Finance lease

Finance lease transactions are accounted for both by the lessee and the lessor under IFRS 16 "Lease" rules.

In the system, you can account for lease by way of the instruments applicable to accounting of other financial instruments.

Financial instruments catalog

When you create the Accounting parameters of financial objects catalog item, click the Lease (IFRS 16) tab and select a lease type:

Lease liability (according to IFRS 16).
Lease outside the scope of IFRS 16 (accounts payable).
Accounts receivable under operating lease.
Investments in lease (asset).

You can either set a lease type manually or determine it by specifying key lease contract parameters in the lease classification wizard.

Key lease contract parameters are specified in the contract card. They include a lease period, an asset useful life, whether lease buyback is possible at the end of the lease, whether asset sublease is possible, whether the method of getting economic benefits from the leased asset can be changed, whether replacing the asset during the lease is possible, whether early termination of the lease contract is possible, whether unilateral lease changes are possible, the preferential right to extend the lease contract, the ability of the lessor to determine the asset operating conditions for the lessee, the lessee's participation in the construction (design) of the lease object.

Key lease parameters are stored in the information register. You can view them in the contract card. Based on various combinations of key contract parameters, the system recommends its users possible options for classifying leases in accordance with IFRS 16.

You can take advantage of an analytical report to perform a summary key parameter analysis. The report shows the contract classification, its key parameters, contract amount, and start and end dates. Users can analyze all existing lease contracts for compliance with IFRS 16 and revise the classification of leases upon transition from IAS 17.

To select a required presentation of the lease payment schedule, go to the Accounting parameters of financial objects catalog item and select an option from the Schedule display option drop-down list:

With no extra details. Schedule is the same as specified in the contract and contains only payment dates.
For reporting dates. Schedule shows all indicators as of the report and payment dates.
For the end of the month. Schedule shows data as of the end of a calendar month along with contract payment dates and amounts as of the report date.
For every day. Schedule generates indicators for each day.

In the GL accounts table, specify accounts of assets and liabilities used by the system for automatic lease accounting entries. These GL accounts include lease liabilities and lease contract interest GL accounts.

To drill down a finance lease asset (liability) by repayment periods, set up the Debt intervals catalog.

When entries are generated by the Record of documents at depreciated cost document, the net book value of the lease asset (liability) is reclassified by repayment periods to generate lease information disclosures.

In this document, you can enter an advance payment and select the Recognize new financial instrument (IFRS) property if the payment schedule changes significantly.

Accounting for finance lease by lessor

Standard solution restrictions

In accordance with IFRS 16, lessors must recognize assets under finance lease in the balance sheet and submit them under "Net investment in lease" in discounted valuation.

Under NAS, there are various entries to account for leased assets. They can be accounted for both in the lessor's balance sheet or in the lessee's balance sheet. In this case, these assets are recorded to the lessor's off-balance account.

In the standard solution, the model of the lease object accounting entries on the lessee's balance sheet is introduced. In this case, the lessor records deferred income from finance leases and long-term accounts receivable of the lessee.

An alternative option to account for leased assets under NAS is an entry model using account 97 without recognition of deferred income. This model is not introduced in the standard solution.

Translation of NAS data on finance leases is carried out under all finance lease contracts recognized under NAS.

The standard solution does not support automatic import of NAS schedules with the lessor advance offset and deferred income write-off during the lease contract period.

All VAT cash flows are kept on separate accounts or reclassified in accordance with their actual scope.

The standard solution supports early lease buyback and return transactions. In case of early lease buyback, the system classifies the full repurchase payment to lease debt repayment. It is not classified into principal and interest. At the moment of early schedule, the schedule of deferred payments under the lease contract is automatically updated. The amount of deferred minimum rental payments for the remaining lease objects are reduced. It applies if several objects were leased under one contract, and one of them was purchased prematurely. In case of early termination of the contract and asset return, it is disposed (NCA object write-off). Leased property, its depreciation, and related long-term lease liabilities are written off from the balance sheet. Any financial result from this transaction is recognized as profit or loss for the current period.

Steps to follow in the application

To make sure your IFRS accounting is complete, check whether all lease transactions to recognize under IFRS are recognized under NAS. If some lease contracts are not recognized under NAS, recognize them directly under IFRS.

First, set up a lease transaction translation template from the NAS database.

You also need to make sure that all lease contracts to be recognized in the reporting period are registered in the Contracts catalog.

Then set the lease transactions accounting parameters in the Accounting parameters of financial objects catalog. Indicate the required GL accounts for net investment in finance lease, finance lease income, other debt, off-balance accounts for information disclosure in the notes to the IFRS reporting. Accounting parameters are set for homogeneous lease transactions. For example, create different catalog objects for transactions in rubles and in a foreign currency since they have different parameters and different GL accounts. For more information about the Accounting parameters of financial objects catalog, see chapter "Financial instruments".

Next, for each lease contract in the Record of financial instruments at depreciated cost document, specify a payment schedule under IFRS at the date of leased object transfer to the lessee. To import a schedule, in the document, click FI flow. For more information about the Record of financial instruments at depreciated cost document, see chapter "Depreciated cost accounting using the effective interest rate method in the FI program".

In case of early lease return or repurchase, on the Leased objects tab, enter the dates of early NCA object return or the debt repayment date in the schedule.

To view the account balances under the contracts listed at the document date, open the Record of financial instruments at depreciated cost document and click Accounting data. With this button, you can quickly verify the correctness of the translation of NAS data related to lease contracts to IFRS GL accounts and view account balances before and after the document is posted under IFRS.

Enter an IFRS schedule for calculating the initial net investment in finance lease and recognition of finance lease manually on the FI flow tab in the Record of financial instruments at depreciated cost document. Under IFRS, the lease payment schedule includes cash flow of minimum lease payments and outflow of lessor's funds for purchasing the leased object including direct non-refundable purchase costs (such as insurance costs, delivery of the leased object, and other). The schedule does not include VAT cash flows.

All amounts in the schedule under IFRS should be shown VAT exclusive. VAT amounts should be filled in a separate column for reclassification.

Once IFRS schedule is entered, the system automatically calculates the lease rate implied in the contract by the internal rate of return (IRR) formula, accrues financial income up to the end of the lease contract period, and also performs other calculations to correctly reflect the net investment in the lease and VAT calculations in accordance with IFRS.

If the IFRS schedule is filled in and calculated correctly, the balance of the net investment in the finance lease on the contract end date will be equal to zero.

Once the IFRS schedule is created, generate the Reversing entry of NAS financial expenses document. With this document, the system automatically reverses NAS transactions that do not comply with IFRS. Post the document to avoid double-entry accounting of lease transactions under IFRS.

To create IFRS finance lease entries including financial income accrual, perform "Period closing operation by financial instruments" on the IFRS period-end closing date or on the last day of the reporting month.

The main entries generated for the finance lease issued are:

Recognition of net investment in finance lease, including:
- □ Recognition of the initial cost of the leased object.
- □ Lessor advance payment write-off.
Accrual of the subsequent lease payment with recognition of financial income, VAT payable, and partial repayment of the net investment in finance lease.
Accrual of interest up to the end of the month (if applicable).
Reclassification of the short-term part of the net investment into finance lease.
Reflection of additional information for disclosure in IFRS notes on off-balance accounts: gross investments in lease, net investments in lease, and unearned financial income broken down by repayment due dates: up to one year, from one to five years, over five years.

Accounting for finance lease by lessees

In accordance with IFRS 16 "Lease", lessees recognize lease objects as right-of-use assets and liabilities to lessors. Assets are valued at the amount of the discounted value of minimum lease payments increased by the amount of advance lease payments and other direct costs incurred by the lessee. Liabilities are valued at the discounted value amount of minimum lease payments. The effective interest rate implied in the contract is used for discounting if the value of the leased property is known and this rate can be easily determined. If this rate cannot be easily determined, the lessee must use the lessee's incremental borrowing rate (market interest rate).

Steps to follow in the application

There are two ways to record a lease contract received under IFRS in the system:

Upon the initial record of the lease contract under NAS.
Upon the initial record of the lease contract under IFRS.

As the Contracts catalog is unified in the accounting system except for some accounting specifics, you can add lease contracts to this catalog in several subsystems:

In cash management: Cash management – Contracts and securities – Contracts.
In IFRS: IFRS accounting – Financial instruments (including lease) – Contracts.

Recording lease contracts under NAS

Recording leased object receipt

In Fixed assets and Intangible assets – Fixed asset receipt, register the receipt of fixed assets. If other objects (intangible assets, inventory, assets under construction, deferred expense objects) are used as lease contract objects, their receipt must be recorded at the NAS level. Lease contract objects under NAS should be recorded in the same period as the financial instrument recognition under IFRS.

When you create an object, fill "IFRS information" as follows:

Accounting option: parallel accounting.
Accounting parameters.

Creating contracts

In Cash management – Contracts and securities – Contracts, create a contract with the Received leasing type.

On the Main tab of the contract, fill the contract validity dates.

On the AR/AP accounting schedule tab, fill an accrual schedule and a payment schedule. To import a schedule from Microsoft Excel, click Import schedule. This schedule is used to automatically fill the "Record of financial instruments at depreciated cost" document at the IFRS level.

On the IFRS tab, fill Accounting parameters for IFRS accounting purposes.

To specify IFRS leased objects (right-of-use assets), click Go to – Default IFRS lease objects.

This way the system maps leased objects (right-of-use assets) to contracts. It also indicates an AR/AP schedule, rates, and other.

You can also use the following objects as leased objects:

Intangible asset.
Product range (inventory).
Asset under construction.
Fixed asset.
Prepaid expense object.
Cost item.

Translating data from NAS to IFRS

First, set up the lease transaction translation template received from the NAS database. Set up the template considering specifics of recording lease transactions received under NAS.

To set up the template correctly, take into account that NAS transactions which can be correctly transferred to IFRS accounts are subject to translation. For example, transactions of long-term AR/AP with the lessor, leased object recognition, VAT payments are translated. If transactions are to be reversed or recalculated under IFRS (for example, charge of operating lease expenses which is considered finance lease under IFRS), such transactions are not translated.

In "IFRS accounting" – "Translation and transformation": NAS accounting entries are translated into IFRS entries (in case of transforming analytical trial balance of NAS into analytical trial balance of IFRS). For more information about "Translation", see User Guide.

Learn how to account for lease contracts received under IFRS below.

Recording lease received under IFRS

Accounting parameters of lease contracts under IFRS

Before you register an IFRS financial instrument, make sure all the parameters required for IFRS accounting are specified in the lease contract. Go to IFRS accounting – Financial instruments (including lease) – Contracts and check the following parameters:

Contract validity period on the Main tab.
Schedule of accruals and payments on the AR/AP accounting schedule tab.
IFRS accounting parameters on the IFRS tab.
Default IFRS lease objects.

If the parameter is empty, fill it first and then register a financial instrument under IFRS.

Note that if no accounting parameters of financial instruments under IFRS are specified, the "Record of financial instruments at depreciated cost" and "Record of financial instruments at fair value" documents will not be filled automatically. In this case, you can specify the accounting parameters of financial instruments under IFRS manually in these documents.

Depending on the contract accounting at the NAS level, approaches to subsequent accounting under IFRS are the following:

If the lease contract is recorded as an operating lease under NAS, fill all the necessary contract parameters manually under IFRS in accordance with this clause.
If the lease contract is recorded as a finance lease under NAS, you can do the following depending on your company approach:
- □ Translate NAS accounting data of the lease contract to IFRS accounting without changes.
- □ Set accounting parameters to "Parallel accounting" and recognize the lease contract under IFRS in accordance with this clause.

Applied interest rates

There are several options of interest calculation rates for calculating the current value in the system:

The market interest rate can be:
- □ Entered into the system as a general one (to automatically fill the "Record of financial instruments at depreciated cost" document) as of a certain date in Accounting parameters of financial objects as shown below.
- □ Entered manually when entering a financial instrument for the IFRS schedule.
The effective interest rate can be calculated after calculating the leased object (right-of-use assets) cost.
The contract rate is filled from the contract. You can change it in the "Record of financial instruments at depreciated cost" document. You can also edit the rate in the document:
- □ Filled from the contract by default.
- □ IFRS rate can be changed in the document.

Determining the initial cost of the right-of-use asset

Requirements for calculating the initial cost of the right-of-use asset

In accordance with the requirements of IFRS 16, the lessee estimates the right-of-use asset at its initial cost on the lease commencement date. The initial cost of a right-of-use asset includes:

(a) The initial measurement value of the lease liability as a lease liability at the present value of lease payments that have not been made on that date. Lease payments should be discounted using the interest rate stipulated in the lease contract if such rate can be easily determined. If this rate cannot be easily determined, the lessee must use the lessee's incremental borrowing rate (market interest rate).
(b) Lease payments on or before the lease commencement date minus incentive payments received on the lease.
(c) Any initial direct costs incurred by the lessee.
(d) Estimation of costs that will be incurred by the lessee upon dismantling and moving the underlying asset, restoring the site where it is located, or restoring the underlying asset to the condition required under the lease terms except for the cases when such costs are incurred to produce inventory. The lessee's liability in respect of such costs arises either on the lease commencement date, or as a result of the use of the underlying asset during a certain period. The lessee must recognize such costs as a part of the initial cost of the right-of-use asset at the moment the liability in respect of such costs arises.

Financial instrument recognition under IFRS

To determine the initial cost of the right-of-use asset after posting the contract of received lease, go to IFRS accounting – Financial instrument documents and create the "Record of financial instruments at depreciated cost" document.

To automatically fill the "Record of financial instruments at depreciated cost" document based on the data of the Received lease contract, click Fill in.

Make sure all the specified fields are filled in.

Minimum lease payment schedule

You can fill the minimum lease payment schedule (VAT inclusive) on the Minimum lease payments tab using either of these methods:

From the schedule in the contract card.
Import it to the contract card from a Microsoft Excel file.
Manually.

Leased objects (right-of-use assets)

Check whether the specified objects are present on the Leased objects (right-of-use assets) tab in "FI scheduled flow". If no NCA objects (right-of-use assets) are found, add them manually.

Recording additional expenses

If there are any additional expenses that increase the right-of-use asset cost, specify them on the Additional expenses tab in accordance with IFRS 16. Set a payment type to "Renovation payment".

Rates

Later you can select the required rate on the IFRS – Accounting parameters tab of the contract in compliance with IFRS accounting policy to calculate the present value from minimum lease payments by clicking "Recalculate NCA value" and determining the initial cost of the right-of-use asset. Usually "Effective rate" – "Implied rate", or "Market interest rate" – "Imputed rate" is used.

The following calculation parameters are specified.

To reclassify a long-term part of the debt, fill the algorithm of the Financial object type financial instrument (Contract – IFRS – Accounting parameters).

The schedule is calculated based on the type of the rate specified in Instrument parameters:

The receipt of the principal debt on the financial lease and its allocation to the initial cost of the leased object (right-of-use asset) and interest is calculated as the present value of minimum lease payments at the market rate specified on the Instrument parameters tab of the IFRS schedule.

If the cost of the leased NCA (right-of-use assets) is unknown, enter Market interest rate on the Instrument parameters tab manually. The NCA cost is calculated automatically as the net present value of minimum lease payments.

To automatically fill the "Record of financial instruments at depreciated cost" document, fill "Market interest rate" from "Market interest rate" as of the date (Contract – IFRS – Accounting parameters – Market interest rate – FI quotation values).

Calculating the initial cost of right-of-use assets

To calculate the principal debt of the finance lease and allocate it to the initial cost of the leased object (right-of-use asset) and interest as the present value of minimum lease payments, click "Recalculate NCA value" on the Leased objects (right-of-use assets) tab. After the calculation, the initial cost of the right-of-use asset is specified in the Amount column.

The "Record of financial instruments at depreciated cost" document registers the FI scheduled flow, determines the initial cost of the right-of-use asset and the interest expense amount but does not generate entries. The entries are generated when you post the "Financial instrument closing operation (IFRS)" document.

Recording entries under the contract of finance lease received

To generate IFRS entries under the lease contract after posting the "Record of financial instruments at depreciated cost" document, fill in the "Financial instrument closing operation (IFRS)" document.

In the document, select Report period, click Save and Post.

IFRS accounting entries will be generated for all financial instruments for the specified reporting period.

The following entries are generated:

Recognition of a financial instrument under IFRS at the date of the right-of-use asset entry.
Reclassification of VAT on minimum lease payments to other accounts payable.
Recognition of financial costs of finance lease.
Reclassification of long-term debt of a financial instrument at the reporting date.
Generation of disclosures by intervals in accordance with IFRS 7 "Financial Instruments" at the reporting date.
Reclassification of accounts payable of augmented interest to the short-term debt.
Reclassification reversing entry of accounts payable of augmented interest on the first day of the next reporting period.
Disclosure generation entries by intervals are reversed on the first day of the next month in accordance with IFRS 7 "Financial Instruments" at the reporting date.
Reclassification reversing entry of VAT on minimum lease payments to other accounts payable.
Disclosure generation entries by intervals are reversed on the first day of the next month in accordance with IFRS 7 "Financial Instruments" at the reporting date.

Specify disclosure generation settings by intervals in IFRS chart of accounts – Extra dimension type – Debt intervals.

If there is no specified Debt intervals extra dimension type, an entry is generated only to allocate long-term debt to the long-term liability GL account.

Materiality threshold for lease recognition

The system provides the variable Lease recognition threshold option. It is set in the company accounting policy to exclude recalculation in accordance with IFRS 16 of non-essential lease contracts at the discretion of the company. If the total amount of the contract is less than this limit but the contract meets the lease criteria, the system classifies these contracts as non-leases under IFRS 16 when using the lease classification wizard. This transaction is not mandatory for companies and is set depending on the existing IFRS accounting policy of the company.

Recording changes of the lease contract received under IFRS

Changing the schedule (Cash management section)

If you change the contract schedule in the Cash management section, the IFRS accounting section of the contract card will change accordingly as they both use the same Contracts catalog. To change the contract schedule:

Create a new version of the contract.
Change the "Version is valid from" date on the Main tab.

In this case, the contract schedule must be updated considering the financial instrument (lease contract) modification date.

You do not need to register the new lease contract schedule in the contract card in the Cash management section as the Contracts catalog is unified. The changes in the payment schedule under the lease contract can be entered immediately to the IFRS accounting section.

Changing the schedule (IFRS accounting section)

You can record the changes in the lease contract payment schedule in the IFRS accounting – Financial instrument documents section, in the "Record of financial instruments at depreciated cost" document for the corresponding reporting period. Specify the Change accruals transaction type. When auto filling the "Record of financial instruments at depreciated cost" document for a reporting period with the Change accruals transaction type, the system automatically identifies versions of contracts with schedule changes that have contract version dates within the document report period.

It is important to specify a lease contract modification date in the payment schedule modification date (for example, the date of disposal of a part of the leased object (right-of-use asset) – car 1).

The "Disposal" transaction type is used when minimum lease payments under the contract are stopped and the contract is completely terminated and closed.

In compliance with paragraphs 3.3.2, B3.3.6 of IFRS 9 "Financial Instruments", when changing the payment schedule, the system automatically calculates the new schedule variance from the previously calculated one and displays the calculated variance percentage in the Materiality percentage IFRS field. If the variance is greater than 10%, a new financial instrument is automatically recognized and the old one is reversed.

If one or more leased objects (right-of-use assets) are eliminated, the schedule will be modified.

If one or several leased objects out of the total number of leased objects (right-of-use assets) are eliminated, it will be "Reversing entry and recognition" and the Change accruals transaction type. Minimum lease payments continue.

When making changes to "FI flow", note the following:

Specify schedule start and end dates and a market interest rate.
Determine how to record entries for separate transactions of the financial instrument change recognition:
- □ If the Recognize new financial instrument check box is selected, a reversing entry will be generated for a previously recognized financial instrument and a new financial instrument will be recognized.
- □ If the Recognize new financial instrument check box is cleared, no reversing entry will be generated for a previously recognized financial instrument and a new financial instrument will not be recognized. A change in a previously recognized financial instrument will be registered.
Import VAT inclusive minimum lease payments.
Specify the appropriate right-of-use asset automatically or manually and the appropriate transaction type for this right-of-use asset.

The following parameters correspond to each type of financial instrument record transaction:

Financial instrument record transaction type	NCA (right-of-use asset) under NAS	FI scheduled flow	Right-of-use asset transaction type	Financial instrument accounting parameters
Recognition	Receipt of leased assets	Initial recognition	Commissioning	Initial indication of accounts and accounting parameters
Change of accruals	No changes	Change FI scheduled flow	Increase in lease net book value Decrease in lease net book value	Change of accounting parameters, for example, market interest rate
Reclassification	No changes	FI scheduled flow change, for example, due to reclassification.	Any	Change of accounting parameters (for example, accounts)
Disposal	For example, disposal in case of return of the right-of-use asset to the lessor.	FI scheduled flow change, for example, early repayment, return, debt, event of default.	Return of the leased object to the lessor	No changes

After registering a payment schedule with changes, calculate the leased object (right-of-use asset) cost: a net present value is calculated from a part of minimum lease payments at the market interest rate.

Recording entries upon schedule change result

Once the "Record of financial instruments at depreciated cost" document is posted including the changes made to the lease contract schedule, fill in the "Period closing operation by financial instruments" document to generate IFRS entries under the lease contract.

After posting the "Period closing operation by financial instruments" document, contract modernization entries will be registered for the corresponding reporting date:

Reverse record of a financial instrument (lease contract) with the previous schedule.
Accrual of a financial instrument (lease contract) with a new schedule.
Difference is accrued on the impairment account (income and expenses of the current period) or on the NCA (right-of-use asset) GL account.

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