Asset-level lease accounting is a requirement under the new ASC 842 and IFRS lease accounting standards which requires the recording of transactions by generating debits and credits for every asset on a lease contract. At the asset level, lessees are also required to separate lease and service components of bundled leases. The lease portion should be capitalized and the on-lease portion should be accounted for appropriately.
Contract-level versus asset-level lease accounting
With contract-level lease accounting, transactions are recorded by generating the debits and credits for each lease contract. This approach is typically used for real estate leases when there is only one asset associated with the contract. This method can become ineffective and is prone to error when there are asset-level variations within a contract.
On the other hand, asset-level accounting transactions generate debits and credits for every asset on a lease contract and offers a more accurate and effective approach. However, managing asset-level of lease accounting detail can become extremely complex very fast, as data quality and accurate calculations are crucial for compliant reporting. Plus, there is potential for significant data to be generated throughout the lifecycle of the lease, including asset-level decisions and events at the lease start, during the lease term and at the end of the term, including negotiating buy-outs and renewals.
Major challenges associated with asset-level lease accounting
To take on the major challenges associated with data quality and accurate calculations associated with asset-level accounting, companies need a trusted battle-tested software solution to manage what could be potentially millions of calculations and journal entries. A centralized subledger and calculation automation are among the advantages enterprise-level lease accounting software can provide to streamline the asset-level accounting detail process. The same software should offer audit trails and automated workflow status updates for assets and leases.
The hidden benefits of lease accounting compliance When shopping for a software solution during the lease accounting compliance process, keep in mind the potential for a significant return on investment, as the new lease accounting standards offers ample opportunities to streamline operations, increase negotiation power with vendors and other advantages.