Asset Leasing Feature Review: Leasing Conventions

As part of the 2020 Wave 2 releases, Microsoft released the Leasing Conventions feature with general availability March 31, 2021. This post will explain this new functionality in greater detail and explain if you should enable it during your Asset Leasing implementation. 

Overview

The asset leasing conventions feature helps users automatically determine the commencement date of a lease. Prior to this release, it was recommended to enter the commencement date as the 1^st day of the month the lease has commenced. This advice was oftentimes forgotten or ignored and people were left with schedules that did not end on the last day of the month. Additionally, this caused confusion as users expect to enter the true commencement date of the lease rather than the first day of the month.

How does it work?

To use this feature, enable the “Leasing convention for asset leasing” feature found in the Feature Management workspace:

Now, within your Lease Books setup, there will be a new field labeled “Leasing convention”:

This field only has two options: None or Full Month

• None – The Commencement Date for a lease book is set to the Lease Start Date from the Parent Lease
• Full Month – The Commencement Date for a lease book is automatically set to the 1^st day of the month of the Lease Start Date from the Parent Lease

Now, when creating a lease, instead of populating the Commencement Date field, the Add Lease form will have a field labeled “Lease Start Date”:

This field will now determine the Commencement Date of the lease at the book level and the Commencement Date is noneditable as it is now solely derived from the Lease Start Date and Leasing Convention.

Example

Assume a lease group “BUILD” associated to two books: an IFRS 16 book with a “Full month” leasing convention and an ASC 842 book with a “None” leasing convention:

In this example, I’ve created a lease assigned to the BUILD lease group with a Lease Start Date of January 15, 2021:

The IFRS 16 book, using the “Full Month” convention, populates the Commencement Date to January 1, 2021 as that is the first day of the month:

The ASC 842 book, using the “None” convention, populates the Commencement Date to January 15, 2021 as that is the Commencement Date. Note, using the None convention produces the same end result as not using the Leasing Convention feature:

Schedules

If we look inside the schedules, we will see where the conventions feature makes the biggest impacts. Below is the depreciation schedule for the IFRS 16 book. You will notice the schedules start on the first day of the month and end on the last day. The module will post the entry on the Period End Date meaning the depreciation expense for $908.80 will post on January 31, 2021:

Likewise with the liability amortization schedule, the dates align to the starts and ends of the months and therefore, the interest expense journal entry of $91.20 will post on January 31, 2021:

Conversely with the ASC 842 book, using the None leasing convention, the schedules start on the 15th of each month and end on the 14th of the next month. This means the journal entries will be posted on the 14th of the following month for expenses accrued over partial periods of both months:

Note: The amounts of expense are identical between the two schedules. The only change is the date convention.

It's also important to note how the payment schedule is not affected by the feature. Because the dates on the payment schedule are derived from the payment schedule lines, the leasing convention will not impact this schedule:

"Full Month" Convention:

"None" Convention:

Final Thoughts

If you use calendar month fiscal periods, this feature should be enabled on Day 1 to avoid any confusion on the Commencement Dates of leases. This will provide a consistent user experience and consistent convention of the dates of the schedules. This will ensure all leases have a consistent pattern of their commencement dates and your expenses are accrued on the final day of each month. However, for clients that may conform to a non-calendar month fiscal periods, this convention may not be as useful and entering the commencement date on the first day of the fiscal month may produce more consistent results with your expense recognition pattern. 

By Brian Markgraf CPA, Crowe LLP, a Microsoft Dynamics 365 Gold Partner https://www.crowe.com/services/consulting/microsoft-dynamics-365

Learn more about Crowe’s Microsoft Asset Leasing Quick Start Implementation here.