NetLease - ST/LT Reclass Calculation
Overview
The method used to calculate the short-term and long-term portions of the lease liability depends on the selected accounting approach. There are three common approaches:
- Summing the principal payments due over the next 12 months
- Using the effective interest rate to separately calculate the present value of the lease liability
- Summing the undiscounted payments due in the next 12 months
Netgain’s lease accounting solutions apply Approach #1, as it most closely aligns with the presentation requirements under ASC 842 for the current portion of long-term debt.
According to ASC 842, the current portion of long-term debt is defined as the amount of principal due within the next 12 months. Accordingly, the lease liability is treated similarly to a loan, with the upcoming 12 months of principal payments reclassified as the short-term portion of the liability.
Illustrative Example
The example below illustrates how NetLease calculates the short-term portion of the lease liability.
If a short-term/long-term reclassification is required as of the end of the January period, the system calculates the short-term portion by summing the amounts in the Allocated to Principal column of the amortization schedule—i.e., the principal payments due—over the next 12 months. The remaining balance for any periods beyond that is then classified as the long-term portion of the liability.
FAQs & Troubleshooting
A common question is why a particular lease does not appear as an option during monthly reclass processing for a given period. In most cases, this occurs because the current portion on the relevant schedule line is zero, making the lease ineligible for reclassification during that period.
To validate this, navigate to the lease record in question and click Edit next to the schedule line corresponding to the month for which the reclass is being processed:
On the schedule line record, navigate to the Reclass Information subtab to view the Current Portion of Lease Liability field:
The Current Portion of Lease Liability field is automatically calculated based on the methodology described earlier in this article. If this amount is calculated as zero for a given period, it indicates that the sum of principal payments due over the next 12 months is either zero or negative. In such cases, the lease will not appear on the Monthly Reclass Journal Processing screen for that period, as a short-term/long-term (ST/LT) reclassification can only be processed when the 12-month principal total is greater than zero.
If a lease is not appearing as available for ST/LT reclassification, this field should be reviewed first. If the Current Portion of Lease Liability is positive and the lease still does not process the reclass, please contact support at support@netgain.tech to submit a ticket for further assistance.