Deep Dive into Asset Leasing Posting Types

You just enabled the Asset Leasing module and are excited to begin using one of the latest modules Dynamics 365 F&O has to offer. You navigate to the Asset Leasing parameters setup and are shocked to see 16 different posting types awaiting your configuration. You think to yourself, “Do I really need all these accounts?”

This blog post will set out to answer that question and to give examples of when these accounts will be used.

Let’s start with the most commonly used posting types:

Lease Asset

The account associated with the right-of-use asset. This account will be debited when initially recognizing a lease under the new standards IFRS 16 and ASC 842. This account may either be debited or credited for a lease modification depending on if the modification increases or decreases the lease liability.

This account will not be used for leases associated to a fixed asset. Rather than debiting the lease asset, the initial recognition journal entry will debit that fixed asset directly as an acquisition entry.

This account would also not be used for deferred rent treatment leases include those leases classified as operating under ASC 840 and IAS 17, or short-term or low value under IFRS 16 and ASC 842.

Example journal entries:

Lease Liability

As the name indicates, the account associated with the lease liability arising from the discounting of payments under the new standards IFRS 16 and ASC 842. This account will be credited upon initial recognition under the new standards. This account will be debited for lease payments and credited for interest accruals.

Like the lease asset account, if leases are classified as deferred rent treatment, there would be no need for the lease liability account as these leases are “off balance sheet”.

Example journal entries:

Interest Expense

Journal entries produced from the liability amortization schedule record the interest expense accrued on the lease liability. The account mapped to this posting type represents the interest expense and will be debited and the lease liability will be credited.

Leases classified as deferred rent treatment would not use the interest expense posting type as there is no lease liability to amortize.

Example journal entries:

Depreciation Expense

The account associated with the expense related to the depreciation of the right-of-use asset under IFRS 16, ASC 842, and finance leases under IAS 17 and ASC 840. This account will be debited when a right-of-use asset is depreciated each month.

When a lease is tied to a fixed asset the depreciation is conducted through the Fixed Assets module so there would be no need for this account for such leases.

Example journal entries:

Accumulated Depreciation

The account associated with the contra-asset account of the right-of-use asset. This account will be credited when depreciation expense is posted.

Again, like the Lease Asset and Depreciation Expense, this account is needed whenever leases are not tied to fixed assets.

Example journal entries:

Lease Payment

The Asset Leasing module gives users some flexibility when determining how they want their lease payments to be posted. When configuring the lease book, the ‘Pay to vendor’ parameter will determine whether lease payments generated from the lease payment schedule will be offset directly to the vendor or to this account.

If the ‘Pay to Vendor’ parameter is enabled on the lease book setup, this account would not be used. In such case, when generating entries from the payment schedule, the module will create invoices directly to the vendor listed on the lease details.

Example Journal Entry:

Lease Expense

When a lease is classified as a deferred rent treatment lease, lease payments are expensed to the Lease Expense posting type. This account will be debited when an invoice is posted against a deferred rent treatment lease.

This account would only be used for leases classified as deferred rent treatment as non-deferred rent treatment lease payments would decrease the lease liability.

Example Journal Entry:

Lease Payment (Deferred Rent Treatment Lease):

Deferred Rent Asset (Liability)

The account associated with the deferred rent asset or liability resulting from a deferred rent treatment lease. This account will be debited when an invoice is posted against a deferred rent treatment lease if the lease payment amount is greater than that period’s straight-line rent expense. This account will be credited if the lease payment is less than that period’s straight-line rent expense.

This account is also used in initial recognition when there is a value in the deferred rent carryover field. When transitioning a lease from the previous lease accounting standards, the amount of deferred or accrued rent is included in the recognition of the beginning right-of-use asset balance. Carried over deferred rent assets, represented as a positive value, will be credited and will increase the right-of-use asset upon initial recognition, while any deferred rent liability, represented as negative values in this field, will decrease the right-of-use asset:

Example Journal Entries:

Lease Increase/Decrease

In accordance with the lease accounting standards, there are several items that are included in the calculation of the right-of-use asset upon initial recognition. These items include initial direct costs, lease prepayments, and estimated dismantling costs which increase the right-of-use asset in addition to lease incentives which decrease the right-of-use asset.

This account serves as a catchall for those additional right-of-use asset considerations upon the initial recognition or lease adjustment to offset the lease asset.

Example Journal Entries:

Assume a lease with 5,000 of initial direct costs at the initial recognition:

Assume a lease with 1,000 of lease incentives arising from a lease adjustment:

Short-Term Lease Liability

For disclosure purposes, companies may need to separate their liabilities into current and non-current portions. The Asset Leasing module records the entire liability amount to the account mapped to the Lease Liability posting type. To reclassify the short-term or current portion of the lease liability, the user can run the short-term lease liability reclass through the batch job:

This entry will reclassify the current portion of the lease liability, shown on the liability amortization schedule, from the lease liability account to the short-term lease liability accounts on the last day of the period. This opposite entry is booked on the following day to reverse the reclassification.

Example journal entry:

Rounding Difference

When a lease is denominated in a different currency from the accounting or reporting currencies defined on the ledger for that legal entity, it is common that rounding differences may occur upon translation. This penny difference is captured in the Rounding Difference posting type.

This account is not necessary when all leases are transacted in the same currency as the accounting and reporting currencies.

Example journal entry:

Assume a lease denominated in JPY in a legal entity where the accounting currency is GBP and reporting currency is INR. The exchange rates are GBP > JPY is .01 and JPY > INR is 1.293:

The following posting types are less frequently used for most companies. In most cases, you can get away with not having these accounts mapped on Day 1. They are used in less frequent scenarios, typically around intricate lease adjustments. It’s easy to see how comprehensive the module can be and how the module can cover the rarest of scenarios.

Impairment Expense

When the lease is not associated to a fixed asset, the user can impair the right-of-use asset via the impairment function on the book details.

In a lease impairment journal entry, the impairment expense posting type is debited and the lease asset directly credited. This account would not be used for leases associated to a fixed asset as impairments are conducted in the fixed assets module.

Example journal entry:

Retained Earnings

Under US GAAP ASC 842, when a lease modification changes the classification of a lease from finance to operating, the right-of-use asset is written up to match the lease liability. The retained earnings posting type is used to offset the lease asset writeup.

For leases accounted under IFRS 16, this posting type is not used.

Example journal entry:

Assume a finance lease accounted for under ASC 842 with a liability carrying balance of $500,000 and lease asset balance of $253,000. The lease is adjusted, and the liability increases by $750,000. After the adjustment, the lease is classified as an operating lease. The first two lines of the entry will reverse the balances out of the finance liability and lease asset. The next two lines will place those same amounts in the operating liability and asset accounts as the lease is now an operating lease going forward. The next two lines represent the $750,000 increase to the lease liability and lease asset. Finally, the final two lines represent the write up of the lease asset to match the lease liability amount (1,250,000 – 1,003,000 = 247,000):

Gain/Loss on Lease Modification

When a lease is adjusted and the lease liability is decreased by an amount larger than the carrying value of the lease asset, the difference is booked to the Gain/loss on lease modification posting type. This is applicable for both IFRS and ASC nondeferred rent treatment leases.

Example journal entry:

Assume a lease with a carrying balance of the lease asset of $50,000 and liability carrying value of $75,000. The lease was adjusted and the new sum of present value of payments is only $10,000. The adjustment entry would decrease the lease liability by $65,000 (75,000 – 10,000 = 65,000). However, the lease asset’s carrying value is only $50,000 and cannot be decreased past its carrying value. Therefore, the lease asset is decreased to 0 and the remainder of $15,000 (65,000 – 50,000) is posted to the Gain/loss on lease modification account:

Variable Payment

The payment schedule for every lease has a column specifically for variable payments. This column is editable for all unposted months even after the payment schedule is confirmed. These payments do not impact the lease liability and are expensed to the Lease payment posting type. The total payment amount between the payment amount and variable payment is credited to either the Lease Payment or vendor accounts.

Example journal entry:

Expense Offset

Finally, the Expense offset account configured in the Asset Leasing parameters is simply a placeholder posting type. The actual account to be used to offset against any executory costs is selected directly on the executory costs payment schedule lines:

Final Thoughts

While there are many posting types to configure the Asset Leasing module, depending on your lease portfolio and configuration of the module, not all accounts are necessary. It’s important to understand when each account is used to understand the proper accounts to map or even if new accounts should be created. It’s easy to appreciate the complexities and full coverage this module provides for all kinds of lease accounting needs.

By Brian Markgraf CPA, Crowe, 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.