Lease transactions
Numerous types of transactions occur within the Asset leasing module, and each transaction type is part of the leasing calculation and process. Each lease type handles accounting differently for different lease transactions. The transactions include initial recognition, interest expense, lease due payment, and lease depreciation, and they’re based on the accounting standards that you’re following (IFRS 16 or ASC 842).
Asset leasing also integrates with General ledger to ensure that all posted lease transactions update the corresponding user ledger accounts. Asset leasing integrates with Accounts payable to track lessor invoices in Accounts payable and take future payments from there. The integration with Fixed assets lets you track leases in the fixed assets register and post right-of-use assets transactions, including the initial recognition, depreciation, and impairment of the asset, from within Fixed assets.
Initial recognition – This transaction uses the calculated net present value so that it can be reported on the balance sheet. The accounting entry for this transaction is generated automatically, but it must be posted by the user. This transaction debits the right-of-use asset account and credits the operating lease liability accounts.
Type Debit Credit Operating lease under US GAAP Right-of-use asset Operating lease liability Finance lease under IFRS and US GAAP Right-of-use asset Finance lease liability Lease liability amortization (interest expense) - The interest for a lease is recognized by calculating interest for the lease’s beginning balance, period lease payment, interest borrowing rate, and compound interval periods each year. The interest amount increases the lease liability account by crediting it, which will be reflected on the organization’s balance sheet. The transaction also includes a debit entry to the interest expense account, which is reflected on the profit and loss statement for finance leases, and to the lease expense account for operating leases.
Type Debit Credit Operating lease liability entry under US GAAP ASC 842 Lease expense Operating lease liability Finance lease liability entry under IFRS and US GAAP Interest expense Finance lease liability Accrued lease payment - An accrued lease payment is recognized as a lease future payment that’s due to process as a payment transaction from the bank or cash accounts. The lease payment due will decrease the lease liability by debiting the lease liability account against whether a vendor subledger (in case of the lessor) has been defined as a vendor, or by posting the credit side to a notes payable ledger account, and then the payment will be run against the vendor or notes payable.
Type Debit Credit Operating lease under US GAAP Operating lease liability Vendor liability Finance lease under IFRS and US GAAP Finance lease liability Vendor liability Asset depreciation - The right-of-use asset is depreciated over whichever is the smaller amount: the asset useful life or the lease term. The method for calculating depreciation for a US GAAP (ASC 842) operating lease is based on the difference between the straight-line lease expense and the interest amount.
Depreciation on finance leases is calculated by using a standard straight-line method. The lease depreciation affects the profit and loss statement by debiting the interest expense for operating leases and by debiting the depreciation right-of-use asset expense for finance leases.
The balance sheet is affected by crediting the accumulated right-of-use asset account for operating and finance leases. If the lease is linked to a fixed asset, the depreciation transactions will be run from the Fixed assets module only.
Type Debit Credit Operating lease under US GAAP Lease expense Right-of-use asset accumulated depreciation Finance lease under IFRS and US GAAP Depreciation right-of-use Right-of-use asset accumulated depreciation Short-term lease - A short-term lease is recognized as an expense that will affect an organization’s income statement. The generated lease payment due will debit the lease expense account and credit the notes payable or vendor subledger account.
Type Debit Credit Short-term lease entry under IFRS and US GAAP Lease expense Vendor liability Low value lease - A low-value lease is recognized as an expense that will affect your organization’s income statement. The generated lease payment due will debit the lease expense and credit the notes payable or vendor subledger account.
Type Debit Credit Low-value lease entry under IFRS and US GAAP Lease expense Vendor liability Index revaluation - The asset leasing account for variable lease payments that are measured by an index rate. Changes in lease payments that are caused by index rate fluctuations constitute a lease adjustment under IFRS 16. The lease liability and right-of-use assets will be adjusted to account for the new payments. When payments change because of a change in the index rate, only the variable payments will change unless changes have been added to cash flows, such as a change in lease terms that is related to interest rates under US GAAP ASC 842.
Type Debit Credit Index revaluation entry under IFRS in case of increase Right-of-use asset Finance or Operating lease liability Index revaluation entry under IFRS in case of decrease Finance or Operating lease liability Right-of-use asset Lease impairment - Represents the carrying over balance reduction of the right-of-use asset. It identifies the impairment amount, transaction date, and periods remaining. The remaining right-of-use asset will be amortized on a straight-line basis. The lease impairment logic considers the asset carryover value that exists in the asset depreciation schedule.
Type Debit Credit Impairment entry for IFRS and US GAAP Impairment expense Finance or Operating Right-of-use Finance or Operating