Theory and Practice
✘ Does not apply to US GAAP (ASC 842) Finance Leases
✘ Does not apply to US GAAP (ASC 842) Operating Leases
✔ Applies to IFRS (IFRS 16)
✔ Applies to UK GAAP (FRS 102)
Annual rent is $50,000, indexed to CPI. At commencement, CPI is 100, so $50k is included in the lease liability calculation. After Year 1, CPI rises and rent for Year 2 increases to $52,000.
Under IFRS 16 (Jan 1 of Year 2, when the new rent is known): Recalculate the remaining lease liability based on the updated future payments (now $52k for Year 2, and assume future increases based on current index level). Say the increase in present value of remaining payments is $N (the difference between the original projected payments and the new higher payments). The lessee records:
| Account | Debit | Credit |
|---|---|---|
| ROU Asset | $200,000 | |
| Lease Liability | $200,000 | |
| Lease liability is remeasured for the index change, and the ROU asset raised accordingly. No immediate Income Statement impact – the effect of higher rent will be reflected in future depreciation and interest expense. If the index change had decreased future payments, the entry would debit Lease Liability and credit the ROU asset, reducing both. | ||
Doing it in Sage Intacct Lease Accounting
Take the lease Out of Service
If no other changes are required to the lease, you many need to run the Generate Payment Schedules option to get the Lease into a Change Status of ‘Payment Schedules Generated’
Then Add or Import further Payment Changes to reflect the changes to the index.
Revalue the Lease.
Place the Lease back in Service.