15.4 Terminate a lease contract (In the lease period)

Please note that you can’t delete a lease contract after track changes are turned on. If a lease is terminated before the end of the lease term, the termination must be used. It’s important to distinguish between a reassessment of an existing lease contract and a lease modification. Reassessment relates to a change in estimates, which means that the termination before the end of the lease term was an option in the original contract. If it’s not an option in the original contract, it’s a lease modification.

15.4.1 Situation A: Reassessment

A termination that’s an option in the original contract.

In this case, answer No to the question, “Is the change a lease modification?”

Press Log other change for the lease (Here, we call it “Termination Reassessment”) in situation A and enter the date for the change. This is not the date the termination takes effect, but it’s the date that will recognize the change to the liability and ROU asset value. We set it as March 31st 2020.

Please note that the Date of termination is the date that will be used in the calculation. The cash flow will end in June 2020. A termination fee will be included at the date registered (Date of termination penalty fee) in April 2020. Update the calculation file as described and make sure that the lease is terminated as expected. Since the termination is not a modification, the reduction in the cash flow reduces/ increases future depreciations and don’t result in a gain or loss on termination, except in those cases where the termination has immediate effect (When the change date and the date of termination is the same date).

15.4.2 Situation B: Modification

You agree to terminate an existing agreement and enter a new agreement with the same landlord. The termination of the existing contract was not part of its original terms. The new contract is entered from the commencement date.

In this situation, the termination of the existing contract is a lease modification, and the answer to the question, “Is the change a lease modification?” should be Yes.

Press Log other change for the lease (Here, we call it “Termination Modification”) in situation B and enter the date for the change (We set it to March 31st 2020). The Date of termination is set to June 30th 2020. The termination penalty fee is 300,000.00, which is paid on April 1st 2020. Answer Yes to the question, “Is the change a lease modification”.

Save the change and then update the calculation file. Click on the Termination Modification contract, so we can see that the cash flow stops after June 2020 (The date of termination). Since it’s a termination modification, a gain and loss is recognized. For contracts with termination modification, if from the change date, the future cash flow isn’t changed (For example when there’s no termination penalty fee) and neither is the discount rate. The future depreciation won’t be changed either.

You’ll also find the change in the reconciliation menu, as well as, in the change menu.

You can use the Is Terminated filter in the Reconciliation tab and set it to TRUE to quickly find the leases with termination changes. In the reconciliation menu, the gain or loss is also calculated.

You can use the Change Type filter in the Changes tab and choose Termination to quickly find the contracts with termination changes. You can also identify whether the termination to a contract is a lease modification by adding the question, “Is the change a lease modification?” in a cell in the title bar.

Please see the example guidance (Chapter 14.8, 14.9, 14.10) for examples of different lease modifications.

15.4.3 Situation C: Immediate termination

If you terminate a contract immediately (Change date is the same as Date of termination), the calculation model must set the ROU asset to 0, the Liability to 0, and the difference between ROU asset and Liability will be a gain/ loss.

Press Log other change for the lease (Here, called “Immediate Termination”) in situation C and enter the date for the change (Here, set as March 31st 2020). The Date of termination is the same as the Change date (March 31st 2020).

Save the change and then update the calculation file. Click on the Immediate Termination contract and notice how the cash flow stops after March 2020 (The date of termination). Since the contract is terminated immediately, a gain and loss is recognized.

You’ll also find the change in the Reconciliation menu and in the Change menu.