Karen Brown, Senior Principal Product Manager at Oracle, and Aparajeeta Deshpande, Director of Product Development at Oracle, spoke about new lease accounting standards that both lessees and lessors need to comply with.

Business Problem

In order to help customers comply with new lease accounting standards defined by the FASB and IFRS, Oracle JD Edwards recently released new features in Real Estate Management and Financial Management.

Major changes to accounting processes include:

• Showing lessee accounting for property and non-property leases on the balance sheet
• Revenue recognition for lease management companies
• Straight-line rent accounting for lessors

As of January 1, 2019, public companies are expected to abide by these new lease accounting standards. Private companies have more time to adjust, as they are not required to follow new measures until their first fiscal cycle following January 1, 2020.

Ultimately, these standards were adjusted to provide investors and creditors more transparency into long-term leases.

Impact for Lessees

In the old standard of lease accounting, costs were reported for rent and office or retail space using AP for rent payments and expensing rents. In the new standard, companies must list equipment assets and property assets with a leasing system that manages lease terms and pays leases. Lease assets must be accounted for on the balance side.

Impact for Lessors

New standards require lessors to put off recognizing revenue until they have satisfied the performance obligation for that asset. For instance, if you receive rent in advance of the rental period, you can’t recognize revenue until the end of the month/quarter/rental period. The performance obligation is not met until the end of the time period is reached.

The core principle as stated from IFRS is to “Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.”

The basic steps that are outlined in relation to the new lease accounting standards include:

1. Identify the contract(s) with the customer
2. Identify the separate performance obligations
3. Determine the transaction prices
4. Allocate the transaction price
5. Recognize revenue when a performance obligation is satisfied

Business Solution

Within JD Edwards EnterpriseOne, lease processing is available in Real Estate Management, and finance principles are available in Oracle Lease and Financial Management.

These tools are generally available under the following conditions:

• For Lessee customers with a license to Financials
• For Lessor customers with a license to Real Estate Management
• For EnterpriseOne releases 9.1 and 9.2

A JD Edwards Financials license now comes with a restricted use license of Real Estate Management.

Lessee Accounting Business Process

There are several UX One roles delivered in JD Edwards to help execute the lessee accounting business process. Both the Lease Administrator and Lease Accounting Manager come as delivered roles. These roles can leverage the UX One landing pages to become more effective and efficient.

The new lessee process begins with the lease administrator. This person creates leasing information, including asset and billing information. Next, he or she notifies the lease accounting manager to review and approve the lease terms. The manager will go on to create an amortization schedule and lease commencement journal entries.

At this point, monthly processing takes place through adjustments to the balance sheet accounts or recurring billing for leases. The image below shows a flow chart of the lessee accounting business process:

There are several applications that will help the lease administrator set up the lease information:

• Lease Master
• Asset Master
• Billing Information

The Lease Master application is where the lease administrator will begin the setup. This application will provide information about:

• Who the tenant of the lease is
• How long the lease is for
• If it is a lessee lease
• If you’re most likely to retain the asset
• What the borrowing rate is
• What asset is being leased
• If the asset is property or non-property
• The type of lease
• The accounting status
• ROUA end date

Lease administrators can also create an asset directly within the Lease Master application.

The Asset Manager application is where the lease administrator will set up details for the asset itself. Some of the information established in this application includes:

• Asset number
• Unit number
• Serial number
• Parent number
• Company number
• Responsible BU
• Account number
• Date acquired
• Status

One thing to note about Asset Manager is that depreciation was set to “no” because assets are no longer depreciated, they are amortized.

The Billing Information application can be used for recurring billing or manual billing.

The recurring billing portion of the application will show information about:

• Bill code signifying what will be paid
• How long it will be paid for (start and end date)
• The gross amount paid
• The billing frequency
• If it affects Lease Liability
• If payments are being made in advance or arrears
• If there is a specific Guaranteed Residual Value

The manual billing portion of the application will show information about:

• Invoice number, date, and amount
• Lease number
• Payment terms
• Batch number
• Lease incentives, direct costs, and/or advance lease payments

Lessor Accounting Business Process

There were several enhancements made within Real Estate Management for revenue recognition:

• Real Estate invoices now available for all processes
  • Utilize a batch process to recognize revenue
  • Use Workbench to manage exceptions
• Specific trigger configuration available for Real Estate invoices
• Ability to create a schedule for the recognition of amounts
  • Available for all invoice types with the exception of sales order invoices

The Real Estate trigger configuration identifies which types of invoices the system will put into the revenue recognition process. It identifies invoices in many ways, including by specific customer, chargers to a specific account(s), type of service, and many other fields to choose from. It is also date effective.

The Revenue Recognition Schedule has the ability to schedule the recognition of revenue for an invoice over time. It also has the ability to recognize revenue based upon a schedule. It applies to invoices from Accounts Receivable, Service Billing, Contract Billing, or Real Estate.

There were also enhancements made to the lessor straight-line rent accounting standard. Before the new standard, there was a maximum of 10 bill codes specified in processing options and a maximum of 10 conversion bill codes specified in processing options for R15130. After enhancements were made, users had the ability to choose to continue to use the Purchase Order to specify bill codes. Users can set up default values of straight-line rent generation in Bill Code Master (P1512). They can also manage straight-line rent generation by bill code in the Recurring Billing application (P1502). There is now an unlimited number of bill codes and conversion codes per lease for straight-line rent processing.

6 Steps for Transitioning to New Lease Accounting Standards

Here are six simple steps to follow when transitioning to the new lease accounting standards:

1. Update system with new lease accounting information
2. Create/review amortization schedules
3. Write balance sheet entries into the alternate ledger for retrospective reporting
4. Set constants to tell the system to use the new standard
5. Create as-of lease liability and ROU asset balances
6. As lease payments are made, create journal entries to adjust lease liability, ROU Asset, and other accounts

Looking Ahead

In the future, users can look forward to continued support for customers adopting this solution, multi-currency lease support with lease liability gains and losses and right of use asset revaluation, and Oracle by Example (OBE) for Lease Accounting.