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
- Opt-in Lease Accounting Feature
- Enable Lease Accounting Business Function on the Business Unit
- System Options
- Discount Rate Indexes
- Payment Templates
- Manage Locations
- Manage Account Rule
- Manage Subledger Journal Entry Rule Sets
- Manage Accounting Methods
- Manage Lease Accounting Lookups
- 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.