Lease Accounting Scenario

Question

Dear:
            We have Lease accounting for assets configured in Organization Now the leasing process has changed. Management now receives funds from bank for the value of asset being purchased i-e finance lease. AS-IS process (currently running ) and TO-BE (what we want ) are given
Where lessor don't transfer funds for car in which accounting entries are as follows
AS-IS Process
At inception:
Security deposit               Dr.
                                Bank                      Cr.
Leased Asset                     Dr.
                                Lease Liability    Cr.
Monthly installment:
Lease Liability                    Dr.
Lease interest                   Dr.
                                Bank                      Cr.
TO-BE Process
·         We want this to be used Where lessor transfer funds for car. Please advice on the feasibility of automating this process in lease asset module. Specially the first entry is confusing. How will we cater it in AA module or passing a manual JV will be a solution. Please guide.
At inception:
Bank                                      Dr.
Security deposit               Dr.
                                Lease Liability                    Cr.
Monthly installment:
Lease Liability                    Dr.
Lease interest                   Dr.
                                Bank                      Cr.
Regards
Edited by: Atif Farooq on Jul 23, 2011 10:00 AM

Answer 1

Just a few question to clarify your scenario.
Your organization acquired the cars from the car dealership or manufacturer?
Your organization is the (lessor), and there are customers (lessees) who lease your cars?
When customers make payments, your bank receives the money and gives it to your organization?
If these 3 questions all have answer of Yes, then you have to decide what accounting rules you wish to follow.  US GAAP, IFRS, something else.  The reason must decide on accounting rules is because leasing rules are changing, and early adoption of the new rules may already be in place in your firm.
To get SAP advice, you have to be able to say whether or not this is a capital financing lease or is an operational lease.
If it is a capital financing lease (for your customer/buyer) then in the substance of the actual transaction you have already sold the car according to US GAAP existing rules.  You do not have a capital asset (car) in your AA sub-ledger any longer.  Instead you have a long-term lease receivable for the present value of all future payments to arrive.  The current year portion of the amount will be classified as current year.  As payments come in, you reduce the current receivable by the previously recorded present value amount, and you credit imputed effective interest income for the difference to balance your entry with cash.
But if the leases are operational leases, then you will depreciate the cars while you receive lease and imputed effective interest revenue.  You will get the cars back with more than just small residual value left.