Operating and Finance Lease functionality in nettTracker

There are a few subtle differences between a finance and operating lease that can make quite a big difference in how they should be accounted for.

The biggest difference between the two lease types is that, with an operating lease, it’s the lessor that retains full control of the asset concerned.  However, whether you are following accounting standards FRS102, IFRS16, or ASC842, most leases (both operating and finance) need to be recognised as both a lease liability with a connected Right of Use Asset on the balance sheet.

Depending on the accounting standards followed, operating leases can be treated the same way as a finance lease when it comes to the accounting entries required.  In essence, this means the profit and loss reports interest and depreciation.  The Right of Use (ROU) Asset is depreciated on a straight-line basis, and interest charged for the lease, which will reduce as the lease liability reduces.

However, if we are strictly following the accounting requirements for an operating lease, the ‘Lease Expense’ needs to be reflected on a straight-line basis.  The lease expense is a combination of interest on the lease and the depreciation of the ROU asset, making the asset depreciation the difference between the straight-line lease cost and the reducing interest on the lease.

nettTracker can now fully account for both finance and operating leases, ensuring the correct values are calculated and the appropriate accounting entries made, regardless of the accounting standard you are adhering to.  If you select Operating Lease when creating your lease, the ROU asset that is also created will have a bespoke depreciation schedule that reflects the reducing interest charge over time.

Adding an existing item - what is the current asset value?

If you are introducing existing leases into nettTracker, it is quite possible that you won’t know the value of an asset being leased at the date point you need nettTracker to start calculating.  This is most common with operating leases, however, nettTracker now has some additional functionality to help calculate the Right of Use Asset Value and Lease liability. 

We now offer the option to use an effective borrowing rate instead of the asset valuation when entering the new lease.  The Effective Borrowing rate can be an estimated interest rate that a bank or lender may charge if a loan was required to cover the lease payments moving forward.

This short video explains the different settings and the impacts on your reports.

How do I get access to the Loans & Leases features?

Don’t forget that the loans/lease features are included within your nettTracker subscription at no additional cost on companies that have been upgraded to Version 2.  If your company hasn’t been upgraded yet and you want to get your hands on these new tools, please contact our support team. 

These recent updates are a result of customer feedback and support questions. We look forward to receiving more feedback to help us improve nettTracker further.