Decrease in Scope Modifications (Partial Termination)
Please Note that Modifications are not included in the NetLeaseGo free version.
Overview
A decrease in the scope of a lease can also be referred to as a partial termination—it removes the right to use one or more underlying assets or shortens the contractual lease term. This can happen, for example, by modifying a lease to reduce the amount of square footage in a building
Prerequisites: Lease modifications must be entered in NetLeaseGo within the month and prior to month-end amortization and reclass entries. Since a lease modification cannot be undone without significant effort, it is best practice to review the lease entries and confirm the changes you intend to make to the term, discount rate, and payment schedule before running a lease modification.
Effective Date: The effective date is the date when both parties agree to the lease modifications. Therefore, the month in which the agreement is obtained is most likely the date that it should be recorded within NetLease.
Process Steps
Step 1:
- Navigate to the lease record where the modification is to be recorded and select the Modify button
Step 2:
- On the Lease Modification page update the Modification Type to Decrease in Scope (LL Remeasure & Gain/Loss)
- Note that the fields are prepopulated with the current lease attributes, including the payment schedule
Step 3:
- Update the following as necessary for the lease modification (refer to the guidance for appropriate adjustments per your modification type)
Field | Description | Example |
Effective Modification Date | Defaults to the first period without amortization recorded. To update to a later period, monthly journals will have to be run up to that point – please consider carefully before skipping ahead. | 03/01/2020 |
Modified Lease End Date | Adjust to the updated lease end date for any extensions or reductions in the lease term | 03/31/2021 |
Discount Rate | Update the incremental borrowing rate to present value the lease liability going forward | 5.0% |
Scope Decrease | Input the percentage scope reduction—note that this is the percentage that impacts the P&L for the pre-modification ROU & LL reduction percentages | 40% |
Adjusted Payment Schedule | Update the payment schedule for any changes to the expected lease payments causing the modification | 11,000 |
Modification Note | Provide a brief description of the basis and adjustments made with the modification for subsequent support and reference | Exercised option for 1 year extension |
Step 4:
- After double-checking updates and inputs for the modification and remeasurement, click Modify Lease
- You will be navigated back to the lease record and you can refresh and monitor the Processing Modification notification until the modification is complete and you can see the modification and subsequent adjustment to the go-forward schedule entries