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1.Introduction ............................................................................................................................................. 3
4.Definitions ................................................................................................................................................ 5
8.2 Uptake the Phase I solution and generate the reports only ..................................................... 14
8.3 Uptake the Phase II solution ......................................................................................................... 17
16.1 Prerequisites.................................................................................................................................. 55
16.2 Setup .............................................................................................................................................. 57
16.2.1 Term Template ...................................................................................................................... 57
16.2.2 Discount Rate Index .............................................................................................................. 58
16.2.3 System options....................................................................................................................... 59
16.3 Leases .............................................................................................................................................. 60
i. Leases ....................................................................................................................................... 60
16.3.2 View transactions ..................................................................................................................... 64
16.4 Reports ............................................................................................................................................ 64
17 Transaction flow / Period end process under equipment lease.................................................... 65
Authors
1.Introduction
Recently the IASB (International Accounting Standards Board) and FASB (Financial Accounting
Standards Board) have made some major changes with respect to accounting standards for
leases. Real estate entities are required to change certain lease accounting practices to comply
with IFRS 16 and ASC 842. These new standards significantly impact the accounting for lessees
for real estate tenants, requiring them to recognize rental contracts on their balance sheets as
lease liabilities with corresponding right-of-use-assets.
The current whitepaper discusses these changes for lessee/Tenant’s accounting and designed
solution for the same in Oracle Property Manager and new Equipment leasing enhancement of
the Property Manager
In Addition to that they also need to book their interest expense separately. Here is a glimpse of
how the pre-Accounting and Post Accounting Changes are impacting the Profit and Loss
Account and Balance Sheet
As can be seen from the above screen shot, earlier leased assets were not part of balance sheet.
However going forward, tenants need to calculate lease liability and ROU balances and it needs
to be included in liability and asset side of the balance sheet.
On similar lines, P&L account use to have one component called “Lease Expense” as a part of
operating cost. However, going forward, the lease expense needs to be split into Amortization
of Lease expense and Interest component separately.
3.Effective Dates
US GAAP (ASC842) International GAAP (IFRS 16)
Public companies: Annual periods beginning after All companies: Annual periods beginning after
December 15, 2018 (i.e., January 1, 2019 for a January 1, 2019
calendar year entity), and interim periods within
those years
All other companies: Annual periods beginning
after December 15, 2019
Early adoption is permitted on a retroactive basis Early adoption is permitted on a retroactive basis,
provided IFRS 15, Revenue from Contracts with
Customers is adopted at the same time
Two Year Look Back - Two year look back reporting is required to report comparative financial results
for FY2017 and FY2018—There are discussions going on for dropping this requirement
4.Definitions
Lease Liability — This is the monetary value of the tenant’s obligation in a lease. This will
be displayed/disclosed in the tenant's balance sheet as a liability. This is calculated as the
present value of all payments due to the landlord towards rents, option amounts, one-time
payments, and so on.
Right of Use (ROU) — This is the value attributed to the right (non-monetary) that the
tenant holds in a lease. You may consider the lease liability as the ROU with/without any
adjustments. Generally, ROU is same as liability when calculated for the first time if there
are no additional amounts contributing to additional ROU.
Lease Expense — The total payments (cash expenses) on a lease when calculated per period.
For US GAAP purposes, this is the expense that needs to be reported as the expense for the
period.
Amortization Expense — Amortization expense is the systematic write-off of ROU. For
IFRS purposes, the amortization expense is calculated on a straight-line basis. For US
GAAP, Amortization Expense is the difference between the interest expense and lease
expense. This different treatment of Amortization expense is limited to Operating leases in
US GAAP
Interest Expense — Interest Expense is the financing cost component of the lease expense. It
is usually calculated by applying the internal rate of return on the outstanding Lease
Liability. For IFRS reporting, Interest Expense and Amortization expenses must be reported
as separate lines of an expenditure.
Cash — Scheduled outflow of periodical cash to vendors (including landlord).
Finance Lease:- In a finance lease, tenants create a ROU asset by calculating the present value of
the lease expense. The lease liability is calculated as the present value of the lease payments.
As time passes, interest is calculated and applied to the liability balance; amortization of the
ROU asset is recognized on a straight-line basis. For the finance lease, both the interest accrual
and the asset amortization are recognized as expense. IFRS mandates, charging of interest
expense and amortizations as two line items whereas FASB mandates single line charge.
Operating Lease :- For an operating lease, tenants create a ROU asset by calculating the present
value of the lease expense; an associated lease liability is calculated as the present value of the
lease payments, same as a finance lease.
As time passes, interest is accrued and applied to the liability balance; amortization of the lease
expense is recognized on a straight-line basis. The ROU asset amortization is calculated as the
difference between the amortized lease expense and the interest accrual. For the operating lease,
only the amortized lease expense is amortized.
Here is an example of how the accounting is generated under IFRS and US GAP
6.Solution Approach
The solution to meet these new requirements from these accounting standards was delivered in
two phases i.e
Phase I- focuses on application enhancements for performing all calculations needed for “Look
Back” period (2017-2019). The calculated values are provided to the user in the form of three
reports- one very specific and detailed report for lease level and other two reports at portfolio
report. Users can use this information to update their financials and for comparative statement
Note - The two year Look Back requires users to “rebuild” existing Leases, to report
comparative financial results of operations from 2017 and 2018. The requirement is to:
Calculate and report the present value of asset and liability balances;
Calculate and report the financial streams for asset amortization, interest accrual and
lease expense
Note: Only property manager solution has Phase I solution. Equipment users directly move
onto phase II.
a. Available all the calculations and reports till phase II came into availability
b. Build the infrastructure for calculations
c. Report balances on the archived data
During initial phases of Phase I an archival script was also provided to enable users to take
archival of data. This archived data can then be used to run calculations on.
Phase I calculations when run in “Final” mode, would also take archival of lease data and
calculations.
Phase II- Property manager will generate accounting for various events in the life cycle of lease
from tenant’s perspective accounting.
Prerequisites:-
Property manager IFRS enhancement functionality is available on 12.1.3 and 12.2.X versions. So
to get this new functionality, below patches need to be applied
Note – The phase II patch provides both Phase 1 and Phase II functionalities.
To meet the new reporting requirements, the below setups changes has to be done
Here we can either query an existing Index or we can define a new Interest Index by
clicking on Create index option.
While creating a lease, based on the effective start date, system will decide the applicable
interest rate. For e.g in the above screen shot, there are two interest rates defined with
effective date of 01-Jan-2016 and 01-Jan-2017. Now if we create a lease as of 1st Jan 2018,
system will pick the interest rate of 7% as that is the latest rate applicable based on the
effective date.
The below are the important aspects of Discount Rate Index
A new section has been included in the system options based on which the accounting
events will be generated as per the Phase 2 solution.
Transition Date — On the date of transition, transition balances are calculated according to the
lease and term, and also uploaded as accounting balances. Transition date can be of Past date or
system date and if we are giving a past period transition date, there should not be any
transaction after this particular date. More to follow later in the Transition section.
GAAP Regime - You must select the compliance regime as per their compliance needs. The
available values are IFRS, ASC 842 and Both.
Primary Regime — If you select Regime Name as Both, then you must select a primary regime
as IFRS or ASC 842. The primary regime is followed for all accounting into primary ledger and
other regime accounting will be done in associated secondary ledger and will provide
accounting representation.
Calculation Frequency – The available options are
Periodical: If you are following regular English calendars in primary ledger, you can
choose periodical calculations. The balances are calculated as of the event date as period
end for the regular calendar.
Daily: If you are following an irregular calendar like 4-4-5, you will need daily
calculations. Amortizations are calculated based on actual days in the period and
similarly, interest amounts are calculated for the exact days in the month. You are
advised to use only the days/month convention if you are using daily calculations. Days
in an adjustment period are not taken into consideration for calculations of numbers.
PV of payment terms are always calculated with respect to number of days. Hence
during calculation of Liability/ROU, there is an element of compounding for calculation
of PV. Based on the number of days a payment falls from either lease commencement
date/ACD, the PV values are calculated using the PV formula
Periodical calculations use “Simple” Interest method while Daily calculations use
“Compound Interest Method for calculation of Interest Expense.
Since daily calculations use compound interest method, there is no need for calculation
of “IRR” for Liability Interest calculation. But for periodical since the PV calculation
follows daily calculations but interest expense is a simple interest method, there is a
need to calculate “IRR”-Internal Rate of Return, which is at times slightly different from
the discount rate used for discounting. IRR is displayed prominently in the Lease Detail
Report.
Accounting Method - The Accounting Method is used to capture the lease classification
for reporting, as well as the categorization of leases. The options we have is Finance
Lease and Operating Lease. The default value for this field is “Operating lease “
Before moving to Phase II solution, users will see four values here:
a. Operating
b. Finance
c. Both and
d. Exclude
After Phase II solution is enabled, users will see only operating and finance as values in
the dropdown. Users will need to enable “Both” in the system options if they want to
see/account both the representations. Similarly, if users want a lease to be excluded from
reporting, they will need to either not check the checkboxes for ROU/Liability or not
provide discount rate index.
Discount Rate Index – Assign the Discount rate type which will be applicable to the
particular lease.
Adder Rate – This option can be used add / substract the rate derived from the discount
rate Index. For e.g the interest rate applicable as per discount rate index attached is 10%.
However for this specific lease, the interest rate applicable is 9%, then we need to enter
-1 in the adder rate column.
Even at Payment term level, below check box option has been provided for the users to
select whether they want each payment term to be considered for calculation purpose or
not.
ROU Asset- Need to check this check box if the payment term need to be included for
ROU calculation
Liability – Need to check this check box if the Payment term should be considered for
deriving the lease Liability.
Report from Inception - If you select this checkbox, the ROU or liability balance is
calculated based on cash flows from the lease start date. If this checkbox is not selected,
cashflows after the lease creation period are considered for calculations. Though the
calculations are based on data from the lease's inception, reporting is limited to periods
falling after January 1, 2017.
Under this system, there will not be any calculation of ROU / Liability balances and no
interest expenses will be calculated. Under this user will not be selecting any of the
compliance related attributes / setups and it will work as current property manager
functionality is working i.e Accounting entry is generated when AP invoice is created
and when normalization entry is interfaced to GL.
8.2 Uptake the Phase I solution and generate the reports only
Under this approach, using property manager solution, organizations can generate ROU
/ Liability balances and interest and Amortization calculation etc. and they can also
generate the reports to extract these balances. But under this approach, there will not be
any accounting entry that will get generated / interfaced to GL.
The steps for migrating from current property manager to New Compliance regime is
Finalize the Update the Run the Run the Run the
Apply the compliance calculation
lease to be Lease calculation
Phase 1 reports and Program in
part of new Agreements Program in
Patch verify the FINAL
Compliance using the API DRAFT
requirement mode data mode
Release Patch
12.1.3 and above Patch 26678852:R12.PN.B
12.2.4 and above Patch 26678852:R12.PN.C
Required /
Structure Attribute Name Allowed Values
Optional
accounting_method Required FINANCE,
OPERATING
discount_rate_index_id Required Valid discount
pn_upgrade_lease.lease_rec rate index id
adder_rate Optional
lease_id Required Valid lease id
Pn_upgrade_lease. rou_asset_flag Optional Y, N, NULL
lease_terms_tbl
liability_flag Optional Y, N, NULL
rept_inception_flag Optional Y, N, NULL
payment_term_id Required Valid payment
term id
The phase II solution patch contains the phase 1 patch as well. So there is no need
to apply the phase 1 patch separately. So if we need to migrate from existing
property manager to Phase II solution, the below step needs to be followed
Finalize the Run the Run the Verify the Run the
Update the Setup the
Apply the lease to be calculation calculation calculation
Lease system reports and
Phase II part of new program in program as finalize the program as
Agreements options
Patch Compliance Final mode as of transition Balance of transition
using the API Setup
requirement of previous date in Draft date in Final
period
In the above flow, the first 3 steps remains same as it is explained in Phase 1 solution. The patch details
will be
Release Patch
12.1.3 and above Patch 27606088:R12.PN.B
12.2.4 and above Patch 27606088:R12.PN.C
4. Setup the system options Setup – As a part of phase II solution, the system options form
has been enhanced to capture the transition date, Primary regime and the calculation
frequency etc. Users need to enter these attributes before they migrate to Phase II solution.
While migrating to Phase 2 solution, the calculate program needs to be run in final mode for
the previous period. For e.g , if the transition is done on 15th of Jun, then the calculate ROU
and Liability program needs to be run in final mode for the period end May-18 period. This
will generate the ROU / Liability balances on existing lease / Payment terms as of 31st of
May-18 period.
Once the balances are finalized for the previous period i.e May-18 in our example, the next
steps would be to run the “Calculate Balances as on Transition Date” in draft mode.
Once the program is run in draft mode, it will process all the lease / transactions which are
created after the last period end i.e 1st jun to 15th Jun and ROU and Liability balances will get
calculated for each of the leases / payment terms
a. Even loading of leases into the application is considered to be transaction for the purpose of
Transition. Hence Transition date cannot be in a previous period from the month of loading
of leases
b. If lease balances are needed for reporting for periods prior to Transition periods, then run
the calculation periods for those periods
c. If Reporting is not needed from lease commencement date, do not check report from
inception, but run the calculations for prior periods. Calculations cannot be run post
Transition date
9. Reports
As a part of this enhancement request, below 4 reports are provided i.e
Portfolio Summary Report
Portfolio Detail Report
Lease Detail Report
Lease Analysis Report
As of date - This is a mandatory period and we need to select the staring period from
which the portfolio balance will be reported.
End date – User need to enter the end date if they want to see the balances until a
specific period. It is not a mandatory field and if in case if this parameter is not passed,
the report will show the entire portfolio of the leases until the last period of all the
leases.
Representation – User need to select the accounting method value, if they want to see
the report balances only for a specific accounting method
In this section we can see period wise liability, cash, ROU and interest balances etc for both
Finance and operating lease as well as separately for Finance and Operating leases.
Portfolio Balance report is kind of a controller report as this report lists the original portfolio
balance for the period and it also shows the difference amount calculated for that particular
month due to an amendment or Edit. For e.g the original ROU / liability balance for a period is
$10000 and due an amendment, the ROU balance for the period was increased by another
$2500. So now the original balance for the period will show as $10000 and under Increase /
Decrease column we will see the $2500 balance.
In this section we can see all the leases and their amendment details which are contributed to
the difference amount under the “Portfolio Balance Details” section.
The portfolio detail report is used to drill down and analyze the detail of totals reported in
the portfolio summary by lease. The portfolio detail report displays the ROU asset and
liability ending balance for each lease in the OU for the selected month. Like the Portfolio
Summary Report, this report also displays the required monthly interest and amortization
streams for finance and U.S. operating lease reporting methods. Even this report is
generated at operating unit level and has below parameter for running this report is
Portfolio detail report shows the streams balances for a particular month. This report has
below sections
Header section -
In Header section, even this report shows the report parameters with which the report is
run.
Portfolio Balance – In this section we can see the details of ROU, Liability, interest, Amortization
etc which are generated at each of the lease level for Finance And Operating Lease, Finance
Lease(IFRS Operating Also) and Operating Lease(US GAAP Only)
This report captures the streams details at Payment term level and if there are multiple payment
terms under the same lease, the lease will have multiple rows in the report
In addition to the above, this report also has List Of Lease Modifications and
Intercompany Balances sections
Portfolio Summary and Detail reports are useful to verify Transition Transactions.
These reports can also be used to prepare Look Back period comparative statements.
This report provides the balances for a particular selected lease “As of” date. This report is
complimented with detailed amortization schedules which explain the basis of calculations of
these balances. This report can be run with below parameters
Even this report has different sections like
Header section covers the report run date, Operating until under which the lease falls, The lease
commencement date, lease termination date, lease classification etc.
All the balance sheet balances like ROU and Liability are month end balances. Accrual
transactions are the expenses for the month. Every month which has a payment is displayed in
this report.
The lease detail report shows balances / streams calculations for each of the payment terms
under a lease. Even at payment term level, there are 3 sections i.e
Payment term variables and ROU / Liability Balance calculation. The same section also shows
all recalculations too.
Under payment term variables we can view the Payment term amount, Payment term start date
and end date, Interest rate applicable to the payment term, total duration etc. and this section
also captures, all the compliance related attributes selected at the payment term level.
The next section i.e Right of Use Asset calculation. In this section we can see the pay date, total
number of days that has been considered for the Present value (PV) calculation, interest rate
used for the present value and finally the derived present value amount.
Similarly, in Lease liability calculation section, we can see the attributes used to derive the Lease
Liability amounts.
This section shows the ROU and Liability balances used for reporting under U.S. GAAP. This
also captures the interest expense, amortization amount, ROU and liability balances for each of
the month throughout the Payment term life span.
The Amortization amount for US operating leases is the difference between Lease Expense and
Interest Expense. The lease expense is the simple average of total of lease payments over the life
of the lease.
This section captures the details required for Operating and Finance lease under IFRS and
Finance Lease reporting requirements under U.S GAAP. What this means is that the
Amortization expense which is calculated on a straight line basis like Lease Expense under US
GAAP is same for Finance leases of US GAAP and any lease under IFRS. In place of Lease
Payments, the ROU balance is amortized on a straight line over the life of the lease as shown
below.
9.4 Lease Analysis Report
This report shows the lease liability balances both at undiscounted as well as
discounted amounts, based on the lease / Payment term duration. This report can be
run by passing the below parameter
This report also has different sections like header section captures the report
parameters passed while running the report.
In this section we capture the remaining liability balances which are <= one year, <= 5
years and greater than 5 years. For e.g if the as of date for the report is passed as Jun-18 then we
calculate the undiscussed balances for each of these columns as using the below formula
Lease Liability <= One Year - Sum total of all payments terms for 12 months from 30-Jun-
18(=<12 months)
Lease Liability <= Five Years - Sum total of all payments terms for 60 months from 30-Jun-18
until 30-Jun-2023(=<60 months)
Lease Liability <= Five Years - Sum total of all payments terms for all terms until termination
date if remaining term life is >=60 months
Lease liability – discounted
Lease Liability <= One Year - Liability balance as of 30-Jun-18 as of date less
Liability balance as of 30-Jun-19
Lease Liability <= Five Years - Liability balance as of 30-Jun-18 as of date less Liability
balance as of 30-Jun-2023 if any(upto 60th month). If remaining life is less than 60
months then Liability as on 30-Jun-18
10. Options
As a part of this enhancement request, options tab in lease work bench has been enhanced and
going forward, users can use the options tab to enter the payment terms which are certain to be
exercised from tenant’s perspective and mostly it is used to capture any one time payment
terms. But it could be periodical as well depending on the business need.
Option tab now has been enhanced and below details can be captured now
Option Type :- Few pre-defined option types has been added to the LOV and user need to
select these options types only.
Calculation frequency – Same values as we have in payment term i.e One time, Annual,
Monthly etc
Escalation percent – Users can enter the escalation % if they want the options to be created
automatically. For e.g if the current option amount is 100 and the escalation % is defined as 10,
system will generate a payment term of 110 for the next fiscal year and so on. Note that
escalation % can be a negative or a positive amount
Escalation Amount - works similarly to escalation percent but user will have to provide the
amount.
Status – Options can be created in any status like cancelled, exercised, open, rejected etc. But
options with status ‘OPEN’ only will be considered for calculation
Compliance related Check boxes – Now even at Options level, the compliance related check
boxes like ROU / Liability/ report from Inception / inter Company check boxes can be checked.
Please note that only the options which has ROU / Liability check boxes checked will be
considered for calculation
Options will also be part of period end accrual balances and Interest
Expense and amortization expense will be derived for Liability and ROU
considering option amounts.
Amortizations and interest expense for options are calculated till option
termination date. The amortizations/interest are not restricted to the lease
termination date.
In this page, we can query the transaction based on operating unit,Ledger Name, Lease name,
Lease number, transaction type, Currency etc. Even though lease name is not a mandatory field,
without selecting the lease, we will not be able to query the transactions.
When we enter all the mandatory attributes and click on Find, the list of transactions that has been
done on the lease will be listed.
We can click on any transaction number to check out the different balances / streams that got
generated under that particular transaction like under Booking event, ROU and Liability balances
are hit,
Similarly under Termination event we can see that ROU and liability balances are reversed due to
termination
Using the transaction View form, we can also drill down to the accounting entry details generated
for each of these accounting events. To drill down to the accounting entries, select the Radio
button next to the transaction and click on ‘view Journal’
Also using the transaction view form, we can view the data for both primary and Secondary ledgers.
To do so, we will have to select the secondary ledger the Ledger field in view transaction form and
then click on Go. Then form will list all the account balances that got generated / accounted in
secondary ledger.
The Transactions are created in Entered currency. Hence if a particular Booking is generated from
payments terms in multiple currencies, then booking amounts arising from each payment term are
displayed when the correct currency is selected.
Please refer to the detailed whitepaper on accounting configurations for SLA 2396463.1. The release
notes also contains a list of new Property Manager sources available for configuring SLA.
AP invoices are also fetched into this new view so that the users get to see all the transactions at one
place.
Once this lease Approval status is changed to ‘Final’ System will trigger the
schedule and items program and will generate the schedules.
If the Report from inception is checked, then even for a new lease, the cashflows
from lease commencement date will be considered. The current carrying balances of
the lease will be used to created starting booking events.
Post completion of schedule and items program , in view transaction page we can
see that “booking” event is generated and system has calculated the ROU/ Liability
balances
In the view transaction form, the transaction date for the booking transaction type will
be derived based on the below logic
Lease commencement date in past Transaction date will be First day of the system
month For e.g if the if the Lease is created on 8th of July with lease start date as 1st June,
then transaction date will be 1st Jul as the system date is in July period
Lease commencement date=system date Transaction Date = system date
Lease commencement date less than system date but in the same system period
Transaction date = Lease Commencement Date
Lease commencement date in futureTransaction Date = Lease Commencement. This
way the future transactions cannot be accounted on the system date.
b. Approve the Schedules for the period
The next step in the period closure process would be to approve the schedules for
the period. The same can be run by navigating to Leases and Documents > Payments
> Authorize
As part of this enhancement, the liability flag captured the payment level is sent over to
the AP invoice line level as segment value two. Users can use this value to author their
accounting in accounts payable to reduce the leave library instead of posting the amount
to the expense.
The transaction date for the accrual transaction will be generated based on when the
‘Transfer normalized lines to GL program is run”. It is either the first date of the
system period when the program is run or the last date of the period for which the
program is run.
The first date of the next period is used as the transaction date for the accruals. If the
accruals are a man in a batch for the past periods, then accruals Ujjain Reckitt one for
each period but they would all be created with the first day of the next period or the
period in which they are run.
In our example, I have run the accrual program on 8st of Aug for Jun-18 period and
that is why the transaction date is derived as 1st of Aug. If I had run this program on
30th of Jun for Jun-18 period, then the transaction date would have been 30th of Jun
2018.
Accruals cannot be run for future dates/periods.
Accruals also cannot be created for periods before lease creation date. For
example if a lease is loaded with a create date of 10-Jul-18, accruals for
periods before this creation date cannot be created. This restriction is put in
place to avoid the balances to be brought down further from the brought
forward balances.
Accruals cannot be modified once run
Accruals cannot be run till the period end. This way even if there are
modifications, accruals need not be adjusted.
The journal lines can we create it in a summary form to avoid multiple lines for ROU
or liability et cetera for the payment term level. The journal line types can be created
in summary
For the purpose of this project the following list of amendments that take place:
Changing the discount rate index
Adding payment terms
Renewals
Changing the least classification
Termination of the lease or contraction of the payment term etc
Most of the above amendments are created as a revision event. User can configure
accounting rules for the revision events to complete the accounting for the revision
events. The revision events/amounts are created and transacted through well laid
down rule.
Adding a new payment term, extending a existing payment term etc will trigger the
schedule and items program and this will show the revised schedules generated. It
will also create a “Revision” transaction type for the amend transaction
The transaction date for the Revision event always will be the system date on which revision is
done.
On the other hand, if we perform a contraction of the lease agreement, then system will
generate the “Termination” event type.
Users are advised to follow the rules described in the release note for the various scenarios of revisions
and terminations. These rules describe the calculation logic as well as the rules with respect to
transaction date.
When a lease is created under foreign currency, the conversion can be done in two ways i.e
Conversion rate type specified in the Currency Conversion Type system option
Entering the conversion rate manually in Payment terms window. This can be
entered only if the Conversion rate type is set to ‘user’ in System Option
Below is the setup option which decides what exchange rate type will be used for
converting the foreign currency amount to functional currency
Under the new IFRS regime, for foreign currency leases all the streams / ROU /
Liability balances are created in entered currency only. Even all the seeded reports
show the details in Entered currency only.
The foreign currency balances are converted in to functional currency, when the
transaction is accounted. The conversion rate for each of the transaction will be
When we run create accounting for these accounting events, the accounting entry will be
generated in entered Currency as well as accounted currency.
The below mentioned rules are followed for creating transactions in foreign currency:
a. Based on system option either the user rate or the corporate rate is used for the
transactions
b. If the user selects user rate than the rate existing at the time of creation of the lease
does not change over the life of the lease.
c. If the user chooses corporate rate then ROU is only locked for the life of the lease.
d. Interest and amortization expense are calculated using the month-end rate on the
lease.
e. AP invoices are generated using the rate existing at the car at the time of creation of
the invoice
f. All the amendments during the life of the lease follow the above set rules.
15. Formulas Applied
Under the new IFRS regime, ROU, Liability, interest etc are calculating using the below
formula
14.1 Present value
R= Discount rate
For Actual days in a period or 365 days proration rule, the same method of calculation of
PV as explained above is followed.
Though the interest calculation method is compound interest for daily and simple interest
for periodical the present value calculations I am always daily compounding as explained
above. The daily compounding of interest for present value calculation is very accurate and
can do day wise calculations.
From next period onwards the ROU balance will be = Beginning ROU Balance –
Amortization
If the schedule day for the payment term is in the beginning of the month
Interest expense = (Total Liability at the beginning of the period – Payment amount)* (Interest
Rate /Proration date)* Number of days from Schedule date to period end
If schedule day is any day after the Starting date of the period
We calculate interest till payment date on opening balance of lease liability. From Payment
date month end date, interest is calculated on Liability remaining after payment deduction.
= liability balance start * interest rate per day * no of days before payment
( liability balance - payment ) * interest rate per day * remaining days after payment
Note - For periodical interest calculation we use Internal Rate of Return and not Discount
Rate for periodical calculations. However for daily calculations, discount rate is used as is in
place of internal rate of return. The present value calculation is exactly the opposite direction
calculation of compound interest and hence there is no necessity for using internal rate of
return.
360 Day Proration: for this proration, both the present value calculation and interest
calculation assume that every period has 30 days hence in a year 360 days.
If the proration rule is Days/ Month, the formula for interest calculation will be
= (Beginning Liability / 12) * IRR rate *number of days / Total number of days in Month
= P(1+r/n)^r
14.5 Amortization
The formula for calculating the amortization amount will differ between US GAAP and
IFRS.
For US GAAP—X-Y
Now we will review / apply the above formula’s on a particular lease / Payment term and
check how each of these balances are derived
Pay date – This value is derived based on the Schedule date. In our example the schedule
date is 1 and that is the reason why pay date is populated as 1st Jul 2018. If the schedule
date for the payment term was 15th of Jul, then the pay date would have been 15th of July 9,
2018
Day – The value in days column is calculated based on the period start date and schedul
days. In our example, since period start date and schedule date is same, the day column is
showing zero days.
PV (present value) – The amount in the present value column for Aug-18 period is derived
by using the below formula
= C /(1+R/100/Proration days)^N
= 1000/(1+7/100/365)^31
= 994.07
Same formula is applied for all the months to derive the Present value. For each of the month, all
other factors will remain same except the Number of days of the cash flow from “As of Date”
i.e ‘N’
Beginning ROU Balance – Beginning ROU balance for the first period i.e period ending 31st Jul 2018
will be equal to total present value. As we have seen the previous screen shot, the total PV balance
for the lease is 17134.77 and the same value is populated as Beginning ROU.
Generally ROU starts with a balance equal to liability. However if the ROU has a few adjustments
then it is advised to create those adjustments as separate payment terms which only ROU value
selected. The amortizations can also be worked for negative payment terms. For impairment of
ROU, add a negative payment done with the start date through the amendment commencement
date which can correct the right of use balance.
Amortization – The amortization amount under US GAAP will be derived based on below formula =
Lease expense – Interest Expense
Ending Balance- Ending balance is derived by subtracting the beginning ROU balance –
Amortization
= 17,134.77 - 904.08
= 16,230.69
Beginning Liability Balance = Will be equal to the total Present value of the lease as of date.
Interest Expense – Interest Expense for the period is calculated by applying the following
formula
Interest expense = (Total Liability at the beginning of the period – Payment amount)* (Interest
Rate /Proration date)* Number of days from Schedule date to period end
= (17,134.77 – 1000)*(7%/365)* 31
=95.92
Lease Expense – Will be calculated based on total cash payments / Number of periods in payment
term. So total cash flow for the payment term is 18000 and the life span of the payment term is 18
months. So lease expense will be = 1000.
Beginning ROU Balance – Like US GAAP, even under IFRS beginning ROU balance will be equal to the
total Present value of the payment term as of date
Amortization – Under IFRS amortization amount is calculated on a straight line basis i.e ROU Balance
/ Number of periods Lease term i.e 17134.77 / 18 months
= 951.93
The Present value and Interest calculation for the lease will be
Note –
** 1708.88 is the total liability at the beginning of Jul-18 period
ROU / Liability Balance before the new payment term addition is = 1708.88
Now we added a new payment term to the same lease and the payment term has below details
Start Date End date Proration Rule Schedule Day Interest rate Amount
01-Jul-2018 31-Dec-2019 365 1 7% 500
After adding a new payment term, the amount calculated for the earlier payment term will remain
unchanged and system will calculate the ROU / Liability balance etc to the extent of newly created
payment term
The Present value and Interest calculation for the lease will be
Note –
As the schedule day is 1, for Jul-18 period the number of days for the month is considered
as 0
The ROU and Liability Balance calculated to the extent of New payment term is 8567.39.
So a revision event with below balance has been created by the system
The Present value and Interest calculation for the lease will be
=3.74
Note –
In the above calculation 1760.17 and 1664.25 are the beginning liability amount for
Jul and Aug-18 period respectively.
For Jul-18 we have considered only 29 days (14 days before the schedule day and 15
days after the schedule day) because as per the calendar setup, July-18 has only 29
days. Similarly for Aug-18 period only 28 (16 + 12) days is considered for calculation
as Aug-18 period starts from 30th of Jul and ends on 26th of Aug as per the calendar
setup.
The Present value and Interest calculation for the lease will be
Note -
With 360 days proration rule, all the months are considered to be having 30 days.
For Jul-18 period, since schedule day is 1, the number of days is considered as 0
In this case, since schedule day is 1, the monthly schedule payment amount i.e 100 has
been subtracted from the beginning liability i.e 1737.78 and on the remaining liability
amount interest amount is calculated.
Note -
With Days/Month proration rule, the beginning liability is divided between 12 periods
equally
In the above calculation we have taken 30 days for both the months because the schedule
date for the payment term is 1st of the month.
So ROU / Liability balance for the lease during lease creation is 593.73. Now the lease is
exetended up to 31st Dec 2019. So system will calculate the revised ROU and liability
balance for the period 01-Jan-2019 to 31st Dec 2019 and the revised amount will be
1143.86. So revision event is generated for the same amount
Some of the amendments required use of latest discount rate for recalculations. For
example, lease rainy was our payment term contraction. During recalculations the system
checks for the discount rate at the time of recalculation, and uses the new rate for all the
downstream recalculations.
The reporting requirement of equipment lease is similar to the requirements specified under the
Operating leases which are mentioned earlier i.e calculation of ROU / Liability balances, Interest
calculation, Amortization of ROU balance and Lease liability etc.
16.1 Prerequisites
12.2.X 12.1.3
28073854:R12.PN.C Patch is still under Progress
Once we apply the above patch, we will get the equipment lease menu which can be linked to
the responsibility. To get the lease equipment function / menu under any responsibility, the
below menu has to be added to the responsibility
The menu name is - PN_EQ_NAVIGATE_CUSTOM. This menu has below 3 options
Lease tab is for creating / querying the leases and to amend the leases.
Inventory Set up
Another prerequisite for using the equipment lease, the user should do necessary set up in the
Oracle Inventory as well. The required set up for Inventory as follows:
16.2 Setup
The setup for equipment lease involves setting up Term template, Discount Rate Index and
system options. To setup all these we can navigate to setup tab in the equipment lease self-
service page.
16.2.1 Term Template – Under term template, we can query the existing term templates or we
can create a new one. To create a new term template click on Create button in the above page
which will open the below page
Even in equipment lease, we have to create the term template at operating unit level and other
fields are similar to term template setup we have in current property manager. Please note that
checking the active check box in term template level is mandatory and without that the
template will note appear during the lease creation.
Once all the mandatory details are entered at the term template level, we need to click on add a
new row in account distribution section to enter the distribution details
The next step would be to enter all the account details and save the term template
Accounting Options – This has 3 options All Terms, Normalized Terms Only and None. The
details of how each of these options works is available in property manager user guide
Currency Conversion type – The exchange rate type that is application to the Operating Unit
needs to be set. If this field is set as user, then exchange rate value needs to be entered at lease
level.
Smallest term amount – This setup at system options decides what is the minimum payment
term amount that can be entered during lease creation for a particular OU
Automatic Number Gen- This option decides whether lease number needs to be generated
automatically or it needs to be entered manually during the lease creation
Inventory Item master – Here system will show all the master organizations defined in the
system and based on the master organization selected in the system options, system will derive
the asset attributes like description etc will be derived during the lease creation
Compliance setup – This setup is similar to how we have setup in Property manager System
options which is explained above. In this case, user has an option to select the regime which
they want the Operating unit to be linked and they can select either IFRS or ASC 842 or both. If
option ‘Both’ is selected, then they need to select the primary regime.
16.3 Leases
Under Leases tab, there are two sections i.e
i. Leases
Under leases we can query the existing lease or we can create a new lease. To create
a new lease, click on create lease option and it opens the below form
In the above form there are different sections like lease details, compliance related
setup like Lease classification, discount rate index applicable to the lease, added rate,
if in case if any, lease term start and end date. These fields are similar to what we
have in property manager form as well.
Once all the these information’s are entered and saved, we can see other tabs to enter
other details of the lease
Parties
Under the parties tab, the lessor and lessee details will automatically enter based on
the party name and the operating unit entered
Assets
When we click on create option under assets, the below page will open
Asset Number – is the unique identifier of the asset. Asset number can be an alpha
numeric value.
Asset description – explains the description of the asset and the values in the asset
description field is derived from the Inventory master item assigned at the system
options level for the Operating unit. The LOV will show all the item descriptions
which are defined under the inventory master organization with item type as
“Equipment” or “Equipment-item” along with “Lease” item status.
Model Number – the unique number provided by the manufacturer for the
equipment.
Unit – captures the number of equipment assets captured / bundled under that
particular asset
Total cost – It is a system derived value based on the unit and the unit cost value
entered
Install At – shows the physical location of the asset. The LOV for this field is derived
from the location details defined at operating unit / inventory organization level.
Address – System automatically derives the address details based on the location
field selected
Effective from – Indicates the starting date of the particular asset. This date can be
any date between the lease start and end date and any payment term created under
this lease cannot be prior to the asset effective date.
Effective to- This indicates that the end date of the particular asset in the Lease. The
effective to date cannot be beyond the Lease termination date and before the Lease
commencement date.
Status - The status indicate that whether the asset is active or terminated
Payments
The create payment term in page in equipment lease is similar to the payments tab
we have in property manager and it has an option to capture all the details like term
template, payment term start date, end date, compliance related check boxes like
ROU, Liability, Normalization etc
The payments schedules for Equipment leases are enhanced with two new features:
a. Schedule day can be selected by the user until last day of the month, values like
29, 30 and 31 are also allowed.
b. The schedules run from Payment start date to end date. Hence even for monthly
frequency, there is no proration in the first and last month of the lease. For eg if a
lease starts on 10th and payments run from 10th to 9th of the next month, then
that’s how the schedules also run.
Options
Payment terms which users are certain of exercising, needs to be captured under
options tab and it can be captured any time during the life span of the lease.
Asset Number – This is an optional field and user can enter any asset number
against which they want to link the options.
Status – user need to select the option status. Only the options which are in ‘Open’
status will be considered for compliance related calculations
Option Type – user can select the type of option which they want to exercise. The
available options are Early Termination, Purchase, Renewal, Residual.
All other fields like supplier name, supplier site, payment term amount, escalation %
etc are available even in equipment lease form like how it is available in property
manager lease creation form.
Users can click on the transaction number and drill down to transaction / stream details that are
effected in that particular transaction.
Users can also drill down the journal lines against each of these transactions using the view transaction
form
16.4 Reports
Using the reports tab in equipment leases page, user can submit the request / concurrent
programs. The page provides the option to select the language in which the report needs to be
run, the report layout options
17 Transaction flow / Period end process under equipment lease
In equipment leasing the transaction flow will be
Enter the asset details against asset for which lease is created
Enter the payment term details
The next step would be to finalize the lease. Same can be done by changing the lease
status to Final
Once the lease approval status is changed to final, schedule and items program will
automatically get trigged and the generated schedules can be seen in the request output.
Select the action button in the above screen which will open the amendment form.
Enter all the amendment details and click on apply. Post that other tabs will appear. Now we can
navigate to asset tab / Payment tab and complete the amendment transaction. In our example, we will
add a new payment term. So navigate to payments tab
Once we click on save button, schedule and items program will automatically get triggered and the
schedule items program will show the revised schedule details.
To approve the schedules in equipment lease, we need to run the “Approve or Cancel Approval of
Equipment Schedules”
Once the program is completed, the output file will show the details of the schedule that got approved.
Once the lines are approved, the next step would be to export the lines to Payables. The lines can be
exported to AP by running the program
Once the program completes successfully, the output file shows the details of the invoices that are
exported to AP
Once this program is completed successfully we can see the accrual event generated in view
transactions page
Like property manager, even in equipment lease the accrual event can be generated only for prior
periods and you cannot generate the accrual event for the future periods. Also the schedule lines for the
corresponding period for which Transfer normalized lines to GL program is run, should be transferred to
AP already.
The next step would be to run the create accounting program to interface the Booking and accrual
events to GL.
18. Reports
Under equipment leasing solution, below 3 reports are supported
Portfolio Summary
Portfolio Detail
Lease Detail
The report layout, calculation logic / formulas applied to derive the interest rate, amortization amount,
Present value of the future cash flows etc will remains same as it is there under property manager IFRS.
The details of all the reports and formula’s are explained in detail above.
Please note that the exchange rate derivation logic in equipment lease is same as it is derived in
property manager IFRS solution.
20 Approval workflow
The Finalization of Lease can be controlled by an approval process as well. If the user wish to use
approval mode by using the Profile option: PN: Use Lease Approval Workflow with value “Yes”.
It also enable the user to configure the Approval Management (AME) and process the approval as per
the approval hierarchy defined by the user.
Lease creation/update
Create/ update parties
Create/update Asset
Create/update option
All of these are available in the package named PN_EQUIP_LEASE_PUB (Upgrade Lease API).