Renewal Income Method of Residual Recovery: When do you begin seeing Renewal Income?

Renewal Income Method of Residual Recovery: When do you begin seeing Renewal Income?

There are 2 options for Renewal Income, which are set at the Global and individual Finance Company Levels within the Administration > Accounting > Accounting Options > Renewals tab.  This article is specifically discussing when Renewal Income will be seen using the RESIDUAL RECOVERY option.



With the Renewal Income Method of Residual Recovery, ASPIRE will attempt to recover the percentage of the Residual Amount prior to tracking any renewal payments as income once the Residual has been recovered.  The speed of the Residual Recovery will depend upon a few factors.  Each will be further discussed below.
  1. The Residual Recovery Percentage
  2. The Amount of Residual vs the Total Amount of the Renewal Payment Stream
  3. The Number of Equipment Records with Residual to Recover
  4. The Proration Method, set on the individual Renewal Schedule's Assets tab
  5. Residual Recovery Settings

Residual Recovery Percentage
There is a default setting in the Administration > Accounting > Accounting Options > Renewals tab that is set at the Global and individual Finance Company Levels.  This value will automatically populate onto the Renewal Schedule as you build it.  However, you may override the default on the individual Renewal Schedules of the individual Contracts.

The Residual Recovery Percentage will not prevent you from recovering 100% of the Residual Value, even if set at a value such as 80%.  The only thing that would prevent that is if the Renewal Schedule didn't have enough payments to actually recover the entirety of the Residual Value of the Equipment Records on the Contract Equipment records. 

Having a value of less than 100% for the Residual Recovery Percentage will result in a slower recovery period.  Below are two examples, both using a Renewal Payment Amount of $1000.  For detailed examples of the actual GL Entries you can expect to see for a Finance Lease vs Operating Lease as well as whether you are processing using the Gross or Net Recovery Method, please refer to the KB Article titled Renewal Processing Training.  There is an attachment titled "Renewal Processing - detailed documentation.pfd", and this will be discussed in the attachment, beginning on page 22.  Links to the Renewal Processing Training Article:

EXAMPLES:
  1. 100% Residual Recovery:  100% of each Payment will go to the Residual Recovery, until fully recovered.  Once 100% of the Residual has been recovered, the extra will go to Renewal Income Account.
  2. 80% Residual Recovery:  80% of each Payment will go to the Residual Recovery, until fully recovered.  The other 20% will go to the Renewal Tran Code's Credit Account.  Once 100% of the Residual has been recovered at this slower speed, the extra will go to the Renewal Income Account.


The Amount of Residual vs the Total Amount of the Renewal Payment Stream
The total amount received (pre-tax) must be the same amount as the total Residual Value or exceed the total Residual Value, otherwise you will not see any entries to the Renewal Income Account when utilizing the Renewal Income Method of Residual Recovery.  This is especially important to remember when utilizing a Residual Recovery Percentage that is less than 100%.  For example, let's say the total Residual Value to recover on all Assets on the Contract is $5700.
  1. 100% Residual Recovery Percentage:  The total amount (pre-tax) of the Renewal Schedule needs to add up to at least $5700.  Otherwise, you will not fully recover the Residual within the Renewal Payment Schedule.
  2. 80% Residual Recovery Percentage:  The total amount (pre-tax) of the Renewal Schedule will be higher, as it will need to take into consideration that 20% of each payment will no longer be going toward Residual Recovery.  Regardless of the number of payments in the Renewal Payment schedule, it will need to add up to at least $7125; $5700 is 80% of $7125.

Number of Equipment Records with Residual to Recover
Residual Recovery will only occur if the Equipment Record(s) on the Contract that have a value listed in the Residual Value field on the Equipment Screen after you build a Renewal Schedule onto the Contract. 

Once you have a Renewal Schedule built on to the Contract, you can exclude certain equipment records from the Renewal Schedule, if desired.  Go to the "Asset" tab of the Renewal Billings screen and deselect any equipment records you want to exclude from the Residual Recovery efforts of the Renewal Payment stream.  Excluding any Equipment Records from this screen will result in the Residual NOT being recovered through this Renewal Schedule if the Equipment Record happens to have a Residual on it.


Proration Method
If the Contract has multiple assets with Residual Values, the Renewal Payments will Prorate on one of 3 methods, which are able to be edited on the Renewal Schedule's Assets tab:
  1. Equipment Cost (default)
  2. Equipment Rental Payment Amount
  3. Purchase Option Amount

If one (or some) of the Equipment Records' Residual Values have been fully Recovered but other assets on the contract have not had their Residual Values fully recovered yet, you MAY still see a GL Entry to Residual Income while there is still Residual being Recovered.  This is not in error.  The Residual Recovery will be processed asset by asset.  Once the individual asset has had its residual fully recovered, the individual asset will begin tracking its Renewal Income while the other assets continue to recover the residual.


Residual Recovery Settings
This section appears when you select a Renewal Income Method of Residual Recovery.  It sets the default Residual Realization Method and the Default Recovery Percentage.
  1. Residual Realization Method - This cannot be overridden at the Contract Level when building Renewal Payment Schedules.  It indicates the Accounting Method, or what type of GL Entries that are desired as Renewal Payments are processed.  The Residual Realization Method applies Renewal Payments as a reduction to the Residual Book Value of the asset(s), until it reaches $0.00.  Any additional Renewal Payments are then recognized as Income.  Residual Recovery will not be applied to a daily basis but will follow the earnings once the Renewal Payments are received.  
    1. Net - Default Setting.  The Income Account and Contract Residual Accounts are utilized with this accounting method.
    2. Gross - The Income Account, Expense Account, and Contract Residual Account will be utilized with this accounting method.
  2. Default Recovery Percentage - This may be overridden at the Contract Level when building Renewal Payment Schedules.  This value will auto populate within the Contract Explorer > Billing > Renewal Billings screen, however the user may override this to edit the speed in which the Residual will be recovered on a Contract by Contract basis. 

    • Related Articles

    • Renewal Processing Training

      Please see the attachments for detailed information, recording available from within the Vimeo weblink below Attachments available + a link for the Recorded Training: 1. Detailed notes that accompany the Recording, titled "Renewal Processing - ...

    • Updating Book Depreciation during Renewal to depreciate the residual

      It is not an uncommon scenario to have an operating lease asset that is set to depreciate down to a residual value. Once the contract matures and it moves into a renewal period you typically want to continue book depreciation to offset the renewal ...

    • Renewal Configuration

      See attached document for complete details. The attached document outlines configuration required to setup a Renewal schedule on a contract.

    • Adjustment Item Earnings Method

      See attached document for in-depth details. Adjustment Item Earnings Method tells the system how to calculate earnings on Contract Items (such as IDC and the Loan item for loans). It defaults to "Customer" but there are 3 choices, all explained ...

    • Configuration settings in the ASPIRE Accounting Options screen

      Please refer to the various recordings that discuss the configuration settings on each of the tabs within the Accounting Options menu. This ASPIRE screen can be accessed within Administration > Accounting > Accounting Options. Each topic below will ...