations is provided with twin objectives:
a.There is a proper trail and auditability of the data used for calculations and this data is secured from updates
b.The calculations for every month end are based on information existing as of that month.
Archive- Lease Data program will be used to archive the data as per user run. Users can use the program until phase 1 patch is provided to them. After the phase 1 patch is used by the users archival of data and calculations will take place on running the calculation program in “Final” mode. Thereafter the archival program will not be operational.
Hence the customers are advised to apply the patch to their production after ensuring that the calculations and compliance functionality is meeting their requirements. The customers can keep archiving their production data through the earlier provided archival program while the testing is going on. This will provide customers to run corrected calculations on the periodical archived data.
This program will:-
Archive lease data with amendments from 01-Jan-2017 till system date of program run. Calculation program will perform the calculations on the archived data for the periods before the calculation program is available. Archival program should be used in place of archival scripts after the uptake of archival program by the user.This program does not have any parameters and it archives only the data pertaining to the current operating unit till system date.
All parameters for calculation program like ROU, Liability check box, Adder Rates, Accounting Method etc will need to be updated on the archived lease data from the period when calculation program is made available, on the calculation program run in “Final” mode, the archival of lease data and calculations should be auto triggered and completed.
Archival of data and calculation shall not take place in “Draft” mode of the calculation program.
Users are expected to archive data regularly till phase I patch is provided. The archival will also include amendments data. The calculation program will run on the archived data if available for a period and on production data if archived data is not available.
At a high level, customers are required to complete below mentioned activities as upgrade preparatory work:
a.Lease classification- Classify your leases into Finance/Operating/Both and leases which can be excluded from compliance reporting.
b.Setup Discount Rate Index
c.Identify adder rates for the contracts
d.Identify checkbox values for ROU, Liability and Report from Inception for payment terms
e.Identify Options with values and effective from date to be added to the leases
f.Update production leases and archived data with values required for all newly introduced attributes.
a.The current patch is on 12.1.3 baseline and made available to the customers as a controlled release. The password to the patch is provided to the customers on request. The customers can install and verify if the calculations are meeting their requirements.
b.12.2+ patch is ready for release and may be released by 3rd week of September,2017
c.General availability of these two patches is planned by end of October,2017
With credit to
Navin Gadidala, Senior Principal Product Manager