Fixed Asset Management and Lease Accounting
Synchronizing Depreciation Expenses and Right of Use Asset Inventories
Many companies will want to synchronize their fixed asset management and lease accounting systems. Ideally, the fixed asset systems should be tracking all plant, property, and equipment, including leased right-of-use assets. Maintaining an accurate inventory of leased real estate and equipment in the fixed asset system is critical for calculating the depreciation used in financial reporting and property tax calculations. Additionally, an accurate inventory of all assets is required to secure proper insurance coverage for leased real estate and equipment.
At a regular frequency, the fixed asset system should be updated with a list of all the real estate, vehicles, computers, airplanes, rail cars, marine vessels, material handling, and other types of equipment being leased across the enterprise. There are two primary approaches to keep the fixed asset management and lease accounting systems synchronized:
- Changes Only – The first approach is to publish only the changes to the lease portfolio on a daily, weekly, or monthly basis. As new leases are signed, they are published with supporting details to the fixed asset system. Similarly, as assets under existing leases are renewed, terminated, or purchased, the changes are published to the fixed asset system.
- Periodic Reconciliation – A second approach is to perform a periodic reconciliation between the two applications. On a weekly or monthly basis, the entire list of leased assets are published to the fixed asset system for matching and comparison. Assets in the lease accounting system that are not found in the fixed asset system are assumed to be new. Assets removed from the lease accounting system are assumed to have come off lease. Assets that match between systems, but have data discrepancies, need to be researched and updated manually.
There may also be a need to publish the monthly depreciation expenses for each leased asset from the lease accounting system to the fixed asset system. Best practice is to calculate depreciation for right-of-use assets in a true lease accounting subledger. On a periodic basis, the depreciation amounts will be published to the fixed asset system and then applied to accumulated depreciation to accurately reflect net book value. In this model, accounting organizations must classify leased assets as non-depreciable to avoid duplicate charges.
Not all lease accounting applications have a true subledger. Instead, some lease accounting systems depend upon the fixed asset management system to manage the depreciation calculations. In these scenarios, a complex process of aggregating data across multiple systems is required to generate the journal entries needed for each monthly close.