Get to grips with exactly how your lease liability and other balance sheet accounts are calculated as of the balance date using the Daily Calculation Report (DCR). In this article, we will aim to cover the following in some detail:
- What is the DCR?
- What is the DCR’s underlying calculation methodology?
- How to review the inputs that make up the lease liability
What is the DCR?
The Daily Calculation Report (DCR) is a detailed report that establishes how each balance sheet and profit and loss account is calculated every day of the lease’s expected term. The Daily Calculation tab of the report uses formulas and cell referencing to show how each account is calculated from the source information.
The DCR can be downloaded as a spreadsheet file for each agreement. This file has several tabs:
- The Journals tab is the daily transactions recognised from transition date (simplified transition), commencement or other lease start date until its anticipated expiry date.
- The Payments tab shows the different future expected cash flows or payment series that have been recognised over the life of the lease across separate columns.
- The Agreement tab shows the different discount rates and any make good provisions that have been applied over the life of the lease.
- The Daily Calculation tab shows the movements of the balance sheet and profit and loss accounts over every day of the life of the lease from the source information tabs (above).
What is the Daily Calculation Report’s underlying calculation methodology?
We will focus on the lease liability through this article as it directly feeds into the right-of-use asset (ROUA) through the transition or commencement journals and subsequent reassessment journals.
IFRS 16 requires that the lease liability is measured at the present value of the future lease payments expected under the lease. This means that the lease liability is always looking forward at what the lease payments are expected to be in the future – we term these future lease payments “the future payment series”.
As the lease liability model is always forward-looking, the future payment series is based on assumptions on what the rent might be at different points in the future (e.g. following CPI rent reviews, Market rent reviews etc.).
As the future becomes the present, prior assumptions need to be updated with the latest information (e.g. changes in rent amounts or lease terms). This causes a reassessment journal to adjust the lease liability to align with the updated future payment series.
The DCR calculates the lease liability at a point in time by using the XNPV formula (see Link for details) to discount all anticipated future lease payments on a daily compounding basis. The Daily Calculation tab references cells from the payment and agreement input tabs to make this calculation. As the payment series changes over the life of an agreement, new columns are added through the payments tab. The calculation then switches over to using the updated payment series column from the effective date of the adjustment.
As there can be many other projected payments on a particular date, each showing through a different payment series column, the current payment series used in calculating the lease liability is identified by column B of the payments tab. This column signifies the payment series column used in the lease liability calculation at that point in time. In the above example – the current payment series that calculates the lease liability on 01/07/2019 is through column L.
The “IFRS Cash” column is the actual payment series recognised on each day of the agreement. This will be the actual payments made for the rent review events that have been completed, combined with the current projection of the payment series into the future. This payment series will also be recognised through the journal report.
How to review the inputs that make up the lease liability
From understanding more about how the lease liability is calculated through Nomos One, you will hopefully start to appreciate how vital the payment series is to understand the lease liability.
Questions that frequently arise from our client’s audits or reviews are often focused on how the lease liability is calculated at year-end or how they have been remeasured during the year. The DCR is essential for reviewing the detail of these queries and can be easily downloaded from the system and provided to auditors.
Addressing these questions again comes back to review the underlying payment series through the Payments tab. In the below example – the lease term has been reduced from February 2041 (column M) to February 2021 (column N) from the effective date of July 2020. This is a reassessment that will show through this agreement from July 2020 that will reflect the difference between the present value of column M and the present value of column N. Column C also shows the end date of the lease has changed from row 8645 (February 2041) to February 2021 (row 1340). This can then be checked back to the present contract and accounting judgements.
To review the lease liability as of December 2020 (e.g. end of financial year) – the payment series through column N could be checked to confirm that this reflected the present contract and accounting judgements.
If you would like to understand more about the Daily Calculation Report, review your balance sheet and profit and loss accounts using Nomos One, or prepare for year-end, please reach out to email@example.com. Or book a customised product demo with one of our IFRS experts here.