Decrease in Scope Modification (Partial Termination)
  • 30 Nov 2023
  • 2 Minutes to read
  • Contributors
  • Dark
    Light

Decrease in Scope Modification (Partial Termination)

  • Dark
    Light

Article Summary

*Please Note that Modifications are not included in the free version.

Use Case: A decrease in the scope of a lease can also be referred to as a partial termination. It removes the right to use one or more underlying assets, or shortens the contractual lease term. An example of this is reducing the amount of square footage rented in a building.

Prerequisites: Before running a lease modification, it is best practice to review the lease entries and confirm the changes you intend to make to the term, discount rate, and payment schedule.

Effective Date: Note that the effective date is the date when both parties agree to the lease modifications. Therefore, the month in which the agreement is obtained is most likely the date that it should be recorded within NetLease.

Step By Step Process:

1. Navigate to the lease record where the modification is to be recorded and select the Lease Action drop down then choose Modify Lease.


2. On the Lease Modification page update the Modification Type to Decrease in Scope (LL Remeasure & Gain/Loss)

3. Users have 2 options for calculating a decrease in scope:

  1. Auto Calculate % Decrease: The user can check this box to auto calculate the decrease in scope. Naturally the lease liability will decrease when the lease payments or the lease end date decrease. This checkbox will reduce the ROU asset by the same ratio that the lease liability reduces.
  2. Scope Decrease %: The user can enter a parentage here to manually reduce the ROU asset independent of the lease liability.


3. We expect the lease end date or the lease payment to decrease in this type of modification. Adjust those as necessary.


4. Update the following as necessary for the lease modification (refer to the guidance for appropriate adjustments per your modification type).

Field

Description

Example

Effective Date

Defaults to the first day of the next period. You can change to the desired effective date by choosing the calendar icon and selecting the date.

Feb 1, 2022

Discount Rate %

Update the incremental borrowing rate that should be used to calculate the present value of the lease liability going forward.

5.0%

Notes

Provide a brief description of the basis and adjustments made with the modification for subsequent support and reference.

Exercised option for 1 year extension

5. Once all the fields have been updated, click Modify Lease.


6. You can view the completed lease modification at the bottom of the lease record under Modifications.


*Note that a new option will appear in the Lease Action drop down menu to Reverse Last Modification.




Was this article helpful?

What's Next