What is a Lease Accounting Subledger?
With the implementation of the new lease accounting standards, many companies are evaluating the need for a dedicated lease accounting subledger. Historically, companies have maintained subledgers for payroll, inventory, fixed assets, accounts payable, and accounts receivable amongst others. Subledgers, formally known as subsidiary ledgers, contain detailed transactions from certain accounts. Companies consolidate the transactions from various subledgers across the business and load them into a general ledger (GL) which is used to produce quarterly or annual financial statements.
For example, accounts receivable subledgers enable a company to isolate and track a specific customer’s purchase, payment, and/or return activity at a level of granularity not possible in the respective GL account. Similarly, while a company’s accounts payable GL account will show the total balance owed to its suppliers, the subledger accounts will show the balance owed to each supplier, as well as the activity supporting each of those balances.
Subledgers are useful for completing several accounting processes. Companies often use them when preparing a trial balance – the workbook where the debits and credits from all GLs are checked for accuracy. In the account reconciliation process, GL accounts are reconciled with their respective subledger accounts to help ensure the accuracy and completeness of each book. Auditors also use subledgers to validate a company’s financial statements. They trace transactions from the subledgers to their corresponding GL accounts, which ultimately leads to the financial statements.
Traditionally, most companies have not maintained a formal lease accounting subledger. However, with right-of-use assets and liabilities moving on-balance sheet, most companies with a leasing portfolio of $50 million or greater will invest in a lease accounting software application that includes a formal subledger.
The ASC 842 and IFRS 16 standards require lease accounting to be completed at the asset level. As a result, lease accounting subledgers will need to track not only what happens to the lease, but also what happens to each individual asset on the lease in order to accurately complete the accounting processes described above. A true lease accounting subledger should be able to store complete journal entries, including commencement date, expense recognition, principal reduction, and both short- and long-term reclassifications. Those journal entries can then be aggregated to the schedule (or portfolio) level and transferred to the lease accounting GL.