This article explains how Soft4Lessee calculates the amounts on a finance sub-lease, and what happens to the head lease when it is sub-let, remeasured, or when the sub-lease ends. A sub-lease is classified by reference to the right-of-use asset of the head lease [IFRS16:B58].
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Before you start Amounts are calculated with the Calculate action on the Sub-Lease Card, while the sub-lease is in status In deliberation. For an operating sub-lease nothing is calculated: Head Lease RoU Asset Value, Net Investment and the upfront gain or loss stay 0. |
Sub-Lease Proportion calculation
The proportion tells the system how much of the head-lease asset is passed to the sub-tenant. It drives every amount below.
Sub-Lease Volume |
÷ |
Head-Lease Volume |
× |
100 |
= |
Sub-Lease Proportion (%) |
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Proportion rules One-to-One Tight: the proportion is always 100%. One-to-Many without volumes: enter the proportion manually. The volume is then Head-Lease Volume × Proportion / 100. The sub-lease volume cannot be more than the head-lease volume that other sub-leases have not already taken. A proportion of 0% is treated as the whole asset. |
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Head Lease RoU Asset Value calculation
Head Lease RoU Asset Value is the part of the head lease's right-of-use asset that is handed to the sub-tenant. It is taken from the head lease's RoU Asset Schedule.
For One-to-One sub-leases (Tight or Loose) the system first recalculates the head lease's RoU Asset Schedule, so the value is taken from up-to-date figures. |
Head lease already has posted months
The system takes the last posted month of the head-lease RoU Asset Schedule that ends on or before the month in which the sub-lease commences, and uses the asset's remaining book value in that month.
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RoU book value Unguranteed Residual Value, last posted month up to commencement |
× |
Sub-Lease Proportion (%) |
= |
Head Lease RoU Asset Value |
Sub-lease starts in the head lease's first month
If nothing has been posted on the head lease yet, the initial measurement of the right-of-use asset is used instead.
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Initial Measurement first month of the head-lease RoU Asset Schedule |
× |
Sub-Lease Proportion (%) |
= |
Head Lease RoU Asset Value |
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Calculation exceptions Different currency – if the sub-lease currency differs from the head-lease currency, the value is converted at the exchange rate of the sub-lease commencement date. Sub-lease ends before the head lease – if Residual Value Unguaranteed on the sub-lease is blank, the system fills it with the head lease's RoU book value around the month the sub-lease ends, multiplied by the proportion. |
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Net Investment calculation [IFRS16:67]
How Net Investment is calculated depends on Sub-Lease Gain/Loss Method in Lease Setup.
Net method
Head Lease RoU Asset Value |
= |
Net Investment |
Gross method
Future sub-lease instalments and the unguaranteed residual value are discounted with the sub-lease Interest Rate, % from the sub-lease commencement date.
PV of Sub-Lease Payments |
+ |
PV of Unguaranteed Residual Value |
= |
Net Investment |
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Solve For Instalment Amount – the instalment is calculated from Net Investment, the interest rate and the number of payments. Interest Rate – the rate is solved from the instalment and Net Investment. If it comes out negative, the rate is set to 0% and Net Investment is recalculated from the instalments. Net Investment – Net Investment is used as calculated above. |
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Gain or Loss on Sub-Lease (upfront)
The difference between what is handed over and what is receivable is recognised when the sub-lease is activated.
Head Lease RoU Asset Value |
− |
Net Investment |
= |
Loss on Sublease (upfront) when the result is positive |
Net Investment |
− |
Head Lease RoU Asset Value |
= |
Gain on Sublease (upfront) when the result is positive |
A gain is recognised only with the Gross Sub-Lease Gain/Loss Method. With the Net method the two amounts are equal, so there is no gain or loss. |
Remeasurement of a fully sub-let head lease
When the whole head-lease asset is sub-let as a finance lease, the head lease has no right-of-use asset left to adjust. A change in the head-lease liability, for example after a rent change, is then recognised in profit or loss instead of adjusting the asset.
The system adds up the proportions of all sub-leases of the head lease in status Active, Extended or Re-opened:
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Sub-Lease Proportion sub-lease 1 |
+ |
Sub-Lease Proportion sub-lease 2, 3 … |
= |
Total sub-let above 99% (or 0%) = fully sub-let |
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What changes on the schedules Fully sub-let: the Adjustment of Lease Liability (+) column on the RoU Asset Schedule stays 0 in the remeasurement month. The liability still changes on the Lease Liability Schedule. Partly sub-let or not sub-let: no change. The remeasurement adjusts the right-of-use asset as usual. Two sub-leases of 50% each add up to 100% and count as fully sub-let. |
Posting of the remeasurement when fully sub-let
Case |
Debit |
Credit |
|---|---|---|
Liability increases |
Loss on ROU Modification |
Lease Liability (current or non-current) |
Liability decreases |
Lease Liability (current or non-current) |
Gain on ROU Modification |
Lease Category must have both Gain on ROU Modification and Loss on ROU Modification filled in, otherwise posting stops with an error. |
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Finance sub-lease termination: RoU asset returned to the head lease
When a finance sub-lease is terminated or expires, the part of the asset that was handed to the sub-tenant comes back to the head lease. The returned amount is valued from the head-lease lease liability at the start of the month in which the sub-lease ends. It is shown on the head-lease RoU Asset Schedule in ROU Modification on Sub-Lease Termination, with the comment "Increse/Decrease for Sub-Lease Termination/Expiration".
Whole asset was sub-let
The returned amount equals the remaining liability, and the asset's book value is reset to that amount.
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Lease Liability opening balance in the termination month |
= |
ROU Modification on Sub-Lease Termination |
= |
New RoU book value |
Part of the asset was sub-let
The same rule applies to the sub-let share only: that share of the book value is replaced by the same share of the liability.
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Lease Liability opening balance in the termination month |
× |
Sub-Lease Proportion (%) |
= |
ROU Modification on Sub-Lease Termination |
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RoU book value start of the month |
− |
RoU book value × Sub-Lease Proportion |
+ |
ROU Modification on Sub-Lease Termination |
= |
New RoU book value |
Example – 40% of the asset sub-let
Line |
Calculation |
Amount |
|---|---|---|
RoU book value at start of month |
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10,000.00 |
Lease liability, opening balance |
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12,000.00 |
ROU Modification on Sub-Lease Termination |
12,000.00 × 40% |
4,800.00 |
Sub-let share of book value removed |
10,000.00 × 40% |
−4,000.00 |
New RoU book value |
10,000.00 − 4,000.00 + 4,800.00 |
10,800.00 |
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Calculation rules The termination month must not yet be posted on the head lease. If it is, nothing is returned. If several sub-leases end in the same month, each one takes its share of the book value at the start of that month. The new book value is then depreciated over the remaining months of the head lease. |
Not available when the Lease Category uses a Fixed Asset for RoU. Posting the head-lease month stops with an error. |
Postings
Document |
Debit |
Credit |
|---|---|---|
Head-lease month posting |
RoU Asset (ROU modification) |
Sub-lease Gain on Activation (Gross) |
Sub-lease termination, RoU Asset Modification Method = Gross |
Sub-lease Loss on Activation (Gross) |
Sub-Lease FL Net Receivable (Current) and (Non-Current) |
The remaining sub-lease receivable leaves as a loss, and the returned asset comes back as a gain. The net effect in profit or loss is the difference between the two. |
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Amounts do not align nicely as Liabilities have had remeasurement.
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