Before signing up with your lease accounting software solution, some due diligence is encouraged. The most crucial aspect of any lease accounting software is the numbers it produces from the contractual data.
Here at Cradle, we are 100% transparent in how we calculate the lease liability and, in turn, the right-of-use asset.
The purpose of this document is to show you how Cradle’s lease calculation methodology works and how it’s 100% in compliance with that of IFRS, including all journal entries.
The International Accounting Standards Board (IASB) have released a number of illustrative examples to provide clarity on judgement areas such as:
From Cradle’s perspective, we’ll leave those judgemental areas to you.
What we've focused on, is those IFRS examples that highlight the calculation methodology prescribed by IFRS. We’ve ensured our numbers are consistent with IFRS’s methodology to the cent unless there’s a logical reason for diverging. The benefit of using Cradle is you can be assured this methodology can be applied to your entire portfolio with no susceptibility to human error.
So we’ll walk you through each applicable IFRS example and compare Cradle’s numbers to those of IFRS, and we’re happy to say Cradle is actually more accurate than those writing the standard!
When using Cradle you have the ability to select which calculation method you prefer, Actual/365 fixed or Actual/Actual ISDA. Microsoft Excel uses Actual/365 fixed when using the built in XNPV function, which means it slightly miscalculates interest on leap years because it assumes that every year is exactly 365 days. However, in Cradle you can also use Actual/Actual ISDA. This convention takes into account the extra day when applicable. In short, if you would like our numbers to perfectly match yours in Excel, select Actual/365 fixed. If you want that extra accuracy, select Actual/Actual ISDA.
The difference would never be "material" enough to bother auditors, but we offer you the option so you can choose for yourself.
At Cradle, our biggest priority is the numbers we produce are correct, the IFRS examples we think are a great way to show you that our numbers are compliant. We also encourage you to perform your recalculations.
If requested, our demo accounts will come with the below examples to allow you to run the financial statement reports for yourself. The below is best read in conjunction with the IFRS Illustrative examples.
These are the following initial recognition details entered into Cradle:
Calculation methodology:
Example 13 initial recognition journals
Part 2 - Subsequent measurement and accounting for a change in the lease term
To account for the modification the following information is entered into Cradle:
On 2025-1-1:
These are the following initial recognition details entered into Cradle:
Calculation methodology:
Part 2 —Variable lease payments dependent on an index and variable lease payments linked to sales
To account for the modification the following information is entered into Cradle:
On 2019-12-31:
On 2021-1-1:
Example 15 provides an example of when a renegotiation of lease terms results in a new lease instead of applying modification accounting to the existing lease. Adding a new lease in Cradle is easier than saying “123”
These are the following initial recognition details entered into Cradle:
Calculation methodology:
To account for the modification the following information is entered into Cradle:
On 2025-1-1:
These are the following initial recognition details entered into Cradle:
Calculation methodology:
To account for the decrease in scope - asset size modification the following information is entered into Cradle:
On 2024-1-1:
These are the following initial recognition details entered into Cradle:
Calculation methodology:
Decrease in the lease term
To account for the decrease in scope - lease term modification the following information is entered into Cradle:
On 2024-1-1:
Increase in the leased space
To account for the increase in scope - lease term modification the following information is entered into Cradle:
On 2024-1-1:
These are the following initial recognition details entered into Cradle:
Calculation methodology:
Modification that is a change in consideration only
To account for the modification the following information is entered into Cradle:
On 2024-1-1: