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Recording Favorable or Unfavorable Leases

Follow the steps in this article to adjust ROU assets and record leases due to acquisitions or other business combinations

When business combinations occur, there may be situations in which the ROU Asset should be adjusted accordingly. To record leases as required by the guidance, follow the steps below:

New Reporting Entity and Initial Application Date

In some acquisitions, it may be necessary to create a new Reporting Entity with the acquisition date entered as the Initial Application Date. You must use the first of the month as the Initial Application Date. 

In most cases, the acquired leases would be considered new leases and therefore the Start Date of those leases should be 1 day after the Initial Application Date of the new Reporting Entity. 

If any existing balances need to be brought over into Crunchafi Lease Accounting in regards to an acquisition, it would be considered a transition lease and the Start Date of the lease should be the same as the Initial Application Date of the new Reporting Entity.

Recording the Lease in Crunchafi Lease Accounting

When adding the lease to Crunchafi Lease Accounting, consider the following for the Lease Payments & Classification tab:

  • If the ROU Asset should be reduced (unfavorable terms), enter the amount of the reduction in the Lease Incentives field. 

unfavorable

  • If the ROU Asset should be increased (favorable terms), enter the amount of the increase in the Initial Direct Costs field. 

Favorable

Leases Outside of Crunchafi Lease Accounting

In addition to the Journal Entry from Crunchafi Lease Accounting, you must also have an adjusting Journal Entry outside of the software from the Cash/AP Clearing account to goodwill recognized in the acquisition accounting. 

Unfavorable (ROU Asset reduced)

Dr. Goodwill

Cr. Cash/AP Clearing

Favorable (ROU Asset increased)

Dr. Cash/AP Clearing

Cr. Goodwill

NOTE

If a payment is made at the beginning of the lease, make sure to isolate the favorable/unfavorable amount from the Cash/AP Clearing line item of the Journal Entries Report. The Lease tab of the report provides the amount in either the Incentives Received or Initial Direct Costs fields. 

For further questions, reach out to our Support Team at support@crunchafi.com.