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How to set up Lease Accounting Business rules for different scenarios

Initial Time Charter Period Journal

When running the Time Charter Period Journal for the first time, the future cash flow for the Time Charter is capitalized to the balance sheet.

You will need to set up the following Business Rules:

Source Code

Bill Code

Description

MLAJ

ROU_ASSET

This is to debit the ROU asset account with the entire lease value.

LLIABILITY

This is to credit the lease liability account.

Initial Time charter Period Journal with Transition

When running the Time Charter Period Journal for a TC starts before 1/1/2019 (or any value according to the flag CFGTCDefaultLeaseTransitionDate), and the capitalization should happen only after 1/1/2019. We call it a “Transition”.

You will need to set up the following business rules:

Source Code

Bill Code

Description

MLAJ

ROU_ASSET

This is to debit the ROU asset account with the entire lease value.

ACCDEP

This is to debit the Accumulated Depreciation account from the beginning of the TC till 1/1/2019 (or any value according to the flag CFGTCDefaultLeaseTransitionDate).

LLIABILITY

This is to credit the lease liability account with the lease value after 1/1/2019,

  • calculated as ROU_ASSET + ACCDEP

BSDIFF

This is to credit the retained earning account with the difference between the Book value of the Asset on 1/1/2019 and the lease liability.

  • calculated as ROU_ASSET+ACCDEP+LLIABILITY

Lease Modification

When there is a modification to the lease period, discount rate or hire rate, the Time Charter Period Journal will need to be rerun to get a new ROU_Asset value. The date on which the change happens is called the Modification date

Modification date:

  1. The Modification Date refers to the Time Charter Period Journal Value Date.

  2. The Forward Periods refer to lease periods starting from the Modification Date.

Ie. Time Charter Period Journal Value Date field should be populated with the date when modification happens.

You will need to set up the following business rules:

Source Code

Bill Code

Description

MLAJ

ROU_REVERSAL

This business rule should use the ROU asset account.

  • The line item is to reverse the Previous Right of Use Asset registered in the previous Time Charter Period Journal.

  • The value is taken from the previous Time Charter Period Journal ROU_ASSET line item.

ROU_ASSET

This business rule should use ROU asset account.

  • The line item is to register the New Right of Use Asset at value date.

  • The value is calculated based on the same formula of calculating the original ROU_ASSET.

LLIABILITY

This business rule should use lease liability account

  • calculated as -(ROU_ASSET + ROU_REVERSAL)

  • It is the counter account for ROU_ASSET and ROU_REVERSAL

ROU_MOD

This business rule should use either ROU asset or ROU accumulated depreciation account.

  • ROU_MOD = NEW BOOK VALUE – OLD BOOK VALUE

  • NEW BOOK VALUE = ROU_ASSET

  • OLD BOOK VALUE = OLD ROU_ASSET – CURRENT ACCUMULATED DEPRECIATION

LL_MOD

This business rule should use a Liability account.

  • This is the counter account for ROU_MOD,

Error Correction

The Error Correction function can be used to correct any errors when a wrong parameter (interest rate, hire rate, service fee etc.) is entered for the last Time Charter Period Journal.

It will recalculate the last Time Charter Period Journal based on the new parameters

You will need to set up the following business rules:

Source Code

Bill Code

Description

MLAJ

ROU_ASSET

This is to debit the ROU asset account with the new value (after the error correction) of the ROU_ASSET.

ROU_REVERSAL

This is to credit the ROU asset account with the old value (before the error correction) of the ROU asset

LLIABILITY

This business rule should use lease liability account

  • calculated as -(ROU_ASSET + ROU_REVERSAL)

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