Before you start to create any new lease agreements, you need to create the lease instruments.
One important aspect for creating an instrument is to choose the interest calculation method.
Create New Lease type
Click on ‘Leasing > Lease types’.
Click 'Add new'.
Type or 'Name'.
This name will appear in all reporting and in the register.
Interest calculation method
Compound
By default, the system will use Compound. Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. This method uses the payment frequency and number of payments in discounting and interest rate calculation.
Simple
Simple interest is determined by multiplying the daily interest rate by the principal by the number of days that elapses between payments. This method uses the payment frequency and number of payments in discounting and the interest rate calculation.
Simple actual days
Simple interest is determined by multiplying the daily interest rate by the principal by the number of days that elapses between payments. This method uses the actual days divided by 365 in discounting and the interest rate calculation. The discounting calculation and interest calculation is always done to "Interest calculation end date" not to ‘Payment date’, because you can alter the payment date and it would then have an effect into the liability opening NPV. If your starting approach for lease accounting is that you start to discount from your reporting start date (not actual agreement start date) and you have leases where you have payments with less than 12 payments a year, then it is recommended to use "Simple actual days" in order to have the NPV and the correct interest for the first broken period.
Payment type
In arrears
This will be the default payment type, meaning that the payments are done at the end of the rent period or during the rent period. This is the preferred option if you are switching from excel to system because normally excel calculations are done this way.
Advance
If you pay the rent in advance for a rent period then choose this type to select this option. In this case (if payments less than 12 payments a year), you should also add the first payment into "Lease payments made on or before the commencement date" - a box that can be found from RoU Asset drop down under lease agreement. If you have monthly paid lease and you want to treat it as advanced paid put also "Exclude first payment from discount calculation if agreement is paid in advance and 12 times a year" active.
Description
Here you can describe the lease type in more detail if needed.
Lease Type Item
This is only used in the overview of the lease dashboard when leases are split between different types.
Business day convention
This is a setup you can use to alter payment dates and prevent payments from becoming due on a day that is not a business day. Currently, weekends (Sat-Sun) are marked as non-business days by our system. This is where you can deal with a payment to make sure you avoid making it during the weekend.
If you are only doing IFRS adjustment postings, it is recommended to use "No adjustment". Because you want the lease cost to be on the right month regardless of the weekday where the payment is.
No adjustment - paid on the actual day, even if it is a non-business day.
Previous - the payment date is rolled on to the previous business day.
Following - the payment date is rolled on to the next business day.
Modified previous - The date will be the first preceding day that is a Business Day, unless the first preceding Business Day is in the previous calendar month, in which case that date will be the first following day that is a Business Day.
Modified following - The date will be the first following day that is a Business Day, unless the first following Business Day is in the next calendar month, in which case that date will be the first preceding day that is a Business Day.
End of Month - No adjustment - the payment date is rolled on to end of the payment month, even if it is a non-business day
End of Month - Previous - the payment date is rolled on to the end of the payment month, if it is a non-business day to a previous day business.
End of Month - Following - the payment date is rolled on to the end of the payment month, if it is a non-business day to a next day business.
Lease Valuation Rate
If you want the system to also calculate a valuation to the agreement, you can set the "Calculate valuation" active. Then, based on the interest rate set here, you will get a market valuation to your lease agreement in the ‘Lease Valuation Report’.
Include service into price increase
If you are also adding service costs into your lease flow (these are not taken into discount calculation) and you have a price increase in your payments (and you want to also increase the service part with the same mechanism than the fixed asset part) choose "Yes". Otherwise, if this is kept as "No" , we won’t include service into price increases. This works only if % increase is applied.
Exclude first payment from discount calculation if agreement is paid in advance and 12 times a year
If you have monthly paid lease and you want the interest to the first payment month then you should also activate this by choosing "Yes". Then the system will not discount the first payment but add it with full amount into the leaseflow and also calculate the interest on correct way for each payment. So then you will have interest cost for the first payment month but not to the last payment.
This works if interest calculation types Compound or Simple are chosen. Not with Simple actual days.
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