recording and accounting for leases through oracle ebs r12

Case Study: Recording and Accounting for Leases through Oracle EBS R12

Author: Mohamed Nazih Oracle Financials Senior Consultant Olympic Group, Egypt [email protected]

Case Study Abstract 1

Case 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 13

Case 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 R12

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Entering 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


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Press (B) Calculate to get present value of lease payments

Figure 3

Determine Lease Type


(N) Setup> Asset System> Leases> Lease Details

Enter Lease Details

Figure 4


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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.


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Operating 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


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Issuing Operating Lease Payment


(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


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Figure 8

From Payables Responsibility, run “Payables Open Interface Import”

Figure 9

Figure 10


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Figure 11

Notes:

1- Distribution account is the Payment account entered in Lease Details

2- Amount line is adjusted to consider calculated sales tax

Capital 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


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JE for payment # Account Amount 1 Dr. Depreciation Expense 625, 000 2 Cr. Accumulated Depreciation 625, 000

Recording 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


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(N) Invoices> Entry> Invoices

Figure 13

Note: Distribution account is Asset Clearing account

Figure 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


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(N) Mass Additions> Prepare Mass Additions

Enter leased asset information

Figure 15

# Account Amount 1 Dr. Leased Assets 5, 000, 000 2 Cr. Asset Clearing 5, 000, 000


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Recording Payments for Capital Lease

Oracle Payables Responsibility

(N) Payments> Entry> Payments

Figure 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


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Alternative 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

recording and accounting for leases through oracle ebs r12

Business

oracle ebs r12

oracle assets responsibility

oracle payables responsibility

asset system

entering lease payments

assets clearing 5

asset clearing 5

leased assets 5