For those companies that have already adopted the new lease accounting standards IFRS 16 or ASC 842, migrating their leases onto the Asset Leasing module presents its own set of complexities. Because the Asset Leasing module relies on the calculations from the user inputs and schedules, a user cannot outright specify the beginning balance of the liability and right-of-use asset. In other words, there are no fields in the Asset Leasing module for the user to enter their carrying value of the right-of-use asset and lease liability at a given date. Instead, the user must enter specific values for the system to calculate the same beginning balances as the carrying values as of the date of migration onto Asset Leasing.

This blog post will walk through an example lease migrating onto the Asset Leasing module using the prospective approach, meaning the schedules will begin starting on the date of migration onto the Asset Leasing module. While this approach has some several drawbacks listed at the end of the post, due to current system restrictions, the user cannot change the dates on Asset Leasing journals and therefore cannot retrospectively migrate their leases without opening prior fiscal periods.

Background

Assume the user wants to enter their Corporate HQ building lease onto Asset Leasing as of July 1, 2021. The company has adopted IFRS 16 as of January 2019 and have been accounting for this lease since then. The details of the lease are below:

Legacy Schedules

Existing Payment Schedule:

Existing Liability Schedule

Existing Depreciation Schedule

Step 1: Determine Current Carrying Balances

Assuming the user posts the journal entries from the amounts shown on the schedules, the carrying value for the lease liability at the date of migration, July 1, 2021 will be 10,753.35 currency units and carrying value of the right-of-use asset will be 14,983.43 currency units:

Step 2: Calculate "Plug" for Right-Of-Use Asset

The next step involves calculating a value to use as a plug to ensure the right-of-use asset is calculated as the current carrying value. The Asset Leasing module calculates the right-of-use asset as the sum of the present value of the minimum lease payments plus any deferred rent carryover, initial direct costs, dismantling costs, or prepayments minus any lease incentives. Because the deferred rent carryover field is the only field that accepts both negative and positive values, I recommend using this field to use as the "plug" to ensure the right-of-use is calculated to match the currency carrying value. 

As for the liability, when discounted properly at the same rate, the carrying value of the liability at any point is equal to the sum of the present value of the remaining payments. Therefore, we will enter the payment schedule lines from the date of migration forward. This point will be illustrated in the later sections of this blog. 

The calculation for the plug is simply the Current Asset Carrying Amount minus the Current Liability Carrying Amount:

For the Corporate HQ lease, the plug figure is calculated as a positive 4,230.08 (14,983.43 - 10,753.35 = 4,230.08). 

Note: This amount should be calculated in the transactional currency of the lease.

Step 3: Determine Prospective Payment Schedule Lines

The next step is to ensure the payment schedule line information will accurately reflect the prospective payments from the date of migration. In this example, payments are made on January 1st of each year. However, we are migrating this lease as of July 1st. Therefore, we will need to include 6 months of free rent to ensure the next payment is discounted correctly. We also cannot migrate any payments that have occurred before July 1, 2021 so the first line can be removed.

For monthly payments, this step is simple however, for irregular payment frequencies, periods of free rent to account for the time between payments will be useful in preventing any issues. 

Step 4: Enter Lease into Asset Leasing Module

Because this example walks through a single lease, we will walk through adding this lease manually. However, for many leases, it will likely be easier to run these exercises for a higher volume of leases and use data entities to import the data.

Navigate to the Lease Summary and Click Add. In the form that appears enter the following inputs in the General tab:

The Commencement Date will be the date of migration onto Asset Leasing:

Enter the Payment Schedule Lines as described in Step 3:

Click Create Schedules and navigate to the schedules to review against the legacy schedules. Notice the system calculated values equal the carrying values of the lease liability and right-of-use asset:

Payment Schedule

Liability Amortization Schedule

Notice how the schedules in Asset Leasing match the remaining schedules from July 1, 2021 forward from the legacy spreadsheets:

Asset Depreciation Schedule

Step 5: Post Initial Recognition

The next step is to confirm the payment schedule and post the initial recognition journal entry. Note the initial recognition journal entry will require the Deferred Rent Asset (Liability) posting type to be configured. I would recommend against mapping the right-of-use asset account to this posting type as it may be confusing to see the entire amount posting to the right-of-use asset account. 

Confirm the payment schedule:

Create and post the initial recognition:

The initial recognition journal entry will be as follows:

Note: These processes can also be run through the Confirmation Batch and Batch Journal Creation batch jobs if confirming and posting multiple leases at once.

Step 6: Reverse Initial Recognition Outside of the Asset Leasing Module

At this point, the carrying value of the lease liability and right-of-use asset are recognized twice. The original amounts have been posted from the legacy system and now they are posted through the Asset Leasing module. To reverse the initial recognition entry, you can either choose to create a manual topside entry in the General Ledger or use the Load Ledger Transactions functionality to invert the originally posted initial recognition entries. 

Note: Reversing the initial recognition journal entry through the Asset Leasing module is not a possible option as you would then not show any balances in the module. 

Drawbacks

The most obvious drawback to this approach is the lack of historical reporting and visibility into the history of the lease. For example, even though this example lease commencement in January of 2019, the user can only view the information from July 2021 forward in the Asset Leasing module. For historical reports, such as the Lease Movements and Asset Movements reports, these reports will not show what has been posted against these leases prior to the date of migration. Forecast reports such as the Lease Balances Forecast or Five Year Undiscounted Payment Forecast reports will not be disrupted as these are prospective reports.

Similarly, the user loses insight into the accumulated depreciation balance for these leases. The right-of-use asset value is migrated at its net value so the total accumulated depreciation values in the Asset Leasing module will not match the trial balance.

Final Thoughts

Migrating mid-life leases onto the Asset Leasing module can be tricky, however understanding this process is vital to getting your company up and running on this new module. There are many other items to consider during this migration process including reporting considerations, foreign currency rates, and lease adjustments. A comprehensive view of your lease portfolio is needed before beginning the migration process.

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.