Lease accounting for lessees applies to any enterprise in any industry that leases in properties and equipment.

Image showing 5 key industries and types of lease contracts : 1. Retail - leasing retail space, transportation, material handling 2. Engineering & Construction - leasing transportation, office space, construction equipment, and hardware 3. Telecommunications - leasing cell towers, real estate, transportation, office equipment 4. Healthcare - leasing medical devices, hardware, transportation 5. Transportation - leasing cars, buses, airplanes and a sixt image for Other industries - leasing office equipment, office space, cars, etc.
Figure 1 Example of lease contract types for lessees in various industries

 

 

 

 

 

 

 

 

 

This blog post gives an overview of lease accounting requirements for lessees. It highlights how Oracle Cloud ERP helps lessees address these requirements.
ASC 842 and IFRS 16 require lessees to record leases on the balance sheet to reflect right-of-use assets and lease liabilities. 
Lessees must also track amortization of right-of-use assets separately from interest expense on lease liability.

Image that shows: Balance Sheet impact: - Right of Use Asset - Lease Liability Whereas previously you'd not have recorded such balance sheet values for operating leases for lessees. Income Statement impact: - Amortization of Right-Of-Use Asset - Interest (on lease liability) Whereas previously you'd just have recorded a lease expense amount for operating leases for lessees.
Figure 2 High level overview of accounting impact with new accounting standard

 

 

 

 

 

 

 

 

 

 

ASC 842 requires you to classify all reportable leases as either operating or finance leases. For operating leases, after the changes, the outcome is an increase in reportable assets and liabilities on the balance sheet. 
IFRS 16 requires a single classification of all leases as finance leases for lessees. 
You break down expenses for leases for lessees into interest and amortization expenses. 
Note: You can exempt low value and short-term leases from your reporting. 
Your enterprise needs to manage complex leases and their dynamic lease life cycle effectively.

Table grouping key business needs into - Lease Creation - Generate Amortization Schedules - Lease Management (amendments, options, termination, expiration) - Generate Lease Invoices - General Accounting - Reporting
Figure 3 Overview of key business needs of lessees who manage complex asset leases

 

 

 

 

 

 

 

 

Lease Accounting enables you to manage complex leases. 
You can:

  • quickly adopt lease processes to comply with ASC 842 and IFRS 16.
  • enforce lease accounting policies consistently across the organization.
  • seamlessly account from lease creation and expense recognition to termination and renewals.
  • automate payment processing from creation and approval to disbursement through integration with Payables.
  • automatically calculate rent increases based on indexes, percent, or fixed amounts.
  • review lease exceptions to ensure best-practice compliance and consistency.
  • manage and track amendments, obligations, milestones, options, and end of term decisions.
  • leverage standardized lease repository and Lease Disclosure Report for reporting and analysis.
  • streamline planning with a single view of all lease contract obligations. 

The business flow diagram below illustrates how you can manage leases easily with Lease Accounting.

High level business flows shows 4 swim lanes - Buyer - Lease Agreement Signed - Lease Administration - capture lease agreement, payment and amortization schedule, validate, approve, activate and manage amendments - General Accounting - accounting entries triggered through various lease events and AP invoice and payment events - Payables - invoice creation and payment
Figure 4 High level business flow for asset lease process for lessees in Lease Accounting.

 

Use Case Example on Impact of Accounting Change 


The operating lease use case example below shows the impact of the ASC 842 accounting change.

Figure 5 Use case example of accounting entry impact of accounting standard ASC 842 showing two tables for a operating lease for lessee with 48 month term: Pre-accounting changes: balance sheet values are zero, and just one operating expense amount for service and lease is posted per year (periodically within the year) Post-accounting changes: Balance sheet values are created for Right-of-Use Asset (ROU) and Lease Liability for the operating lease at the start of the lease in 2022. Then ROU is amortized over life of lease, and Lease Liability is reduced by payments made over lease life. Lease on profit and loss side is broken into Service expenses, depreciation (of ROU), and interest expense (for lease liability).
Figure 5 Example of Financial Impact for an Operating Lease

 

The example shows a 48-month operating lease that consists of service and rent. The interest rate that applies to the lease contract is 8% annually. The present value (PV) for the rent portion is calculated as USD 28,616. 

A table for Pre-accounting Changes shows the lease recorded in the income statement as operational expense. The lease is expensed straight-line with the same amount each year.

A table for Post-Accounting Changes shows two balance sheet amounts for Right of Use Asset (ROU) and Lease Liability for the rent recorded in 2022. The ROU balance reduces over the 48 periods as the ROU asset is amortized. The interest is added to the lease liability balance. The lease liability balance reduces with the rent repayment. The interest expense is tracked separately from the service and ROU depreciation expense in the income statement. 

Lease Accounting automates lease calculations and accounting entries based on flexible setup options. With its multi-GAAP solution, you can address your ASC 842 and IFRS 16 lease for lessee requirements. 
 

Conclusion

You can automate the lease processes, increase productivity, and reduce the risk of error with Lease Accounting.

Useful Oracle Documentation and Webcasts

To gain more insight into Lease Accounting capabilities, refer to the useful webcasts and documentation links below:

What’s New Release Readiness Documentation:
https://www.oracle.com/webfolder/technetwork/tutorials/tutorial/readiness/offering.html?offering=financials-financials-19

Recorded release readiness training for Lease Accounting:
https://www.oracle.com/webfolder/technetwork/tutorials/tutorial/readiness/offering/index.html?product=financials-21

Oracle Cloud Customer Connect webcasts on Lease accounting:
March 23, 2022: ERP – Oracle Lease Accounting: Deep Dive into Recent Innovations: 
https://community.oracle.com/customerconnect/events/603810-erp-oracle-lease-accounting-deep-dive-into-recent-innovations

Lease Accounting Implementation Guide:
https://docs.oracle.com/en/cloud/saas/financials/23a/faila/overview-of-lease-accounting-implementation.html

Lease Accounting User Guide:
https://docs.oracle.com/en/cloud/saas/financials/23a/faula/overview-of-lease-accounting.html

Migration of lease data – High level guidance in technical brief in My Oracle Support Doc ID 2821741.1