Microsoft Dynamics 365 Finance: Asset Leasing

The implementation of the accounting standards FASB ASC 842 and IFRS 16 created the need for additional functionality within ERP systems. To address this, Microsoft has developed a new module in Dynamics 365 Finance dedicated to the management of asset leasing. Luis Cruz takes a deep dive into the new functionalities.

1 Asset Leasing – A dedicated module for companies to manage their lease obligations

1.1 Overview

• The implementation of the accounting standards FASB ASC 842 and IFRS 16 created the need for additional functionality in ERP systems. To address this Microsoft has developed a new module in Dynamics 365 Finance dedicated to the management of the leased asset.
• The new features will reduce manual errors because all calculations will be performed automatically in Dynamics 365 Finance’ eliminating the spreadsheets currently used. With the new release, this process is more streamlined with lease status updated automatically, right of use assets journals, calculations of net present value, lease interest, and future cash payments. There is also the possibility to import through data entities the lease contracts making the data entry process quicker.
• This module will be Generally Available from the November 2020 release.

1.2 What are the main functionalities?

• The Asset Leasing module will help companies to reduce the time dedicated to the treatment of leases. The main functionalities are:
  • Automates complex lease calculation of a lease’s present value, and its subsequent processes such as future lease payments, amortization of lease liability, and the right-of-use asset depreciation and expenses schedules.
  • Helps automatically classify the lease as either operating or finance, or as a short-term lease or low-value lease. The lease classification tests include Transfer of ownership, Purchase option, Lease term, Present value, and Unique asset.
  • Centralizes the management of lease information, such as important dates, including the commencement and expiration dates, as well as the lease’s transaction currency, payment amounts, and payment frequency.
  • Helps generate accounting entries for the initial recognition and subsequent measurement of the lease liability and right-of-use asset.
  • Reduces time for complex calculation of lease modification and automatic adjustment transactions.
  • Provides posting to different layers to accommodate different reporting purposes, such as tax reports that are available in Dynamics 365 Finance.
  • Complies with the accounting standards to represent leases in balance sheets using the Balance sheet impact calculator.
  • Provides audit controls over the integrity of the lease data to ensure that the posted transactions match the calculated amounts of the present value, future payments, and liability amortization.
  • Provides tools to import from or export to Excel for all lease data.
  • Includes features that help in preparing asset leasing reports, particularly the preparation of disclosures and notes.
  • Integrates with your company chart of accounts, currencies, fixed assets, vendors, journals, data management, and number sequences.

2 Basic Configuration

In this section, the basic configuration items that are required to enter lease contracts into Dynamics 365 Finance will be shown.

2.1 Parameters Setup

If we navigate to Asset Leasing > Setup > Asset Leasing Parameters, we can find some of the required configuration options we need to do.

• There are three lease asset journals we must select. The Initial recognition journal name is to post the initial recognition balance of the Right-of-use asset, Invoice journal name is to post the invoices against the vendor (on the accounts payable sub-ledger) regarding the lease contract payments and lastly a Lease journal name to post all the operations related with the lease, such as interest expense and asset depreciation.

• It is also on the Parameters form in the Accounts tab where we configure the posting profiles of the leases. There we can map the ledger accounts for all the different posting types (lease asset, lease liability, lease payment, etc.) related to each lease book created in the system.

2.2 Lease Books

On the asset leasing module, the lease books will perform a similar function as the books on the fixed asset module. We can find it in Asset Leasing > Parameters > Lease books.

• On the Lease Books, we will define some of the crucial information that will drive the system to comply with the different accounting frameworks and automatically classify the lease type.
• We can define the posting layer, similarly to what is done in the Fixed Assets module. A company may decide to maintain more than one book with different posting layers for the same lease (should a company want both tax and GAAP entries)
• The lease type field offers three different options (Operational, Financial and Automatic) and the choice will depend also on the accounting standard relative to this book. If Automatic is chosen, Dynamics 365 Finance will automatically take the decision on the lease type based on the other criteria that are set on the lease book.
• It is also in the lease book where we select the accounting framework in use and where we can set a short term threshold and lease value threshold that will drive the system to treat the lease as a short term lease or low-value lease.
• These different options will satisfy the requirements from the different accounting frameworks and to automate the classification of the lease.

2.3 Lease Groups

It will be on the lease groups where we will link the different books to leases that are part of the same lease category. Lease groups will then be selected on the lease master record and the books will be inherited from it. The system path is Asset Leasing > Parameters > Lease Groups.

• The purpose of the lease groups is the same as the fixed asset groups, but its configuration is simpler.

3 Create a new lease – Basic Scenario

3.1     Create a new lease record

To create a new lease, navigate to Asset Leasing > Leases > Lease Summary. On this inquiry a user can see all the leases created in the company.

• To create new records, we use the New button on the top ribbon. A new form with all required information and mandatory fields open on the screen:

• Under General and Payment Schedule we find the mandatory fields (highlighted in red) we need to populate to successfully create a lease contract in the system. Under Lease Classification are some of the fields that will help the system decide the lease type (when is set as Automatic on the Lease Book)
• On the payment schedule fast tab, we will enter the information relative to the lease payments present in the contract including the periods and amount.
• To finalize the lease creation, we must click in Create Schedules on the top of the screen. This action will generate all the schedules for the lease. These schedules are the functionality from where the users will track the payments, depreciation, and interest liabilities, and it is where all journals will be created. Their purpose will be described further down.
• The lease record is created, and all the financial information is stored on the Books. The transactions will be performed in there as well.

• Below we have the books of the selected lease. On the general fast tab, it is provided with some of the information populated on the lease master record and the current lease status. All the lease books linked to the lease group are created and displayed in the form.

• On the Lease Classification Test fast tab the user is able to see the lease type defined by the system (when it is set to automatic on the lease book) based on the criteria entered on the lease record and lease book.

• It is possible to override the system classification by enabling the Allow manual classification override flag on the Asset leasing parameters. That will enable the Lease Type field on the book to change classification.

3.2 Create Initial Recognition Journal

The first financial transaction we need to perform is the initial recognition of the leased asset. This will create the balance on the Right of use asset and on the Lease Liability. In addition, only after posting this journal the status of the lease will change to Open.

• However, there is a pre-requisite. There is the option to review the payment schedule and we must confirm it before the journal is able to be posted. On the book under Function tab > Schedules > Payment Schedule, is where the payment can be reviewed and confirmed.

• On the Payment schedule form, it is presented all the scheduled payments and respective present value, and on the bottom of the screen the total amount of payments and the calculated present value of the lease payments from this table. The payment journals will be created from this screen and it is possible to track which ones have been posted and reversed.

• After pressing the Confirm schedule button the system enables the function to post the initial recognition journal.
• Once More, from the lease book, the user is able to create the initial recognition journal (only after confirming payment schedule the option is available).

• After pressing the initial recognition button, the system immediately displays a message with the journal number. To post the journal the user needs to go to Asset leasing journal (on the lease book).

• Actually, it is in this form that all journals will be managed and posted. The system displays the journals and respective lines, the Post button will trigger the posting of the journal. After posting the Initial recognition journal, the Lease status changes to Open.

• The screen above also include details regarding the lines of the journal selected.

3.3 Subsequent Transactions

On the subsequent transactions it is included: lease payment, depreciation and interest liability. The subsequent transactions are also created from the Books. On the schedules area we can find all the schedules: Asset depreciation schedule, Liability amortization schedule, Expense schedule and payment schedule (that was shown on the confirmation schedule step).

3.3.1  Asset Depreciation Schedule:

The table displays all the depreciation values, accumulated depreciation and net book value at each period. The Create journal button triggers the system to create the journal for the month we have selected. In the bottom of the screen, the balances can be checked.

3.3.2  Liability Amortization Schedule:

The table above provides a lot of useful information but basically shows all the amortazations on the liability side of the lease, accrued of the calculated interest on top, by period. Again, the journals can be created from this screen by selecting the correct period and pressing Create journal button on the top of the screen.

As it was shown before, for the initial recognition journal, to review and manually post the lease journals we must go to Asset leasing journals on the Books.

3.3.3  Asset transactions:

All the posted transactions posted are available on the books under Transactions.

• The balances and transactions are recognized on both asset and liability side. 
  • Asset transactions: 
    
  • Liability transactions:
    

All the journal creation can be automated by setting batch jobs with that purpose that are available on the module.

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