Demystifying Asset Leasing Classifications: Short-Term and Low-Value

While configuring the Asset Leasing module you may have noticed the many thresholds and setups included in the lease book setup. These threshold tests are critical for ensuring the system will classify leases appropriately under the applicable standard. This blog will dive deeper into the algorithm used to classify leases as short-term or low value and is part of a larger series of blogs written to explain the many classifications of the Asset Leasing module.

Note: This blog post does not intend to give advice on the accounting standards. This blog post is intended to inform the user of the behavior of the Asset Leasing module in order to configure and use the module in the way the user wishes to comply with the standards.

Short-Term and Low-Value Threshold Tests

Let’s start with the short term and low value threshold tests, because the Asset Leasing module also starts with these tests when deciding how to classify the lease. Meaning, even if your book is configured to classify your leases as finance, it can still be classified as an operating lease if either of the conditions are met.

 These tests relate to the two highlighted fields below: Short term threshold (Months) and Low value threshold: 

Short-Term Threshold

If the lease term of the lease book is less than or equal to the Short-term threshold (Months) field in the lease book setup, the Short-term lease field will be enabled for that lease book. When entering a lease, there is no field for entering the lease term.  Instead, the module will calculate the lease term on the exercisable months in the payment schedule lines.

Because the Lease term (months) field on the book is 10 which is less than the Short-term threshold (Months) of 12, the Short-term lease field will become enabled on the lease book:

Low-Value Threshold

If the Asset fair value of the lease book is less than or equal to the Low-value threshold field in the lease book setup, the Low-value lease field will be enabled for that lease book.

Because the Fair value of the asset field on the book is 1,000 which is less than the Low-value threshold  of 5,000, the Low-value lease field will become enabled on the lease book:

Deferred Rent Treatment

If the lease is classified as either a short-term or low-value lease, the lease will be marked as a Deferred Rent Treatment lease. This field determines whether the lease will be capitalized and recognized on the balance sheet or if payments would be expensed each month and no asset or liability recognized upon initial recognition.

When the deferred rent treatment field is enabled, the Lease type field will always be Operating. You will also notice in the screenshot above, there is no liability amortization or asset depreciation schedule created for this book because this lease is not recognized on the balance sheet.

Final Thoughts

Many clients often accidently create low-value or short-term leases. They may forget to exercise a payment schedule line, creating a short-term lease. Or they may enter the incorrect fair value leading to a low-value lease. It is important to understand how these thresholds can affect the classification of your leases and help you to quickly understand the classification of your leases.

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.