Automatic Discount Rate Matching for Lease Accounting

3 min read
May 13, 2021
CoStar Real Estate Manager Blog

Automatic Discount Rate Matching for Lease Accounting

There’s no need to manually enter a discount rate for new or modified leases with lease accounting software from CoStar. Just upload your company’s discount rate tables, and the software automatically identifies which rate to use for each lease.

If you don’t upload your table of discount rates, you’ll end up wasting hours of time looking up and entering rates for each new or modified lease. And you’ll be prevented from using other automations in the software that are contingent upon discount rate matching.

The Need for the Discount Rate

A discount rate is needed each time you create an amortization schedule for a lease or remeasure the ROU asset and lease liability. As you create amortization schedules for new leases and remeasure your current ones, CoStar Lease Accounting will automatically match each lease to the appropriate discount rate. This enables a consistent method for matching leases to correct discount rates, reducing the risk of human error.

The Need for Remeasurement

You need to remeasure the lease upon one of the following events:

  • Reducing or increasing lease terms or payments
  • Exercising the option to purchase a leased property or to renew a lease
  • Terminating or partially terminating a lease
  • Adding or reducing space you’re leasing
  • Subleasing an asset for a period beyond the end of the current lease term
  • Significantly modifying an asset
  • Assessing that you are reasonably certain to exercise a lease option
  • Impairing a property (However, this does not require a new discount rate.)

Automating the Discount Rate

You probably already periodically obtain from your treasury department an updated list of borrowing rates, which are used as your discount rates.  Rather than having your staff manually look up the rate for each new or modified lease, all you need to do is periodically upload your most recent discount rate tables to CoStar Real Estate Manager. Your company should create a policy that states the frequency discount rates are to be updated. Each country should have its own discount rate tables: one for properties and one for equipment. Tables should include the country, currency, lease terms, and discount rate. (See Figure A)

All you need to do is create tables like the ones below and use the Extract, Transform, and Load (ETL) tool to upload the discount rates to CoStar’s Lease Accounting software. It will then automatically assign the correct discount rate to each lease based on the criteria in the tables.

Figure A

Real Estate Location Currency Min time Max time Discount Rate
  U.S. $ 1 day < 1 year 4%
  U.S. $ 1 year < 3 years 3.5%
  U.S. $ 3 years <5 years 3%
  U.S. $ 5 years >5 years 2.9%
Equipment Location Currency Min time Max time Discount Rate
  UK GBP 1 day < 1 year 6%
  UK GBP 1 year < 3 years 4.5%
  UK GBP 3 years <5 years 4%
  UK GBP 5 years >5 years 3%

*More Automations Coming Soon

To partake in future automations, you’ll need to have in place automated discount rate matching. In Q3, we expect to roll out batch accounting, which will allow you to perform remeasurements in bulk with just a few clicks. When you go to your accounting dashboard and click Batch Accounting, you’ll be presented with a list of all the modified leases that your lease administrative team has input into the system. At the top of the list, you’ll click Select All to add them to your batch of leases to be remeasured in one swoop. Then, you’ll confirm the default parameters you’ve defined for the portfolio’s Measure Events and Classifications. Then click the Queue for Validation and Processing button. The application will perform a data validation for quality control. Records that pass validation will automatically be remeasured. You’ll be presented with a list of records that fail validation along with a reason, such as “missing data.” Once you correct the validation issues, click Batch Accounting and repeat the above instructions.

Every year, about 20 percent of a company’s leases are up for renewal and about 10 percent are modified for other events like terminations or partial terminations. All these events require remeasurement and the application of a new discount rate. In one year, a company with 1,000 leases might need the discount rate 300 times — 200 times for renewals and 100 times for other remeasurement events. And that doesn’t even account for new leases, which all also need a discount rate.

Make your work routine a lot easier by importing discount rate tables into transaction management software from CoStar.