How Lease Accounting Works

In Leasecake, a lease and its accounting share one record. You publish a lease, establish a book for each accounting standard it is reported under, and measure that book to produce the lease liability, the right-of-use (ROU) asset, and the schedules. When the lease changes, the change flows into the accounting as a revision instead of being entered a second time. This article explains each step of that flow, from book establishment through revisions, journal entries, the period closing, and reporting.

Books and accounting standards

Each lease gets a book for each accounting standard it is reported under. We support ASC 842, IFRS 16, and FRS 102, and one lease can be measured under more than one of them, so a lease reported under two standards carries two books. Each book holds that standard's accounting judgments and produces its own schedules and journal entries.

Establishing a book: the accounting judgments

Establishing the book means recording the accounting judgments for the lease under that standard. These judgments drive everything the book produces, so they are recorded up front:

• Classification: operating versus finance, including the short-term and low-value exemptions.

• Discount rate: the rate used to measure the lease.

• Lease and non-lease components: how the lease separates components of the payment.

• Initial direct costs: costs included in the measurement.

Measurement and schedules

Measuring the book produces the lease liability, the right-of-use (ROU) asset, and the schedules. Three schedules come out of each measurement: the liability schedule, the ROU asset schedule, and the amortization schedule. You can review a lease's accounting on its Accounting page.

Multi-currency leases

Leases can be multi-currency. Each currency is measured and scheduled separately, and exchange rates are maintained in the app. A lease in two currencies produces a measurement for each, rather than converting one into the other.

Each standard's Policy Election Set chooses the exchange rate for every transactional currency other than the functional currency. In Setup → Policy Election Sets, the Exchange Rates section lists each foreign transactional currency and requires a rate for it before the election can be saved. A choice can be a published system rate such as the Federal Reserve or the European Central Bank, or a rate owned by the workspace; only active rates matching the currency pair are offered, and a match can quote the pair in either direction.

Six system-rate series are published: Federal Reserve EUR → USD, GBP → USD, and USD → CAD, and ECB EUR → USD, EUR → GBP, and EUR → CAD. They sync daily. When journal entries are derived, the historical rate comes from the election in force on the commencement date, and the closing and average rates come from the election in force on the posted date. If journal entry derivation runs without a chosen rate, it records an issue that no exchange rate is chosen for the currency pair.

Reporting entities and Policy Election Sets

Accounting is reported for a reporting entity, and each reporting entity has its own setup: a functional currency, a fiscal calendar (which may have 13 periods), and Policy Election Sets, the accounting policy choices for each standard. The same lease can therefore measure differently under two reporting entities with different policy elections.

When a lease changes: revisions

When a published lease changes in a way that affects accounting, the change becomes a revision. Because the lease and its accounting share one record, you do not re-enter the change in the accounting: the revision carries it there.

A revision is one of four kinds: a correction, a modification, a reassessment, or an asset change. Each revision is triaged, remeasured, and settled, and revisions that need a decision are queued for accountants to work. In a correction, the measurement step previews the discount rate each currency's rebuild will use: a curve-derived rate when the rate is redetermined, or the rate carried forward when it is not.

Posting and the period closing

Accounting activity becomes journal entries, coded through the chart of accounts, chart-of-accounts mappings, and GL coding templates. Entries post in reviewed batches during the month-end period closing. Once the closing finishes, the period locks, so a period's posted entries stay fixed.

Reporting and disclosures

Disclosures include footnote disclosures and roll-forwards. The Portfolio page gives an accounting overview by reporting entity, period, and standard. Reports can be built from the accounting datasets and re-run each period, so the reporting work of one month-end carries into the next.

Moving from another system

Customers moving from another system can carry over prior accounting through a cutover reconciliation. That is how balances established in a previous system become the starting point for measurement in Leasecake.