Author: easysetup4cloud

Lease Accounting Process

The below diagram shows the pictorial view of the lease accounting business processes and all the kind of transaction and functionality we can perform in this module.

In the Overview section, select accounting classification like operating lease and financial lease.Select the lease start date and end date. Amortization start date defaults from the lease start date but we can change. Enter the Discount Rate index.

Navigate to Assets Tab

Click on plus icon

In the Asset section, we have to enter asset number, location, asset start date and end date.

Once the asset details are entered, click on Save and Close button.

Navigate to Payments Tab

Click on plus icon

Select the appropriate payment template, supplier, supplier site, payment frequency and amount.

Once all the payment information are entered, click on save and close button.

Navigate to Actions

Click on Validate

Navigate to Actions

Click on Generate Schedules

Review the Schedules for Amortization

Review the Schedules for Payment

Submit for approval

Approval Worklist

The Approver view from the notification and approves it

Search for the lease and after opening the lease, click on attach lease details report

Click on Process Lease Payment task

Enter the parameters like process type: Lease Payments, Business unit, payment processing as Approve, Export to payables as Yes, Launch import payable invoice as Yes

Click on Submit

Navigator → Payables →  Invoices → Manage Invoices

To review the lease invoices we should follow the above navigation and search the invoices in manage invoices screen.

Click on Process Lease Payment task

Enter the following parameters like process type as Accruals and business unit.

Click on Submit

Enter the following parameters like subledger application as lease accounting, ledger, end date, accounting mode as final, report style as detail transfer to GL as Yes and Post to GL as Yes

Click on submit

Lease Booking Accounting Entry:

Lease Expense Accounting Entry:

Lease Payment Approval Accounting Entry:

List of reports available in Lease accounting module:

Table of Contents:

•Introduction

•Type of Lease

•IFRS 16 and ASC 842 Accounting Standard

•Lease Accounting Setups

•Lease Accounting Transactions

•Lease Accounting reporting

Introduction

•The lease is a contractual agreement between the lessor and the lessee.

•The lease gives the lessee the right to use specific property.

•The lease specifies the duration of the lease and rental payments.

•The obligations for the taxes, insurance, and maintenance may be assumed by the lessor or the lessee.

Type of Lease

Operating Lease

It is also known as service lease or cancellable lease. An operating lease is usually characterized by following features:

•It is a short-term lease. The lease period in such contract is less than the useful life of the asset.

•The lease is usually cancellable at the short notice by lessee.

•As a period of an operating lease is less than the useful life of the asset, it does not necessary to amortize the original cost of the asset.

•The lessee has the option of renewing the asset lease after the expiry of lease period.

•The lessor is generally responsible for maintenance, insurance and taxes of the asset.

Financial Lease

It is also known as capital lease. A financial lease is usually characterized by following features:

•As compared to operating lease, financial lease is for longer period.

•It is usually non – Cancellable by the lessee prior to its expiration date.

•The present value of the total lease rental payment during the period of lease exceeds or equal to substantially the whole of the fair value of the leased asset.

•A financial lease usually provides the lessee an option of renewing the lease for further period.

•The lessee is generally responsible for the maintenance, insurance and taxes of the asset.

Applicability of IFRS 16 to Leases

Background:

•It comes into effect on 1 January 2019.

•IASB and the FASB initiated a joint project to improve the Lease Accounting and agreed that a Customer (Lessee) should recognize all Leasing Assets and Liabilities.

•Leasing transactions relating to Operating Leases were not reflected in a Lessee’s Balance Sheet.

•IFRS 16 has now considered Single Model for Operating as well as Finance Leases. On the contrary, there is only one kind of Lease from Lessee’s point of view.

Applicability of ASC 842 to Leases

Background:

•It comes into effect on 15 December 2021 for Private companies and Non-Profit Organization.

•ASC 842, is the new lease accounting standard issued by the FASB.

•ASC 842 continues to distinguish between finance and operating leases, both are now required to be recorded on the balance sheet.

Impact of IFRS 16 –Lessee’s Books

Setup Overview

1. Opt-in Lease Accounting Feature
2. Enable Lease Accounting Business Function on the Business Unit
3. System Options
4. Discount Rate Indexes
5. Payment Templates
6. Manage Locations
7. Manage Account Rule
8. Manage Subledger Journal Entry Rule Sets
9. Manage Accounting Methods
10. Manage Lease Accounting Lookups
11. Lease Accounting Job Role

*Note: Bold characters are mandatory setups

Opt-in Lease Accounting Feature

Navigator → Setup and Maintenance → Financial Offering → Change Feature Opt In

Enable Lease Accounting Business Function

Navigator → Setup and Maintenance → Financial Offering → Assign Business Unit Business Function

System Options

Navigator →  Setup and Maintenance → Financial Offering → Lease Accounting → Manage Lease Accounting Configuration

Discount Rate Index

Navigator → Setup and Maintenance → Financial Offering →Lease Accounting → Manage Lease Accounting Configuration

Payment Templates

Navigator →  Setup and Maintenance → Financial Offering → Lease Accounting → Manage Lease Accounting Configuration

Manage Locations

Navigator → Setup and Maintenance → Financial Offering → Manage Locations

Lease Accounting Job Role

Navigator → Tools → Security Console → Role

Assign Lease Contract Management duty role to the job role and provide the Business unit data security policies to the job role.

In the next blog we will discuss on the Lease Accounting transactions and reporting.