Read about ASC 842 & other lease accounting topics
Read about ASC 842 & other lease accounting topics
Deathly afraid of lease amortization? Don’t even know where to begin?
No problem. We’re here to walk you through the basics of lease amortization, as well as how to build a leasing amortization schedule. Ready to get started?
The value of an intangible asset decreases over time in a process called “amortization.” This process is based on an asset’s historical cost, estimated economic life, residual value, and the amortization method chosen.
Lease amortization, then, is the reducing the value of an intangible asset in a lease over the course of the agreement. While the term “amortization” refers to the decrease in an intangible asset’s value over time, “depreciation” refers to the decrease in a physical asset’s value over time. In this case, the intangible asset is the lease itself, not the underlying asset that is being leased.
If your books follow FASB ASC 842, lease amortization is calculated differently depending on whether you have a finance vs. operating lease. For GASB 87 and IFRS 16, all leases are effectively considered finance leases; there is no concept of an operating lease.
For a finance lease, which means the characteristics of the lease make it similar to purchasing the underlying asset, an interest expense must be considered for the remaining lease liability. For operating leases, only the straight-line lease expense is considered.
For those operating leases, amortization expense can be thought of as a “plug” number. While unusual in accounting, it’s true in this situation! When accountants balance the debits and credits, all of the numbers are calculated and amortization expense is the “remainder.”
When calculating numbers for any reporting period, start with the lease liability, which is always the present value of future lease payments. Interest expense (for finance leases) is calculated on the outstanding liability for the month. Lease expense is a straight-line calculation of all lease payments of the life of the lease (determined at the beginning of the lease). The initial right of use (ROU) asset is the initial lease liability plus initial direct costs and less incentives received. The ROU asset is then reduced - or amortized - monthly until the last payment. If there is no residual asset value, the ROU asset value ends at zero.
Let’s use an example operating lease to help understand the concept. For this example, the lease is for office space within an office building. The lease begins March 1, 2022 and is a 60-month lease we are not reasonably certain to renew and we’re going to use the risk-free rate as the rate implicit in the lease is not readily available. The monthly rent is $7,500 that increases 3% annually. For this lease, there are no initial direct costs or incentives received. This gives us a lease liability of $452,048.88 and ROU Asset of $459,548.88.
A lease amortization schedule is a table that shows lease payments as well as interest and amortization calculations, typically on a monthly basis, for the entire term of a lease. Lease schedules are often prepared at the inception of a lease, as they are utilized as a guide for projected payments over the course of a lease.
For example, an accountant will often use a lease amortization schedule as a reference to ensure that payments, interest, and amortization are properly recorded on financial statements throughout the term of the lease.
Building an amortization schedule, when not built by lease accounting software, most frequently begins in Excel.
To begin building your amortization schedule, you must start with the ROU asset and lease liability calculations and go from there:
For our example lease above, the following shows our monthly recording of the interest on remaining lease liability and the monthly operating lease expense. The monthly expense may be different from the monthly lease payment as we are now including interest as part of the operating lease expense, different from how operating leases were handled under ASC 840.
We have good news! As you can see, using spreadsheets to build a lease amortization schedule by hand is complicated. Those who are tired of errors and time-consuming spreadsheets can get an accurately calculated amortization schedule - in Excel! - with the push of a button from LeaseCrunch.
LeaseCrunch’s software was named one of the top new products of 2022 for a reason: It can automatically create an amortization schedule that downloads into Excel so you don’t have to worry about calculating and maintaining complicated formulas and spreadsheets yourself.
But our software does more than just that. LeaseCrunch’s software:
And much more. To see the full suite of capabilities, and get a glimpse into how easy creating a leasing amortization schedule and performing lease accounting can be, set up a demo today.
Can You Amortize Lease Commissions?
Lease commissions should be included as an initial direct cost that is added to the ROU asset, then amortized over the length of the lease.
Do Leases Get Amortized?
With the new lease accounting standards, all leases now have to have some sort of amortization/depreciation on the books because they all have an ROU asset.
Are Operating Leases Amortized?
Do you still have questions? Or are you interested in scheduling a demo to see how our software can build your business amortization schedules with a push of a button? Reach out to us today to start a conversation.
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