Recording and Accounting for Leases through Oracle EBS R12
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Recording and Accounting for Leases through Oracle EBS R12

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a white papers demonstrates the handling of operating and capital leases through Oracle Payables and Assets

a white papers demonstrates the handling of operating and capital leases through Oracle Payables and Assets

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Recording and Accounting for Leases through Oracle EBS R12 Recording and Accounting for Leases through Oracle EBS R12 Document Transcript

  • Case Study: Recording and Accounting for Leases through Oracle EBS R12 Author: Mohamed Nazih Oracle Financials Senior Consultant Olympic Group, Egypt m.nazih@gmail.comCase Study Abstract 1Case Study Details 1 Entering Lease Payments 2 Determine Lease Type 3 Operating Lease - Lessee’s journal 5 Issuing Operating Lease Payment 6 Capital Lease - Lessee’s journal 8 Recording Liability for Capital Lease 9 Recording Payments for Capital Lease 12 Alternative Solution 13Case Study Abstract This case study intends to provide a solution to record and account for leased assets in lessee records for operating and capital leases. Although title of ownership does not pass to lessee in capital lease, lessee is required to record leased assets and their depreciation.Case Study Details A lease is defined as a contractual agreement between a lessor and lessee that gives the lessee the right to use specific property, either owned by or in the possession of the lessor, for a specified period of time in return for stipulated, and generally periodic, cash payment. Assume that a company entered in a contract to lease two assets. Consecutively, you have to determine whether this lease is capital or operating. This can be processed as follows:
  • Recording and Accounting for Leases through Oracle EBS R12Entering Lease Payments Oracle Assets Responsibility (N) Setup> Asset System> Leases> Lease Payments Figure 1 Record the payment schedule of lease (as per lease contract) Figure 2 Page 2 of 13
  • Recording and Accounting for Leases through Oracle EBS R12 Press (B) Calculate to get present value of lease payments Figure 3Determine Lease Type Oracle Assets Responsibility (N) Setup> Asset System> Leases> Lease Details Enter Lease Details Figure 4 Page 3 of 13
  • Recording and Accounting for Leases through Oracle EBS R12 A lease will be considered a capital lease if any of the following criteria is met: 1. ownership of the asset transfers to the lessee at the end of the lease 2. A bargain purchase option exists 3. term of the lease is more than 75% of the economic life of the leased asset 4. present value of the minimum lease payments exceeds 90% of the fair market value of the asset at lease inception Figure 5 Neither entering lease payments nor determining Lease type creates journals. Page 4 of 13
  • Recording and Accounting for Leases through Oracle EBS R12Operating Lease - Lessee’s journal Operating Lease expense has to be recognized on a straight-line basis over the life of the lease; with a deferred liability that accounts for the difference between cash paid and accrued expense. Example, operating lease for 5 years, the first 3 years, the lease is EGP 10,000 per month; the last two years, the lease increases to $12,000 per month. Total Lease payments = EGP 648000 over 60 months (= EGP 10800) Monthly JE for the first three years # Account Amount 1 Dr. Operating Lease Expense 10800 2 Cr. Deferred Liability 800 3 Cr. Cash 10000 Monthly JE for the last two years # Account Amount 1 Dr. Operating Lease Expense 10800 2 Dr. Deferred Liability 1200 3 Cr. Cash 12000 In R12 Oracle EBS; 1- Payables: Issue payment by amount of cash 2- GL: Create a JE to adjust Operating Lease Expense by amount of deferred liability Page 5 of 13
  • Recording and Accounting for Leases through Oracle EBS R12Issuing Operating Lease Payment Oracle Assets Responsibility (N) Setup> Asset System> Leases> Lease Payments to Payables Query lease number Figure 6 Figure 7 Select the payment you want to process and press (B) Export Oracle Assets submit “Export Lease Payments to Payables” request Page 6 of 13
  • Recording and Accounting for Leases through Oracle EBS R12 Figure 8 From Payables Responsibility, run “Payables Open Interface Import” Figure 9 Figure 10 Page 7 of 13
  • Recording and Accounting for Leases through Oracle EBS R12Figure 11Notes: 1- Distribution account is the Payment account entered in Lease Details 2- Amount line is adjusted to consider calculated sales taxCapital Lease - Lessee’s journal Production line will cost EGP4, 000,000.00 to purchase new, lessor can lease it for 8. Lease price is 5,000, 000 paid over 8 installments. Financing this lease by a loan will cost lessee 10% interest. If production line had been bought, it would be depreciated over 10 years. According to these terms, the lease is capitalized based on the realization of third condition (term of the lease [8 years] is more than 75% of the economic life of the leased asset [10 years]) JE at initiation of lease agreement # Account Amount 1 Dr. Leased Assets 5, 000, 000 2 Cr. Lease Liability 5, 000, 000 JE for payment # Account Amount 1 Dr. Lease Liability 5, 000, 000 2 Cr. Bills Payables - Current 1, 000, 000 3 Cr. Bills Payables – Long-Term 4, 000, 000 Page 8 of 13
  • Recording and Accounting for Leases through Oracle EBS R12 JE for payment # Account Amount 1 Dr. Depreciation Expense 625, 000 2 Cr. Accumulated Depreciation 625, 000Recording Liability for Capital Lease Oracle Payables Responsibility (N) Setup> Invoice> Payments Terms [Optional] For a capital lease, if contract states that lessor receives Bills Payables for the entire lease payment. You may want to define payment terms to reflect payment schedule stated in contract. Figure 12 Page 9 of 13
  • Recording and Accounting for Leases through Oracle EBS R12 (N) Invoices> Entry> InvoicesFigure 13 Note: Distribution account is Asset Clearing accountFigure 14 Validate and Create Accounting for the invoice # Account Amount 1 Dr. Asset Clearing 5, 000, 000 2 Cr. Lease Liability 5, 000, 000 Run Mass addition Create Page 10 of 13
  • Recording and Accounting for Leases through Oracle EBS R12 Oracle Assets Responsibility (N) Mass Additions> Prepare Mass Additions Enter leased asset informationFigure 15 # Account Amount 1 Dr. Leased Assets 5, 000, 000 2 Cr. Asset Clearing 5, 000, 000 Page 11 of 13
  • Recording and Accounting for Leases through Oracle EBS R12Recording Payments for Capital Lease Oracle Payables Responsibility (N) Payments> Entry> PaymentsFigure 16 # Account Amount 1 Dr. Lease Liability 5, 000, 000 2 Cr. Bills Payables 5, 000, 000 At maturity date # Account Amount 1 Dr. Bills Payables 625, 000 2 Cr. Cash Clearing 625, 000 After clearing negotiated check # Account Amount 1 Dr. Cash Clearing 625, 000 2 Cr. Bank 625, 000 Page 12 of 13
  • Recording and Accounting for Leases through Oracle EBS R12Alternative Solution GL Responsibility: Manual Journal # Account Amount 1 Dr. Assets Clearing 5, 000, 000 2 Cr. Lease Liability 5, 000, 000 Assets Responsibility: 1- Manual Addition # Account Amount 1 Dr. Leased Asset 5, 000, 000 2 Cr. Assets Clearing 5, 000, 000 2- Export Payment to Payables # Account Amount 1 Dr. Lease Liability 625, 000 2 Cr. Supplier Liability 625, 000 Page 13 of 13