IMOS On-Prem - Lease Accounting Formulas

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Note: Configuration flag CFGEnableTCLeaseAccounting must be enabled.

For more information about the lease accounting workflow and IFRS 16, see Compliance with IFRS 15 and 16 Regulations.

Right-of-Use Asset and Lease Liability

When Time Charter Period Journals are created, they are to debit an asset account and credit a liability account. The debit amount is called the Right-of-Use Asset (ROU-A), and the credit is called the Lease Liability (LL).

At the commencement date, the ROU-A is the sum of the initial measurement all Lease Payments that were made on or before the commencement date. This equates to the net present value (NPV) of the Lease Payments from the commencement to the completion of the Time Charter contract. Since the first Hire Payment is made to the owner on or before the delivery of the vessel, the lease payment related to that first billing period does not need to be discounted.

Variables

Calculating the ROU-A Require the following variables:

• Contract Duration: Delivery-Redelivery period of a TC contract, in days
• Frequency of Lease Payments: TC billing period value with the following converted values:
  • Monthly and n^th day of Month = 12 periods/year
  • Semimonthly = 24 periods/year
  • Biweekly = 104 periods/year
  • Weekly = 52 periods/year
  • Every 30 Days = 12.175 periods/year
  • Every 15 Days = 24.35 periods/year
  • Every 10 Days = 36.525 periods/year
  • Every 5 Days = 73.05 periods/year
• Total Number of Billing Periods = Contract Duration * Frequency of Payments
• Value of Lease Payment per Period = Hire Cost for period less Address Commission for period less Service Cost (from the TC Service Rate Schedule) for the period
  • If there is an Off Hire in days, then deduct from the Value of Lease Payment per Period the following amount: Number of Off Hire Days × (Hire Rate − Address Commission − Service Cost) × Off Hire TC In Percentage
  • If there is a lumpsum Off Hire, then deduct from the Value of Lease Payment per Period the following amount: Off Hire Lumpsum × (Number of Off Hire Days in the Period / Total Off Hire Days)
    
• Discount Rate per Period = ((1 + Discount Rate) ^ (1 / (365.25 / Period Duration)) − 1
• T = Indicated period

Formula

ROU-A = (sum (Lease Payment per period T / (1 + Discount Rate per Period) ^ T) for each period T from T = 1 until T = Total Number of Billing Periods) + First Period Lease Payment (i.e., T = 0)

Here is the same formula with typeset formatting:

Sample Calculations of ROU-Asset

Click here to download a spreadsheet of sample ROU-Asset calcuations.

Contract Modification

The formula for calculating the ROU-A and LL for the contract do not change when there is a modification the contract value, but the variables change as does the workflow for handling these changes.

Changes that count as a contract modification are:

• Contract Duration
• Hire Rate(s)
• Service Cost
• Address Commission
• Interest Rate

When any one of these data points on the contract change from what the original ROU-A and LL were calculated on, then a modification occurs. When the subsequent Time Charter Period Journals are run, the original ROU-A is reversed out and replaced with the new value, calculated using the above formula and the new data points. The LL value in the journals reflects the delta between the originally calculated LL and the modified LL. This process occurs for every modification throughout the life of the contract.

Index-Linked Contracts

For those TC contracts that have index-linked hire rates, by nature, they have constant modifications and as a result are treated similarly to the modifications above. One key difference is how the system determines which hire rate to utilize for the index-linked period. 

For contracts that have full index-linked periods:

• Before the first payment is generated, the ROU-A and LL are 0, the system does not use a forward rate.
• When the first payment is made, the ROU-A and LL are calculated using the rate used for the payment as the hire rate for the length of the contract.
• When the second payment made, a modification has occurred and the new ROU-A and LL are calculated using the firm price for the first period and the second price from the second payment for all forward periods.
• This process continues throughout the life of the contract, always using the price from already paid periods and the last known price for all remaining unpriced forward periods.

For contracts that have a flat rate period before an index-linked period:

• The initial ROU-A and LL are calculated using the forward rate for the index-linked period from Market Data while in the flat rate period.
• When the first payment is made against the index-linked period, the process from above is utilized.