As per the standard, when transiting to ASC 842 using the effective date method, all payments made before transition are not applicable when calculating the value of the lease liability at initial recognition. That's because the measurement of the lease liability is all future payments from the transition date.

So how do you handle a payment made prior to transition but applies to the lease post-transition?

The payment would be added or subtracted from the Right of Use Asset value per the above diagram. If the payment were made before transition (a prepayment) and covered a period post-transition, it would be added to the value of the ROU asset. If the payment were still accrued or deferred at transition and not yet paid, it would be subtracted from the ROU Asset.

You can input these amounts in the Initial Recognition tab at the agreement level.

Noting this treatment, let's provide an example in Cradle.

A company transitions on January 1, 2022, and makes a lease payment of $2,000 every two months.

The last payment made was on December 1, 2021, for $2,000. The next payment will be on February 1, 2022. As a result, they have a prepaid balance of $1,000 at the transition to ASC 842.

First, let's onboard the payments:

Then input the prepaid amount before commencement as required by the standard:

From the above screenshots, we have set up the payments and captured the prepaid amount before the commencement of $1,000.

The last thing is to remove the catch-up payment. The catch-up payment is not applicable in this case, as January 2022 was covered by the December 2021 payment. To do this, select the remove catch-up box:

We're now ready to create the lease. To ensure the payments are correct, check the Events tab:

As you can see, there is a payment of $2,000 occurring each month starting on February 1, 2022.

Then when running the journals for the month of transition, there's no payment for January:

The last thing you'll need to do in your general ledger is remove the prepaid balance of $1,000 from the balance sheet as that has now been added to the right of use asset, as per the guidance of ASC 842. That's assuming you've recognized the prepayment.

If you have any questions about this article, please don't hesitate to reach out!

The suspense accounts reflect a balance in your general ledger you will have to clear out. Cradle can't do the actual journal entry as we don't know the specific account name in your company's GL. Furthermore, if we didn't include the suspense entry, our journals wouldn't balance.

For example, the credit of the prepayment suspense account should be a credit against the prepaid balance at transition. In Cradle, input the applicable general ledger codes for the suspense account to ensure that credit goes to the right place.

Keywords

deferred rent, accrued rent, prepaid before the transition suspense account