NetLessor - Financing Subleases
Under IFRS 16, the guidance specifies that subleases should reference the ROU asset rather than the underlying asset. The result is that if a sublease is for the remaining term of the lease, it will be classified as a Sales Type or Direct Financing lease rather than an Operating lease. If the sublease term is only a portion of the remaining term of the original lease, you may still get an operating sublease. (See guidance below).
IFRS 16 B58
In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows:
(a) If the original lease is a short-term lease and accounted for as short term/low value lease on the Lessee side, the sublease shall be classified as an operating lease.
(b) Otherwise, the sublease shall be classified as financing. The lease terms will reference the right-of use asset from the original lease, rather than by reference to the underlying asset (for example, the item of property, plant or equipment that is the subject of the lease).
Set Up
Financing subleases will need to be entered into our NetLessor product to properly compute the accounting. You will have a lease record in NetLease for the Lessee side of the transaction, and a record entered in NetLessor, for the Lessor side.
NetLease Side
- The NetLease Lease will be entered as normal in our NetLease product. Run the amortization schedule and initial journal entry as normal. The initial journal entry in NetLease will look similar to this:
- When the sublease starts, you will need to run a modification on the NetLease Record. If this is at the start of the lease record, then this will be directly after the initial balance is ran. The modification type will be an ROU Impairment, and the amount will be for the full value of the ROU at the time the sublease starts.
- This will result in the following NetLease Modification journal entry:
- The NetLease accounting will continue like normal every month. There will be no ROU amortization, but the payments will be recorded like normal and the lease liability will remain on the books and be decreased every month. The monthly journal entries will look like the below:
NetLessor Side
Once the modification is ran, the amount of the ROU asset is now sitting in the impairment expense and we are ready to create the NetLessor Sublease Lease Record.
| One Time Set-Up Best practice is to create a specific Lease Type in the system for Financing Subleases. Set the Inventory/Fixed Asset Clearing Account to be the Impairment Expense account used in the modification journal. All other accounts will be normal. |
- Create a standard NetLessor Lease with the following fields. All other fields will be filled out normally. Remember to include any payment changes in the payment tab.
| Field | Description | Example |
|---|---|---|
| Lease Type | Specific financing sublease type set up previously. | Real Estate - Financing Sublease |
| Lease Classification | Either Sales Type or Direct Financing. They will be treated the same in a financing sublease. | Sales Type |
| Initial Payment Amount | Amount received monthly for the sublease. Has no tie to the NetLease Record. | 2,000 |
| Economic Life of Leased Asset (Months) | Remaining months of the Lease from the NetLease record. | 120 |
| Lease Term (Months) | Number of months the lease is subleased. | 120 |
| Leased Asset Fair Value | Value of the ROU asset at start of the sublease. This will be the same amount impaired previously. | 163,301.56 |
| Leased Asset Carrying Cost | Same value as the Leased Asset Fair Value. | 163,301.56 |
- Generate the schedule, commence and run the initial journal entry for the NetLessor Lease. The initial journal will look like the below example. Notice the impairment expense is now cleared and only the Net Investment in Lease remains on the books.
- Run the monthly journal entries for the NetLessor Lease like normal. The Net Investment in Lease will amortize like normal every month, the payment received will be recognized, and the revenue will be interest revenue. This will net against the interest expense from the NetLease record, and the difference is the total revenue recognized from the sublease.
- In practice, the interest expense and interest revenue accounts could be mapped to the same account if desired.
Note: The NIL in this example is increasing because the payment amount (2,000) is less then the straight-line lease revenue (2,818.42). This example has payment escalations, so once the payments increase, the NIL will start decreasing.