Theory and Practice
After commencement, in typical textbook examples, lessees record lease payments differently depending on the framework. The major limitation of these methods is that they assume lease payments occur on the Balance Sheet Reporting date.
Under IFRS, UK GAAP and, for finance leases under US GAAP, payments are each allocated between interest and principal. US GAAP for operating leases, meanwhile, record a single lease expense (typically straight-line) without separate interest – achieving a level expense over the lease term. This level expense does not necessarily equate to the payment amount. It is level across the life of the lease. Therefore, if anticipated payments fluctuate or have escalators in them, the calculated lease expense will differ from the cash amount paid.
Considering that payment dates for lease payments do not always occur at period end, and the real-time nature of modern accounting systems, for all of the above scenarios, a more practical treatment is to see the payment as a payment against the lease liability and, considering the timing of payments, terminations, revaluations and other affecting transactions, calculate the interest and depreciation expense for IFRS, UK GAAP and finance leases under US GAAP; and lease expense for operating leases under US GAAP, backwards at the end of each reporting period.
In modern accounting systems, payments are not recorded directly in the General Ledger. An Accounts Payable or Treasury clerk will pay an invoice or code a direct debit that occurred on a bank account, which will in some way of form result in a credit to Cash and a debit to an account of their choosing in the General Ledger. Teaching someone who probably has little insight into lease accounting standards to code the rent bill to a Lease Liability account instead of a Rent Expense account is already challenging. Many accountants let clerks continue to post it to Rent Expense and, either reclass it periodically, or if management is not interested in seeing the effects of carrying the leases on Balance Sheet in their management reporting, use a separate accrual account to contra the Rent expense with the Lease Liability for statutory reporting purposes.
Many examples of payments being shown in theoretical examples, split payments between capital and interest payments. Point is, performing determinations on how much of a payment was interest versus capital, or, in the case of US GAAP, applying different rules depending on whether a lease is an operating or finance lease, is not practical when lease payments occur, like they do, amongst thousands or millions of expense payments.
Therefore, in Sage Intacct Lease Accounting, a more practical approach is followed: At the time of payment, only record a reduction in lease liability, and at period ends, look backwards and determine how much interest and depreciation should be expensed for a period.