1Introduction to Lease Accounting

This chapter contains the following:

Overview of Lease Accounting

Lease Accounting is a financial application that helps in the creation and maintenance of leases in a single repository and generates amortization schedules according to IFRS16 and ASC842 standards.

Lease Accounting provides the ability to capture information such as the lease details, assets, and payments. A lease validation process ensures quality data before activation. The amortization engine calculates the present value of the leases and the amortization of the right-of-use and the lease liability balances according to IFRS16 and ASC842.

The new accounting standards introduced in the past few years have transformed accounting rules that lessees must follow to comply. The following features of Lease Accounting help you to:

  • have touch-less capabilities to manage and process leases, helping you to comply with IFRS16, ASC842, or both these accounting standards in a seamless manner.

  • Improve planning with a single repository of all lease obligations.

  • Generate calculations for balance sheet balances and expenses.

Key Features

Key Features:

Lease Accounting has the following features:

  • The creation of property and equipment leases.

  • The capture of cash schedules needed for the generation of balances and invoices.

  • The generation of balances required as per IFRS16 and ASC842 guidelines.

  • The generation of amortization schedules using Daily Compounding Interest and Daily Amortizations.

When you opt to generate schedules, cash schedules with amortizations are created. Along with this information, balances for right-of-use and lease liability are also generated based on different periods.

The balances and amortizations are calculated by discounting cash flows using discount rates on the lease.

Note: Currently, the only interest calculation method is the 'Daily Compounding Interest,' and the amortization method is 'Daily Amortization.'

Using this information on the cash flows, initial measurement amounts as required by the standards are calculated.

Create System Options

Lease Accounting requires three product setups to be completed before you can start using it.

These setups are as follows:

  • System Options

  • Discount Rate Indexes

  • Payment Templates

Note: These setups are completed using file uploads using FSM only.

The system options definition is the primary step for creating setups for Lease Accounting.

You must ensure that the AP Financials options are already setup before setting up the system options.

The system options defines all major calculation options namely:

  • You must provide the business unit and ledger for which the system options are defined.

  • You must enable auto numbering for leases, assets, and payments.

  • You must select the primary and secondary applicable accounting standards. The options are IFRS16 or ASC842. If primary is IFRS16, then secondary will be ASC842, if both accounting standards are applicable for reporting, and vice-versa.

  • You can decide the amortization and interest calculation methods.

  • You must select a currency conversion type of user, corporate, and such from GL. This will be used on the lease for foreign exchange payments.

  • You must select the inventory organization which is needed for leasing from the inventory master.

  • You must provide a GL calendar for calculations. If the calendar isn't selected, then the primary ledger's calendar is used for calculations.

Create Primary Discount Rate Indexes

You can use the discount rate index for capturing discount rates needed for discounting of cash flows.

The discount rates effective on the amortization start date are used for discounting cash flows on the lease.

You can define multiple discount rate indexes for a business unit. The discount rate indexes can be grouped into logical buckets like 20 years leases, 10-year leases, and so on.

The discount rate indexes are associated to the lease and based on the lease amortization date. A particular discount rate is fetched from index and used for discounting of cash flows.

You must provide the following information for enabling a discount rate index:

  • You must select the business unit.

  • You must enter the name and description of the index.

    The name and description helps you to group the indexes into 10-year bucket, 15-year buckets, and so on, or some other logical grouping.

  • You must enter a series of discount rates with an effective from and to non-overlapping dates.

  • You must also provide an effective start date on the header of the index.

Create Payment Term Templates

You can use the payment term templates for defining payments.

Most of the information needed to define a payment is defaulted from payment term templates.

You can create a payment term template by filling in the payment term template .csv file and importing the .csv file.

The service for the payment term then creates the payment term template.

The payment term template is created for a business unit. It's selected during payment creation, which aids in quicker and error free data entry.

A payment term template requires the following information:

  • You must enter the name of the template.

  • You must enter a brief description.

  • You must select the payment purpose and type.

  • You must select the frequency of the payment.

  • You must provide the supplier name and site.

  • You must select the accounting classes for Right of Use, Lease Liability, Expenses, Gain/Loss, and Foreign Exchange Gain/Loss, among others.

  • You must select the check boxes for Right of Use, Liability and Intercompany, as required.

Create Document Sequencing

You must assign a document sequence to the business unit to leverage the auto-numbering functionality of leases, assets, and payments.