As part of calculating your Lease Liability and Right of Use Asset, Nomos One takes into account and makes assumptions around all scheduled Rent Reviews added to your Agreement. In this article, we'll break down the impact that different kinds of scheduled Rent Reviews have on your IFRS 16 calculations, and talk about how adding Caps and Floors can change this.
Please note: The projections detailed in this article only apply to future (Scheduled) Rent Reviews. Once a Rent Review has been completed on the Agreement Timeline, any amount entered there will be used for your calculations and any remeasurements, rather than the projection.
Once you complete a Rent Review, future projections may adjust depending on the the type of Rent Review, and the amount the Rent changed by.
Default Treatments of Rent Reviews
Fixed Rent Reviews
Scheduled Fixed Rent Reviews project in your IFRS 16 calculations based on the pre-determined $ or % change loaded against the Fixed Rent Review Event. This pre-determined amount is entered in the Events page of the Agreement Wizard when you're onboarding the Agreement.
Market Rent Reviews
Scheduled Market Rent Reviews will revert to the last known Market Rent Review amount in your Agreement. This means if there was a previous Market Rent Review which was completed, that is the amount that will be used for the calculations.
If there was no previous Market Rent Reviews completed, the projection will revert back to the Commencement Rent amount.
CPI Rent Reviews
Scheduled CPI Rent Reviews will revert to the preceding Rent immediately before the Rent Review.
The Effect of Caps and Floors on the Default Treatment of Rent Reviews
The default treatment of Rent Reviews in IFRS 16 Reporting can be overridden by adding a Floor to Rent Reviews in an Agreement. When a Floor is added, that is treated as the minimum known amount that the Rent will increase by on Rent Review.
For example:
If you don't want the Rent amount to revert to the last known Market Rent or Commencement Rent, as that is the default projection for Market Rent Reviews, you can add a Floor of 100%. This tells the system to revert the Rent to the preceding Rent immediately before the Rent Review.
If a Floor of 102% is added to a CPI Rent Review, this will override the default projection and apply a 2% increase to the Rent on all future CPI Reviews.
Because a Floor becomes the minimum known amount the Rent will increase by, if you complete a Rent Review and don't increase it in line with the specified Floor, you'll see a negative revaluation on the Rent Review date in your Journals to reflect that the Rent was less than expected.
When should I add a Floor to my Agreement?
Whether or not you need to add in a Floor to your Agreement depends on what your contract says. If your contract fixes an amount the Rent must increase by on review, you should add in a Floor.
You might also like to use a Floor if you don't want the default Market Rent Review treatment to apply, following the example written above.
What about Caps?
Caps rarely have an impact on your IFRS 16 Reporting but rather serve as a reminder that your Rent should not increase above the recorded amount when you go to complete the Rent Review.
Check out this article on Adding Caps & Floors to your Agreement for steps and further details on when to add Caps & Floors to your Agreements
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