Amortization schedules explained

How amortization works

When a lease is activated, Arvexi calculates two parallel schedules:

• Lease liability amortization: The liability starts at the present value of all future lease payments, discounted at the incremental borrowing rate (IBR). Each period, a portion of the payment reduces the liability principal and the remainder is recognized as interest expense.
• ROU asset amortization: The right-of-use asset starts at the initial lease liability plus any prepaid rent, initial direct costs, and lease incentives received. How it is amortized depends on the lease classification.

Operating lease treatment

Under ASC 842, operating leases produce a single straight-line lease expense on the income statement. Behind the scenes, Arvexi computes two components each period:

1. Interest on the liability: Calculated as the opening liability balance multiplied by the periodic IBR.
2. ROU asset amortization: Set to the difference between the straight-line expense and the interest component. This is the “plug” that ensures total expense is level across periods.

Because the interest component is front-loaded (higher in early periods when the liability balance is larger), the ROU asset amortization is back-loaded. The two always sum to the same total expense each period.

Finance lease treatment

Finance leases produce two separate expense line items:

• Interest expense: Same effective interest method as operating leases, recognized in interest expense on the income statement.
• Amortization expense: The ROU asset is amortized on a straight-line basis over the shorter of the lease term or the asset’s useful life. This appears as depreciation/amortization expense.

Unlike operating leases, total expense is front-loaded for finance leases because interest is highest in early periods while amortization stays constant.

Monthly entries

Arvexi generates amortization entries for each month in the lease term. On the amortization schedule page, you see a row per period with these columns:

• Period start and end dates
• Opening and closing lease liability balances
• Payment amount applied
• Interest expense recognized
• Principal reduction
• Opening and closing ROU asset balances
• ROU amortization expense
• Total lease expense (operating) or combined interest + amortization (finance)

Click any row to expand the corresponding journal entry with full debit/credit detail.

Modifications and remeasurements

When lease terms change (a rent increase, term extension, scope reduction, or IBR update), Arvexi creates a remeasurement event. The modification workflow:

1. Records the effective date and type of change (scope change, term change, payment change, or reassessment).
2. Recalculates the lease liability at the revised discount rate using remaining future payments under the new terms.
3. Adjusts the ROU asset by the same amount as the liability change (for most modifications), or recognizes a gain/loss if there is a partial termination.
4. Generates a modification journal entry capturing the adjustment.
5. Rebuilds the amortization schedule from the modification date forward while preserving the historical schedule up to that point.

The original schedule rows remain locked and visible. The modified schedule appears as a new layer starting from the effective date.

Multi-layer ROU asset tracking

Over the life of a lease, multiple modifications can stack up. Arvexi tracks each modification as a separate ROU asset layer:

• Layer 0 (inception): The original ROU asset value established at commencement.
• Layer 1, 2, … (modifications): Each remeasurement adds or subtracts a layer with its own amortization period and starting balance.

Every layer amortizes independently through the remaining lease term. The total ROU asset balance shown on the balance sheet is the sum of all active layers. This approach ensures accurate rollforward reporting and audit-ready documentation of how each modification affected the asset balance.

You can view the layer breakdown on any lease’s detail page under the ROU Layers tab, which shows each layer’s inception value, accumulated amortization, and remaining balance.