How to Use Accounting Software to Manage Lease Accounting?

Posted In | Finance | Accounting Software

Lease accounting can be complex and time-consuming, but it is an essential aspect of financial management for businesses with leased assets. With the implementation of new accounting standards, such as IFRS 16 and ASC 842, organizations are required to accurately account for their leases and ensure compliance. Accounting software has become a key tool in streamlining lease accounting and ensuring accuracy. In this article, we'll explore how to use accounting software to manage lease accounting effectively, helping you maintain compliance and gain deeper insights into your leased assets.
 

1. Choose the Right Accounting Software

Select an accounting software that offers robust lease accounting features, allowing you to automate the lease management process and ensure accuracy. Look for software that supports the new lease accounting standards, such as IFRS 16 and ASC 842, and provides tools for lease classification, amortization schedules, and disclosure reporting.
 

2. Set Up Your Leases

Begin by setting up your leases within your accounting software. This includes entering essential lease information, such as the lease term, commencement date, lease payments, interest rate, and asset value. Accurately setting up your leases will lay the foundation for effective lease accounting.
 

3. Classify Your Leases

Under the new accounting standards, leases must be classified as either operating or finance leases. Use your accounting software to classify your leases according to the applicable criteria. This classification will determine the accounting treatment for each lease and ensure compliance with the new standards.
 

4. Calculate Lease Liabilities and Right-of-Use Assets

For each lease, your accounting software should automatically calculate the lease liability and right-of-use (ROU) asset. The lease liability represents the present value of the future lease payments, while the ROU asset represents the lessee's right to use the leased asset over the lease term. These calculations will form the basis for your lease accounting entries.
 

5. Record Lease Accounting Entries

Using the calculated lease liabilities and ROU assets, your accounting software should automate the recording of lease accounting entries. This includes recognizing the lease liability and ROU asset at the commencement of the lease, amortizing the ROU asset over the lease term, and recognizing interest expense on the lease liability.
 

6. Manage Lease Modifications

Lease modifications, such as changes in the lease term or lease payments, can impact your lease accounting. Use your accounting software to track and manage lease modifications, ensuring that your lease accounting remains accurate and up-to-date.
 

7. Monitor Lease Performance

Accounting software can provide valuable insights into the performance of your leased assets. Use the software's reporting capabilities to monitor key lease metrics, such as lease expense, remaining lease term, and lease liability balances. This information can help you make informed decisions regarding your leased assets and lease management strategy.
 

8. Prepare Lease Disclosures

Under the new lease accounting standards, organizations are required to provide enhanced lease disclosures in their financial statements. Your accounting software should simplify this process by generating lease disclosure reports that comply with the applicable accounting standards.
 

Accounting software has become an essential tool for managing lease accounting, ensuring accuracy and compliance with the new accounting standards. By choosing the right software, setting up your leases, classifying leases, calculating lease liabilities and ROU assets, recording lease accounting entries, managing lease modifications, monitoring lease performance, and preparing lease disclosures, you can effectively manage your lease accounting and maintain compliance with the new standards. This will ultimately help your organization gain deeper insights into its leased assets and make informed decisions regarding its lease management strategy.