NetLease - Decrease In Scope Modifications (Partial Termination)
Use Case: 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
Under a decrease in scope modification, the lease liability is remeasured, similar to the standard modification, but the lessee also recognizes a gain or loss arising from percentage reduction of the pre-modification ROU asset & Lease Liability (% of the net balance), with any remaining differences being recorded against the ROU asset.
Prerequisites: Lease modifications must be entered in NetLease within the month and prior to month-end amortization and reclass entries. Additionally, before running a lease modification, it is best practice to review the lease entries and confirm the changes you intend to make to the term, discount rate, lease payments, non-lease payments etc.
Effective Date: Note that 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.
Step By Step Process:
- Navigate to the lease record where the modification is to be recorded and select the Modify button
- 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
- Update the following as necessary for the lease modification (refer to the guidance for appropriate adjustments per your modification type)
Effective Date Field
The modification effective date is not a choice. It is the first open period on the lease's schedule without a journal entry posted. It is not available for override. It is auto-populated by NetLease. For example, if you ran journals through July, the modification effective date will be August.
- If you wish to run a modification effective in a future period, you will need to run journals up to that point in time.
- To run a modification as of a prior date, you will need to do a True Up Modification.
In the case where a lease is already Pending Close Out, the modification Effective Date will be the start date of the first NetSuite period after the end of the Lease. Do verify this date, navigate to Setup > Accounting > Manage Accounting Periods.
Field | Description | Example |
Modified Lease End Date | Adjust to the updated lease end date for any extensions or reductions in the lease term | 03/31/2021 |
Incremental Borrowing 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 |
- 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
- Click on hyperlink to the NetLease Modification entry to see the adjustment to the lease liability and offset to ROU asset, as well as the gain/loss for the % reduction in pre-modification ROU Asset and Lease Liability.
- A historical record of the modification will be saved to the Modifications subtab of the NetLease Lease record with details from before and after the modification
- Clicking the Edit link will reveal the lease information both before and after the modification