With the application of FASB ASC 845 and IFRS 16 Leases, businesses face the challenge of updating system processes in order to satisfy new accounting standards. The FASB ASC 845 and IFRS 16 Leases standards were administered for the purpose of providing investors and creditors with more transparency into long-term leases. Effective January 1, 2019, for public companies and January 1, 2020, for private companies, changes will impact JD Edwards lease accounting in the following three ways:
- Lessee accounting for property and non-property leases must be reflected on the balance sheet.
- Lease management companies must adopt Revenue Recognition practices.
- Lessors should continue to use or begin using the Straightline Rent Accounting Standard.
JD Edwards EnterpriseOne Lease Accounting has created simple adjustments within the current program to meet updated standards for businesses affected by the new requirements.
Who Does FASB ASC 845 and IFRS 16 Affect?
Renters and lessors of both property and non-property assets are impacted by these updated standards. This includes, but is not limited to, engineering and construction, oil and gas, real estate, agribusiness, manufacturing and distribution, retail, and more. Essentially, every industry supported by JD Edwards is affected by updated standards and will benefit from the increased functionality within JD Edwards EnterpriseOne Lease Accounting.
Old Standard vs. New Standard
Under the old standard, lessees that rented equipment and office or retail space used AP to make rent payments and expense rents. The new standard requires a system for lessees of equipment assets and property assets to manage lease terms, pay leases, and account for leased assets on the balance sheet.
As for lessors, the standard is two-part:
- IFRS now requires lessors 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 Lessor Straightline Rent Accounting Standard states the following:
- According to FASB, lessors should continue to recognize lease income for operation leases on a generally straight-line basis over the lease term.
- In reference to IFRS, a lessor shall recognize lease payments from operating leases as income on either a straight-line basis or another systematic basis.
How to Transition to the New Lease Accounting Standard for Lessees
There are a few simple steps that users should follow in order to transition to the new Lease Accounting standard for lessees.
- Update the system with new lease accounting information.
- Create and review amortization schedules.
- Write balance sheet entries into an alternate ledger for retrospective reporting.
- Set constants to tell the system to use the new standard.
- Create as-of lease liability and ROU Asset balances.
- As lease payments are made, create journal entries to adjust lease liability, ROU assets and other accounts.
New Functionality in JDE for Lessees
Two roles were necessary for lessees:
- Lease administrator
- Accounting manager
The lease administrator can create a lease master, asset master, and billing information based on the lease. After creation, the information is passed along to the accounting manager. If lease detail changes are necessary, the lease administrator can make these before sending them to the accounting manager for review. Detail changes may include borrowing rate or ROUA end date changes and recurring billing changes
The accounting manager will review information from the lease master and create amortization schedules. Amortization schedules must be correct in order to write accurate monthly journal entries.
The lease liability amortization schedule is made up of recurring billing, lease master, and manual billing. It contains indicators and batch information, period information, beginning balance, lease payments, calculated interest and ending balance.
The right of use asset amortization schedule is made up of recurring billing, lease master, and manual billing. It contains period information, beginning balance, ROUA expense amount, interest expense, and ending balance.
If changes were made by the lease administrator, the accounting manager reviews them and determines whether he or she will remeasure or terminate the lease based on flagged changes. Remeasuring the lease rebuilds amortization schedules from the effective date of lease change and creates journal entries to adjust lease liability and ROUA balances. Early termination marks amortization schedules with effective termination date and clears lease liability and ROUA balances at the terminate date.
New Functionality in JDE for Lessors
Some new functionality within JD Edwards for lessors to leverage within Lease Accounting include:
- Revenue Recognition
- Straightline Rent Accounting standard implementation
With Revenue Recognition, lessors are now required to recognize revenue once the performance obligation has been satisfied. Enhanced functionality to real estate invoices offers the ability to schedule the recognition of revenue for an invoice over time. There are a few basic steps of the new standard for Revenue Recognition.
- Identify the contract(s) with the customer.
- Identify the separate performance obligations.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when a performance obligation is satisfied.
The Straightline Rent Accounting Standard has become mandatory for all lessors. Although Straightline Rent has been available within JD Edwards EnterpriseOne previously, updates to the program include:
- Ability to choose to continue using the PO to specify bill codes
- Setup of default values of Straightline Rent Generation flag in Bill Code Master (P1512)
- Management of Straightline Rent Generation in Recurring Billing (P1502) application by bill code
- Unlimited number of bill codes and conversion codes per lease for Straightline Rent processing
Quick Tips and Tricks
- Manual billing identifies lease incentives, direct costs, and/or advance lease payments which are not reflected in the basic term but do affect lease liability.
- Use the Work with Amortization Schedules application to review schedules and determine if journal entries associated with your schedule need to be performed.
- Batch process to update lease information such as extending the length of the lease, changing the amount in the middle of a lease starting at a specific date for one or more bill codes, or specifying changes across assets on a lease with mass update capabilities.
- Import or Export Lease Information as a standard JD Edwards Z Table for easy updates.
- Recognize revenue for real estate applicable to invoices from accounts receivable, service billing, contract billing, and real estate.
For a greater understanding of updates to the JD Edwards EnterpriseOne Lease Accounting program in order to satisfy FASB ASC 845 and IFRS 16 Leases requirements, check out the full presentation attached below.