Streamline lease accounting compliance (ASC 842, IFRS 16) and eliminate manual errors with NetLease's integrated NetSuite solution.
Lease accounting is one of those areas where the standard is conceptually straightforward and the ongoing arithmetic is not. Recognising a right of use asset and a lease liability is a sentence. Maintaining them correctly across dozens of leases, through modifications, indexation, extensions and terminations, for years, is a job.
Most businesses handle it in a spreadsheet, and most of those spreadsheets are more fragile than their owners would like to admit.
NetLease is a lease accounting application built by Netgain that runs inside NetSuite as a SuiteApp. This article covers what problem it solves, how the native architecture differs from the alternatives, and how to judge whether it is worth the investment for your business.
AASB 16, and its international equivalent IFRS 16, removed the operating and finance lease distinction for lessees. Almost every lease now goes on the balance sheet.
At commencement you recognise a right of use asset and a lease liability, both measured at the present value of the lease payments, using the rate implicit in the lease where determinable and the incremental borrowing rate otherwise.
Then the ongoing accounting diverges. The asset depreciates, typically straight line over the shorter of the lease term and the useful life. The liability unwinds using the effective interest method, so each payment splits between interest and principal in a proportion that changes every period.
That divergence is the source of most of the complexity. Two different schedules, on two different bases, for every lease, maintained for the full term.
The initial calculation is a present value and any competent accountant can do it. What breaks spreadsheets is what happens afterwards.
Leases change. A rent review moves the payments. An option is exercised or the term is extended. Space is added or given back. A CPI linked escalation applies. The lease is terminated early.
Each of these requires a remeasurement, and the treatment depends on the type of change. Some adjust the liability and the asset. Some go through profit or loss. Some are a modification treated as a new lease. Getting the classification wrong produces an error that persists for the remaining term.
In a spreadsheet, each remeasurement means rebuilding a schedule, and every rebuild is an opportunity to break a formula reference in a way nobody notices until an auditor asks a question about an amount that does not reconcile.
Worth being concrete, because the failure is rarely a single dramatic error.
Version control is the first problem. There is a current file, several older ones, and no reliable way to establish which numbers went into which period's accounts.
Formula fragility is the second. Inserted rows, dragged formulas and hardcoded values accumulate, and a workbook that was correct when built drifts as it is edited by people who did not build it.
Key person dependency is the third and usually the largest. One person understands the model. When they leave, the business owns a file it cannot fully explain.
Disconnection from the ledger is the fourth. The spreadsheet produces a journal that someone posts manually, so the balance sheet and the model are two separate assertions that agree because somebody checked, not because they are the same thing.
And audit effort is the consequence of all of it. Auditors test what they cannot rely on, and a spreadsheet cannot be relied on, so they test more.
NetLease runs inside NetSuite rather than alongside it, and the practical consequences follow from that.
Journals post directly to the general ledger from the lease records, so the schedules and the accounts are the same data rather than two versions of it. Reconciliation between them stops being a task.
The lease records carry the same dimensional coding as everything else, so lease cost by subsidiary, department, class or location is available in standard reporting.
Currency handling uses NetSuite's exchange rates and revaluation, which matters for any business with leases denominated in a currency other than its functional one.
And permissions, audit trail and approval workflow come from the platform rather than being reinvented, so who changed what and when is recorded by default.
The functional scope is worth setting out plainly.
It maintains a lease register with the terms, payments, options, discount rate and classification for each lease.
It calculates the initial measurement of the right of use asset and the lease liability, and produces the amortisation and interest schedules for the full term.
It generates the periodic journals automatically, covering depreciation, interest accretion and payment application.
It handles remeasurement events, applying the correct treatment based on the type of change, and rebuilds the forward schedules accordingly.
And it produces the disclosure information the standard requires, including maturity analysis and the movement reconciliations that otherwise have to be assembled by hand at year end.
Businesses evaluating lease software usually focus on the calculation and underestimate the disclosure requirement, which is where a substantial part of the annual effort actually sits.
The standard requires a maturity analysis of lease liabilities on an undiscounted basis, banded by period. Assembling that from a spreadsheet across many leases is a genuine exercise.
It requires a reconciliation of the movement in the right of use asset by class of underlying asset, showing additions, depreciation, remeasurements and disposals.
It requires the interest expense on lease liabilities, expenses relating to short term and low value leases, and the total cash outflow for leases.
Where the underlying data lives in a system that was designed for the standard, these are reports. Where it lives in a spreadsheet, they are a week of somebody's time every year, repeated.
Not every lease needs full treatment and the practical exemptions materially reduce the workload.
Short term leases, meaning those with a term of twelve months or less at commencement and no purchase option, can be expensed on a straight line basis if the election is made by class of underlying asset.
Low value assets can be similarly expensed, assessed on the value of the asset when new rather than its value to you, and applied lease by lease.
Using these properly requires a policy that is documented, applied consistently and disclosed, which is a small piece of work that saves a large one.
A capable system supports the election and keeps the expensed leases visible in the register rather than outside it, which matters because you still have to disclose them.
The discount rate has more effect on the reported numbers than almost any other input and it is frequently treated as an afterthought.
The standard requires the rate implicit in the lease where it can be readily determined, which for most lessees it cannot, because it depends on information the lessor holds.
The fallback is the incremental borrowing rate, meaning the rate you would pay to borrow, over a similar term, with similar security, to obtain an asset of similar value in a similar economic environment.
That is a judgement, and it should be documented. Auditors ask about it, and a business that cannot explain how its rate was derived has an uncomfortable conversation.
It also needs revisiting for remeasurements that require a revised rate, which is another place spreadsheet approaches quietly go wrong by continuing to use the original.
Whether a dedicated application is worth it depends on a few things that are easy to assess.
Lease count is the obvious one. A handful of leases is manageable in a spreadsheet by a competent person. Twenty or more starts to be a real maintenance burden, and fifty is beyond what a spreadsheet handles reliably.
Change frequency matters more than count. Ten leases that never change are easier than five that are constantly modified.
Entity and currency complexity multiplies everything, since consolidation and translation add layers a spreadsheet handles poorly.
And audit scrutiny is a factor. Businesses with a statutory audit, external investors or lender covenants carry a higher standard of evidence than those without.
The application is the smaller part of the work. Getting your lease data into a usable state is the larger part.
Expect to locate every lease agreement, which in most businesses is harder than it sounds because they sit with property, fleet, operations and finance separately.
Expect to abstract the key terms from each one, meaning commencement date, term, options, payments, escalation mechanism and any unusual provisions. This is the effort intensive step and it needs someone who can read a lease.
Expect to make and document policy decisions on discount rates, exemption elections and the treatment of options.
And expect to reconcile the opening position to whatever you currently have, which frequently surfaces differences that need explaining before you can go forward cleanly.
NetLease is one of several Netgain applications built natively for NetSuite, alongside tools covering fixed assets, loan accounting and period close.
The relevance is that lease accounting rarely sits alone. Businesses with a lease population usually also have a fixed asset register with its own depreciation, and possibly borrowings with their own effective interest calculations.
Where those run on the same platform with the same architecture, the month end process is one process rather than several, and the reconciliation between them is structural rather than manual.
Whether you need more than one is a separate question, and the general principle holds. Applications built inside the platform create less ongoing work than applications connected to it.
The case is usually made on three things and only one of them is time saved.
Time saved is real and measurable. Count the hours currently spent on lease schedules each period and at year end, and be honest about the year end number.
Error risk is the second and it is harder to quantify and usually larger. A material error in lease accounting is a restatement conversation, and the probability rises with lease count and change frequency.
Audit efficiency is the third. Auditors testing a controlled system with a reliable audit trail do less work than auditors testing a spreadsheet, and audit fees respond to that over time.
Key person risk sits underneath all three. A business whose lease accounting depends on one person's workbook has an exposure that no amount of care by that person removes.
The remeasurement question is the one worth pressing hardest, because it is where the accounting judgement lives and where a weak product will quietly leave the judgement with you.
The application removes the calculation work and it does not remove the need for a process.
Somebody has to know when a lease changes, which means a route from whoever negotiates leases to whoever accounts for them. In most businesses that route does not exist and changes are discovered later.
Somebody has to review the additions and remeasurements each period, since automation applies the treatment you selected rather than the treatment that is correct.
And the register needs a periodic completeness check against contracts, property records and the fleet list, because the risk with lease accounting is not usually a miscalculated lease, it is a lease nobody told finance about.
If your lease accounting currently lives in a spreadsheet and your lease population is more than trivial, the question is when rather than whether, and the answer is usually before the next audit rather than after it.
If your population is small and stable, a spreadsheet with proper controls and documentation is a defensible position, and the controls and documentation are the part that usually needs work.
Our pieces on the hidden costs of lease accounting errors and what lease data tells you beyond compliance take this further, and implementing lease accounting software for NetSuite covers the selection question in more detail.
If you would like help assessing your lease population and what it needs, get in touch.
