Crunchafi

Recording Favorable or Unfavorable Leases in Crunchafi Lease Accounting

The guidance explains how to record favorable or unfavorable leases in Crunchafi Lease Accounting during business combinations by adjusting the Right-of-Use Asset through lease incentives or initial direct costs on Step 2 of the software, setting lease start dates based on the new Reporting Entity's Initial Application Date, and making corresponding outside journal entries between Cash/AP Clearing and goodwill to reflect acquisition accounting adjustments.

When business combinations occur, there may be situations in which the Right-of-Use (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 as the Initial Application Date (the Initial Application Date must be the first of the month).

In most cases, the acquired leases would be considered new leases. Therefore, the Start Date of the lease should be one day after the Initial Application Date of the new Reporting Entity.

If any existing balances need to be brought through 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 the Crunchafi Lease Accounting Software

When adding the lease to Crunchafi Lease Accounting software, note the following on Step 2 - Lease Payments & Classification:

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

Outside of the Crunchafi Lease Accounting Software

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

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 will provide the amount in either the Incentives Received or Initial Direct Costs fields.

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