Lease Treatments: Deferred Rent Treatment

Some of the most asked questions about the Asset Leasing module are often answered by navigating to lease classification test tab of the lease book. The lease classifications drive how a lease behaves: from the calculation of the depreciation expense to whether an initial recognition journal entry is needed. This blog will dive deeper into how a lease is treated after being classified as deferred rent treatment.

Deferred Rent Treatment Leases

“Where are my asset depreciation and liability amortization schedules?” is one of the most asked questions easily answered by glancing at the Lease Classification Test tab for that lease book. The likely answer is that the lease was classified as a deferred rent treatment lease and therefore, is not capitalized on the balance sheet. In other words, there is no lease liability or right-of-use asset recognized and no initial recognition journal entry to post. As soon as the payment schedule is confirmed, lease payments can be posted, and the Initial Recognition button will remain inactive.

Instead, the Asset Leasing module will only create a payment schedule showing the straight-line rent cost, deferred rent charge, and deferred rent balance for each month. This is where the Deferred rent treatment field derives its name:

When creating a lease payment for a deferred rent treatment lease, the module will create a journal entry recognizing the straight-line expense, crediting either the vendor or lease payment clearing account for the actual rent amount, and the difference, if any, is booked to the deferred rent asset account:

This classification is intended for leases that are exempt from the lease accounting standards IFRS 16 and ASC 842. However, the company is still required to recognize deferred rent and lease expense. Although these leases are exempt from the leasing standards, the Asset Leasing module still allows users to track and post payments against these off-balance sheet leases.

Final Thoughts

In summary, whenever the module is not producing the results you may expect at first glance, dig into the Lease Classification Test subtab to understand the lease classification. Likely, there are some inputs causing the lease to be classified as something you may not expect. Having a solid understanding of how the Asset Leasing module treats different lease types and classifications can save your company time and confusion trying to troubleshoot these issues.

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.