🔶 Overview

IFRS 16 is an international accounting standard that regulates the accounting treatment of leases and has been applicable since January 1, 2019. Its application requires that leases be recognized through a right-of-use asset and a lease liability, which means that the lease is treated similarly to the purchase of an asset financed through borrowing.

The NPS enhancement for IFRS 16 simplifies the creation and tracking of contracts, schedules, and fixed assets in accordance with the standard. This guide introduces the functionalities provided by the enhancement, including:

• Creating a contract as the main carrier of the schedule by monthly installments, with a clear distinction between principal and interest,

• Calculating the present value of the schedule for the fixed asset,

• Creating a fixed asset directly from the contract, with a clear indication that the asset is linked to a specific IFRS 16 contract,

• Automatic posting and reversal of monthly schedules,

• Changing the interest rate after a certain period and generating a new version of the schedule for the same contract,

• Summary and periodic statistics displaying paid liabilities (long-term and short-term), interest, and lease expenses based on the schedule.

🔶 IFRS16 Setup

The first step in the setup process is to create No. Series on the Number Series page. It is necessary to define separate number series for IFRS 16 contracts and for IFRS 16 fixed assets (i.e., fixed assets that will be linked to IFRS 16 contracts).

After that, it is necessary to create a depreciation book for the fixed assets covered by the IFRS 16 standard.

After creating the number series, continue with the setup by searching for IFRS16 Setup.

The setup page will open.

1. On the General tab, enter the number series for contracts.

2. On the Fixed Asset tab, enter the number series for the fixed asset, the depreciation book, and the posting groups for fixed assets. All entered data will be automatically transferred to the card of the fixed asset created for IFRS 16.

3. On the Short-Term Liabilities tab, fill in the fields related to the schedule lines. Based on this data, the schedule will always clearly separate short-term and long-term liabilities, with a 12-month period defined for short-term liabilities.

🔹 FA Posting Groups

On the Fixed Asset Posting Group page, it is necessary to define the following fields:

• Acquisition Cost Account

• Accum. Depreciation Account

• Depreciation Expense Acc.

• IFRS16 Long Term Liabilities

• IFRS16 Short Term Liabilities

• IFRS16 Interim Credit Account

• IFRS16 Interest Expense

🔹 Versions and Status of the Schedule

A single contract can have multiple schedules. The schedule number consists of the contract number plus the schedule number (sequentially 01, 02, 03). The image shows a single contract with two schedules and multiple versions.

The version number of a schedule is automatically increased each time a new version of the schedule is created (e.g., if the leasing provider issues a new schedule for the same contract due to a change in price or contract terms).
For the same contract, there can be multiple schedules, and each schedule can have multiple versions (Version 1, 2, 3, 4, 5, etc., depending on the number of changes to the schedule for the same contract).

The version number also tracks the status of the version. Each version can have its own status.

The status of a schedule version can be:

• New – the initial status, before the schedule is confirmed.

• Active – after the schedule is confirmed, it receives the status Active. At this point, the contract itself also automatically changes to Active.

• Old – assigned to an existing version when a new version of the schedule is automatically created due to a change in price (the old schedule becomes Old, and the new version is New until it is confirmed and becomes Active).

• Closed – automatically assigned when the last installment in the schedule is posted/paid.

The contract status and the schedule version status are interconnected and automated:

• A schedule in New status changes to Active, and the associated contract automatically changes from Pre-contract to Active.

• When the last installment is posted, the schedule changes from Active to Closed, and the contract automatically changes from Active to Closed.

Deleting an active schedule is not allowed. You can only delete a schedule that is in the New status.

Deleting a contract is not possible when the contract is active. Deletion is only allowed when the contract is in Pre-contract status.

🔶 IFRS16 Contract

Enter IFRS16 Contracts in the search.

The IFRS 16 Contracts list will open. On this page, click the New action to create a new contract.

On the General tab of the contract, the following fields are filled in:

1. Contract Number – transferred from the number series.

2. Contract Status – can be Pre-contract, Active, or Closed.

• Pre-contract – the status of the contract before the schedule on the contract lines is confirmed.

• Active – the status after schedule is confirmed and all due installments are posted.

• Closed – automatically assigned when the last installment is posted.

3. Contract Date – enter the date the contract was signed with the leasing provider.

4. Contract Description – enter a short description of the contract.

5. External Contract No. – enter the contract number provided by the leasing provider.

6. Vendor No.– enter the code of the vendor with whom the contract was concluded.

7. Vendor Name – this field is not editable; it is automatically populated based on the entered vendor code.

8. Currency Code – a mandatory field, marked with an asterisk. After entering the currency, the contract lines become available, which consist of the schedules.

9. Contract Notes – a free text field for entering additional information if needed.

After entering the currency, the IFRS16 Schedule tab will become available. Then, click the New action, as shown in the image below.

By clicking New, the message will appear Do you want to create a new schedule for the selected contract?

Clicking Yes opens the schedule for the given contract.

The Schedule page opens, where certain fields cannot be edited. These fields are Contract Number, Contract Date, Schedule Number, Version Number, Version Status, Vendor Number, Vendor Name, and Currency Code. Mandatory fields are marked with an asterisk.

🔹 General tab of the schedule

Fields marked with an asterisk are mandatory. These are: Installment Amount including VAT, Fixed Interest Rate, Lease Starting Period and Number of Payments. By entering the number of installments, the system will automatically calculate and fill in the contract end date.

The Lease Starting Date of the schedule can be in the middle or at the end of the month. In this case, even if the contract has, for example, 36 installments, the schedule will have 37 periods, because the first and last installments are calculated proportionally and together makeup one full installment.

🔹 Schedule Line

After filling in the required fields (Installment Amount including VAT, Fixed Interest Rate, Lease Starting Period, and Number of Payments), the system will automatically create the schedule lines. The General tab of the plan displays the Present Value (PV).

In the schedule lines, the following will be displayed: line number, period start date and period end date, principal amount, interest amount, monthly payment, as well as the closing balance. On line 1 of the Schedule, in addition to the calculated values, the present value is also displayed, which is the value of the fixed asset.

🔹 Exclude Interest First Payment

Exclude Interest from the First Payment is an option located on the General tab within the Schedule. When this option is enabled, the interest will not be calculated or displayed in the first installment during the schedule calculation. This is useful in situations where the schedule requires the first installment to include only the principal amount without any interest.

🔹 Creating a Fixed Asset from the Schedule

After entering all the required data, it is necessary to create the fixed asset, which is generated directly from the General tab of the Schedule. This is done by clicking the three dots next to the Fixed Asset No. field.

The fixed asset will be created according to the number series defined on the IFRS16 Setup page, along with the Depreciation Book Code and the FA Posting Group, which are also configured on the same page. The acquisition cost will not be displayed on the fixed asset until the Schedule is confirmed.

🔹 Confirming Schedule

Once you have verified that the schedule amount matches the plan provided by the leasing vendor, you can confirm the schedule by using the Confirm function.

After confirming the schedule:

1. The contract status changes from Pre-contract to Active.

2. The schedule version status changes from New to Active.

Contract image – Contract status ACTIVE.

Schedule image – Version status ACTIVE.

After confirming the schedule:

1. All fields on the schedule will be locked (they cannot be changed).

2. The General tab of the schedule displays the short-term and long-term liabilities.

Schedule image – General tab after confirming the contract (short-term and long-term liabilities).

3. The acquisition cost of the fixed asset will be automatically recorded on the fixed asset.

Fixed asset card image – after confirming the contract.

4. The Liability Term Type field on the schedule lines will be filled in with the values Short-term and Long-term.

Schedule lines image – short-term and long-term liabilities.

5. The Accruals Posted checkbox will be marked on the schedule lines.

Schedule lines image – Accruals Posted.

General Ledger entries after confirming the schedule - After confirming the schedule, the system automatically posts the acquisition cost of the fixed asset, as well as the short-term and long-term liabilities according. For each period, a separate posting line is created with a unique General Ledger Entry No.. Vendor entry numbers are important, as they are used later when posting due installments and closing liabilities.

🔶 Accruals Posted - schedule

To post a monthly installment of the schedule, use the Accruals Posted action on the schedule lines. Select the line you want to post and then run the action.

After posting the selected line on the schedule, the Accruals Posted field for that installment will be automatically marked. Additionally, the system will automatically transfer the first long-term installment to short-term liability, so that at any time the schedule shows 12 short-term installments in accordance with accounting rules.

*For example, if you have posted the first installment on the schedule, the system will automatically reclassify the 13th installment (which was previously long-term) as short-term.

Schedule image (from Business Central Excel) after posting the first installment, showing the transfer of an installment from long-term to short-term liability and displaying 12 short-term installments.

The system does not allow skipping the posting of installments on schedule. Installations must be posted in the order they are defined; otherwise, an error will be displayed.

Error message image.

In the General Ledger entries, we can see:

1. That one installment has been posted, including the principal amount, lease cost, and interest cost.

2. That the liability has been transferred from a long-term installment to a short-term installment.

3. That exchange rate differences are included in the posting of the installment.

🔶 Reverse Posted Accruals

Business Central does not allow reversing an arbitrary installment. If the last posted installment was number 7, the reversal must start from it. It is not possible, for example, to reverse installment number 4, because installments 5, 6, and 7 have already been posted. If you attempt to reverse an installment out of order, the system will display an error.

Reversing an installment is initiated using the Reverse Posted Accruals action. You need to select the line you want to reverse and then run the action. A prompt will appear: Do you want to reverse Posted Accruals for contract UGIFRS0-044, schedule UGIFRS0-044-03, period 7?

On the schedule, for the line that has been reversed, the Accruals Posted checkbox will be unmarked.

In the General Ledger entries, Business Central automatically performs two actions:

1. It reverses the related entries (because they were previously closed) and reverses the exchange rate differences that occurred when posting the installment from the schedule.

2. It creates a reversal journal and automatically posts it.

We can see that the installation has been reversed (principal, interest, and lease cost), as well as the reclassification from long-term to short-term liability. In this way, the last short-term installment is automatically returned to long-term on the schedule and in the Vendor Ledger Entries. General Ledger entries image – posting reversal of the monthly installment:

1. Reversal of the installment and the long-term to short-term reclassification

2. Reversal of exchange rate differences

The journal created by the reversal has the letter “S” prefixed to the contract number, as shown in the Document No. field. This makes it clear that the journal was generated because of reversing an installment.

🔶 Create New Schedule Version

If the contract terms have changed, requiring a modification (e.g., a change in price or interest rate), this is done using the Create New Schedule Version action on the existing contract.

You will be prompted: Do you want to deactivate schedule UGIFRS0… version 1 and create a new schedule with version 2?

The action allows you to:

1. Create a new schedule.

2. Enter the new modifications (price and interest rate) on the new schedule.

3. The contract itself will display two versions of the schedule (version 1, 2, 3, 4… depending on how many changes have been made to a single schedule).

4. Each schedule has its own status.

A schedule that was previously in Active status is now in Old status. The Old status indicates that the contract terms have been changed, and no modifications can be made to that schedule. If you attempt to reverse or post any installment from a schedule in Old status, the system will display an error.

The newly created schedule is initially in New status. Enter the updated contract terms on this schedule, and once it is confirmed, its status will change to Active.

On a new payment schedule, the fixed assets, number of payments, and the start and end periods are locked and cannot be changed. Only a new price and new interest rate can be entered, as these are editable fields. After entry, the system will validate the rows of the schedule.

After making changes, it is necessary to confirm the schedule using the Confirm action so that the Liability Term Type (long-term and short-term) is assigned to the schedule rows and the price change posting is triggered.

New schedule header image.

By using the Confirm action, the entries are posted, and the system will:

1. Reverse the entries from the old repayment plan.

2. Post new entries according to the new repayment plan.

3. The difference between the old and new repayment plan represents the amount of the fixed asset, which will be additionally posted to the existing fixed asset.

4. Document number – The prefix DE (DE-UGIFRS0-052-01-2) before the contract number indicates that a deactivation has been posted and the price on the repayment plan has been changed.

After confirmation, in addition to the generated entries and the maturity of liabilities, the status of the repayment plan is changed to Active. We can see that version 1 is in Old status, while version 2 is in Active status.

After confirming, it is possible to proceed with posting individual installments, as well as posting subsequent changes to the contract terms, if needed.

🔶 Schedule Statistics

Statistics can also be accessed from both the Contract page and the Schedule page by running the Statistics action.

Image: IFRS16 Contract

The Statistics page provides an overview of all posted general ledger entries and additionally displays summary information, such as open entries and the amounts of long-term and short-term liabilities that have already been posted.

On the General tab, you can find the basic information, such as the Contract number, Schedule number, Version number, and Present Value (PV).

On the Repayment Schedule History Review tab, there are linked fields that allow you to view all posted entries. Clicking on a linked field opens the related general ledger entries and vendor ledger entries.

The General Ledger Entries on the Schedule show all entries that have been posted according to the Schedule.

🔶 Depreciation of Fixed Asset

Depreciation is performed in the standard way by running the Calculate Depreciation action. When it comes to a fixed asset related to IFRS 16, you can trigger this action directly from the fixed asset card or through the search by entering Calculate Depreciation.