Leased Asset Management in Oracle Cloud – A Snapshot
- Ekta Verma
IFRS 16, (International Financial Reporting Standard 16) of ‘International Accounting Standards Board’ (IASB) addresses the accounting treatment for leases. This is effective for annual reporting periods beginning on or after January 1, 2019. The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
Under the Standard, all companies using leased assets – i.e. ‘LESSEES’ are impacted. While the standard exempts specific types of transactions from capitalisation (i.e. short-term leases), all companies with the right to use at least one in-scope asset qualifying as a lease are required to comply with the new standard.
The primary change to lease accounting requires organisations to recognise Leased Assets and Lease Liabilities on the balance sheet for most of the lease arrangements as opposed to the earlier method of treating all Leases as an off-Balance Sheet item and only accounting for ‘Lease Rentals’ as a part of ‘Profit and Loss’ Statement. Lessees are now required to calculate the present value of future lease payments to establish a lease liability and the related ‘Right ‘Of’ ‘Use [ROU] asset.
Complexities
Specific to accounting and financial administration of leases, some critical challenges are:
- Tracking - Keeping track of multiple lease agreements, lease terms, and renewal options can be complex.
- Calculating lease payments - Manual calculation of lease payments, including interest and other charges, can be time-consuming and prone to errors especially when any organisation has a sizeable volume of leased assets.
- Amortization schedules: Creating and maintaining amortization schedules for leased assets over time can be equally complex
- Financial Reporting: Generating accurate financial reports related to lease assets as per the standard without automated reporting tools may be error-prone!
What Oracle Offers?
As a part of Oracle Cloud (Fusion Applications) Suite, Oracle offers robust solutions for managing lease assets within its Fixed Assets Application. Some key features are:
- Lease Classification: Can classify leases according to accounting standards such as ASC 842 (US GAAP) or IFRS 16. These standards distinguish between finance leases and operating leases, each with different accounting treatment.
- Lease Entry and Amortization: Users can input all the lease details into the application, including lease terms, payment schedules, commencement/end date(s), lease payments, and other relevant information.
- Lease Payment and Accounting: Seamless management of lease payments, including recording payments, reconciling with lease schedules, and generating reports for audit and compliance purposes. The application generates lease accounting entries automatically, ensuring compliance with relevant accounting standards – Also provides a flexible, user-configurable sub-ledger accounting framework to customise transaction accounting, as needed. Handles complexities such as initial recognition, subsequent measurement, and disclosure requirements.
- Lease Reporting: Provides comprehensive reporting capabilities for leased assets, including financial, lease liability, lease commitment, and other custom reports as required by users or regulatory authorities.
- Lease Modification: Handles all lease updates – i.e. changes in lease terms or extensions by automatically adjusting amortization schedules and accounting entries.
- Integration with Other Modules: Leverages native capability with inbuilt integrations to other applications such as general ledger, accounts payable, and procurement, ensuring consistency and accuracy in financial reporting and transaction processing.
- Single platform eliminating complex, error-prone, multiple applications/tool usage: Earlier Organisations used to work in Microsoft Excel to maintain lease agreements and calculate lease assets liability and expenses. Excel files are prone to errors, such as accidental deletions, overwriting data, or formula mistakes. Without robust validation mechanisms, it’s easy to introduce inaccuracies into the lease asset records, which can lead to financial discrepancies or compliance issues. All of these issues are summarily resolved by Oracle’s robust framework for leased assets!
Specifics of Accounting/Reporting/Asset Creation – How Addressed?
Accounting
For a finance lease (i.e. a lease in which the ownership of the asset is transferred to the lessee at the end) the lessee must recognise two different types of expenses:
• Interest on the lease liability
• Amortisation or depreciation of the Right-of-Use (RoU) asset.
Oracle – Transactional Process
The interest on the lease liability is recognised separately from the amortization of the right-of-use asset in the profit and loss Statement. A lease payment is a combination of ‘Capital’ repayment against the lease obligation (Cost of the Asset) and ‘Interest’ payment (Financing Cost).
Amortisation schedule calculates and stores the interest amount, principal reduction amount, and interest due date for each lease payment included in the lease liability calculation.
Illustrative accounting entry for assumed interest expense of £2,000 and the reduction in liability for a lease payment of £10,000:
Oracle – Transactional Process
Oracle Assets generates lease payment invoices with a lease clearing account as an invoice distribution account and transfers the same to ‘Oracle Payables’.
From Oracle Payables, run Import Payables Invoices process with source as ‘Assets’ to import any lease payment invoices.
The sample accounting entries for the periodical lease payment invoice of £10,000:
The supplier liability of 10,000 will be offset and when payment is made to the Lessor for the above lease invoice. At the end of the lease term, the net book value of the leased asset and its lease liability will become zero.
For an operating lease (no right of ownership at the end of the Lease – the purpose is to manage cash flows of the Lessee without initial capital investment) – the lessee has to only recognize a single lease expense, calculated to amortise the total cost of the lease over the lease term on a straight-line basis.
Oracle – Transactional Process
‘Calculate Lease Interest and Expense’ process calculates and recognises operating lease expenses.
‘Depreciate’ checkbox will be automatically unchecked while adding an operating lease asset as it’s not required to depreciate like a financial lease asset.
When a user runs the ‘Calculate Depreciation’ process, no depreciation is calculated for assets of operating leases.
The sample accounting entries for the periodical lease payment invoice of £10,000:
Reporting
Standard Reports/Framework in Oracle:
- Asset Leases Expense Report: Lists asset lease interest and expense amounts for the specified period.
- Asset Leases Liability Report: Lists asset lease liability for the specified period. The report is sorted by, and groups total for each balancing segment, expense, account, and cost center.
- Asset Lease Data Extract Report: Extracts and displays the current asset lease data in the ‘Lease Addition’ – ‘File-Based Data Import’ (FBDI) template format.
- Oracle Cloud’s advanced analytics and reporting tools – OTBI framework – Organisations can gain real-time insights into leased assets, enabling better decision-making and optimization of resources. Using the seeded ‘Subject Areas’ provided with the capability to add as necessary this is a very flexible framework to design reporting formats as per specific requirements! – a sort of ‘BYOR- i.e. Bring Your Own Reports!
Asset Creation
- Creating New Lease – Manual: Captures all lease/asset/payment-related information comprehensively in a single user interface.
- Creating New Lease – Import using FBDI Template: Importing using “Fixed Asset Leases Import Template” which generates a CSV file by which the user needs to load the data into the interface by running the load interface file for the import program. Users need to use the Import Process of “Import Asset Leases” and upload the filled template. After creating the lease(s), the user can add leased assets to ‘Corporate Asset Books’ using the ‘Mass Additions’ FBDI Template.
- Note: At the time of addition, the cost of the asset is defaulted for the asset schedule. To get the Asset Schedule Number to use in the FBDI Import Mass Additions template, the user can navigate to the posted Lease (‘Path: – Fixed Assets – Manage Leases – Leases’), click on the specific Lease # then select the ‘Assets’ tab at the bottom. If the user enters a cost other than zero, then the entered amount is considered to be the cost of the leased asset. Any difference between the user-entered cost, and the lease liability is accounted in the ‘Asset Clearing Account’.
- Migrating Existing Lease: Oracle provides strategies and approaches to either create the leases with their original life or create the leases with their remaining life. Both cases are appropriately handled by the application with complete conformance to the accounting standard.
InspireXT’s Experience
During the engagement execution for a large Pharma company in UK having Leased Assets in multiple Sites, InspireXT performed the following steps in a logical sequential order for seamless migration of the entire leased asset records into Oracle Fusion Applications. One of the critical challenges was to educate the business users to provide the right data in respect of the leased assets for migration. Maintaining huge number of lease records in excel was cumbersome activities for business.
To address the challenge of financial term changes or lease terminations creating problems in Excel maintenance. Oracle helps to maintain the header level i.e., basic information including financial term and line level i.e., payment schedule separately, which was useful for business to track the lease asset record effectively and efficiently. An overview of various steps/activities are listed below:
- Extracted lease asset data from spreadsheets.
- Cleanse and validate the data to ensure accuracy and consistency.
- Map the data fields from the legacy system to Oracle Cloud Lease Assets fields.
- Imported the cleansed data into Oracle Cloud Lease Assets using data migration tools provided by Oracle or through manual entry if necessary.
- End to End full-blown testing of all the events for ‘Leased Assets’ to ensure that it meets the organisation’s requirements in full compliance with IFRS16.
- Test data integrity, system functionality, user roles, permissions, and integration with other systems.
- Addressed any issues or discrepancies identified during testing and made necessary adjustments.
- Run all processes in Oracle Cloud for lease assets typically involves several steps, including recognizing lease liabilities, amortizing lease expenses, and potentially accounting for other costs associated with the lease
- Calculating depreciation expense based on the defined depreciation rules and schedules.
- Verify transfer of Lease Payment Invoices to Payables, accounting entries, and settlement thereof.
Conclusion
With InspireXT’s deep dive and actual execution experience organisations can confidently manage lease contracts and all aspects of accounting, reporting fully complying with IFRS-16. Besides, while this article outlines the available features as in Release 24A – Oracle has provided an online, truly interactive platform through ‘Oracle Communities Idea Lab’ which provides a platform to post any new ideas or view and vote for ideas posted by others to enrich the features. Since this is continuously monitored by Oracle, Organisations can rest assured that feature enhancements are an ongoing process with full customer-centricity. Many of the highly voted ideas are the basis for Oracle to incorporate enhancements during the periodical quarterly upgrades.
All in all, as always, Oracle provides a win-win solution for effective management of Leased Assets with full compliance with Accounting Standard IFRS16.
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