Crunchafi

How do I handle monthly lease prepayments?

The article explains that monthly lease prepayments should be recorded using a clearing account to reconcile early payments with lease accounting entries, emphasizing regular reconciliation and noting that early or late payments outside the lease terms do not trigger reassessment unless the lessee has an enforceable right to change payment dates or prepays an entire year, which may require lease liability and ROU asset adjustments in the software.

Handling Monthly Lease Prepayments

This article describes how to handle monthly pre-payments.

A common scenario: A client prepays their lease in advance (e.g., for the June lease, payment is due no later than May 25th). How can this “early payment date” be entered in the Lease Accounting software?

When paying early, it is recommended to use the clearing account as you would for a regular payment.

For a payment made on May 25, processed through your client's AP system (entry will depend on Cash or Accrual method):

  • DR Clearing Account
  • CR Cash

For the monthly Lease Accounting software Journal Entry (example shown for Operating Lease):

  • DR Operating Lease Expense
  • CR ROU Asset
  • CR ST Lease Liability
  • CR Clearing Account

The clearing account will reconcile to zero once the monthly journal entry is posted. It is important to reconcile the clearing account on a regular basis. When payments are made on a different schedule than referenced in the lease document, there will be an unreconciled balance. The decision to make a payment early (or late—this also applies if payments are made in arrears) is an accounting function occurring outside of the Crunchafi Lease Accounting software and is unrelated to ASC 842.

Details of the prepayment are important. If the lessee made a payment a day early for tax benefit or to ensure timely delivery, this is not a trigger for reassessment or remeasurement. KPMG Lease Guide Example 6.7.08 details short payments, which also applies to prepayments.

  • If the lessee does not have an enforceable right to change the way payments are made, the lease should be accounted for under its original terms and conditions.
  • If the lessee does have an enforceable right to change the payment date, a revision should be added to the software to adjust the Lease Liability and ROU Asset.
  • If a lessee decides to prepay an entire year of lease payments, this might trigger a remeasurement (revision) as well.

Details on revisions can be found in the software's revision documentation.