How do I handle monthly lease prepayments?

This article describes how to handle monthly pre-payments.

We recently received this question from a firm partner: Our client prepays their lease in advance (e.g., for the June lease, they must pay no later than May 25th). How can I enter this “early payment date” in the LeaseCrunch?

When you are paying early, we recommend using the clearing account as you would when making a regular payment.

For the payment made on May 25 processed through your clients AP system (Entry will depend on Cash or Accrual method):

DR Clearing Account

CR Cash

For the monthly LeaseCrunch Journal Entry (Entry shown is based on 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's important to reconcile the clearing account on a regular basis noting that when payments are made on a different schedule than what is referenced in the lease document, there will be an unreconciled balance. The decision to make a payment early (or late - this is also true if payments are made in arrears) is an accounting function occurring outside of LeaseCrunch software and unrelated to ASC 842.

The details of the prepayment are important here. If the lessee made a payment a day early so they could get the tax benefit or make sure the mail arrived on time as in the example above, that is not a trigger for reassessment or remeasurement. KPMG Lease Guide Example 6.7.08 details short payments which we believe also applies to prepayments.

If the lessee does not have an enforceable right to change the way in which they make the payments, then the lease should be accounted for under its original terms and conditions. If the lessee does have an enforceable right, to change the date in which they make payments, then 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, that might trigger a remeasurement (revision) as well. Details on revisions are here: Revisions: How To Video.