Lease Accounting

Department: Finance & Accounting Process Owner: Controller Last Updated: January 2026

1. Overview and Purpose

Objective: To define procedures for identifying leases, recording monthly lease asset and lease liability entries, and maintaining lease documentation. This SOP ensures compliance with applicable lease accounting guidance, accurate balance sheet presentation, and consistent expense recognition.

2. Scope

This SOP applies to all operating and finance leases entered into by the organization, including:

• Building / property leases
• Equipment leases
• Vehicle leases (if applicable)

It covers initial recognition, ongoing monthly accounting, amortization / interest components (if applicable), and reconciliation of lease balances. Lease-related disbursements are still processed through accounts payable or treasury SOPs.

3. Step-by-Step Process

3.1 Identify and Maintain Lease Inventory

• Maintain a Lease Register (Excel) listing all active leases in a centralized location
• For any new lease agreement:
  • Obtain final signed contract
  • Confirm lease start date, end date, payment schedule, escalation terms, and any incentives
  • Determine lease type (operating vs finance) per organizational policy
  • Consult with Controller or external accountant to determine appropriate classification based on lease terms and applicable accounting standards
  • Save executed agreements in the designated lease documentation repository
  • Quarterly: Controller reviews lease register with Program Leads / Operations to confirm all active leases are documented and no new leases were signed without being recorded

Reviewer / Back-up: Senior Accountant

3.2 Calculate Initial Lease Asset and Liability (New Leases Only)

• For newly identified leases:
  • Calculate present value of lease payments using approved discount rate
  • Use organization's incremental borrowing rate and if not readily determinable, consult with Controller or external advisors
  • Establish:
    • Right-of-Use (ROU) Asset
    • Lease Liability
  • Record initial entry in accounting system:
    • Debit: ROU Asset
    • Credit: Lease Liability
  • Attach calculation workbook and lease agreement to the journal entry or support documentation folder

Reviewer / Back-up: Controller

3.3 Record Monthly Lease Entries

• Each month, for each active lease:
  • Record monthly lease expense and liability reduction based on amortization schedule
  • Post journal entry in accounting system:
    • Debit: Lease Expense (or split between amortization + interest if finance lease)
    • Credit: Lease Liability (principal portion)
    • Credit: Accumulated Amortization – ROU Asset (if tracked separately)
  • Tie monthly payment amounts to bank / accounts payable disbursement records
  • Save journal entry support in designated month-end close folder

Reviewer / Back-up: Senior Accountant / Accounting Coordinator

3.4 Reconcile Lease Balances to Schedule

• At month-end:
  • Pull accounting system balances for:
    • ROU Asset account
    • Lease Liability account(s)
  • Compare to lease amortization schedule and register
  • Investigate variances (timing, payment changes, escalation clauses)
  • Update schedule for any known modifications

Reviewer / Back-up: Controller

3.5 Handle Lease Modifications or Terminations

• Program Leads / Operations notify Controller immediately when lease terms are being negotiated or changed
• If lease terms change (extension, payment increase, space changes):
  • Update lease register
  • Recalculate present value and revise amortization schedule
  • Post modification journal entry as needed
• If lease is terminated early:
  • Remove remaining ROU asset and liability
  • Record gain / loss if applicable
  • Save supporting documentation and approvals in designated repository

Reviewer / Back-up: Controller

4. Key Roles and Responsibilities

5. Key Files and Systems

• Lease Register (Excel) – Inventory of all leases and key terms
• Lease Amortization Schedules (Excel) – Present value calculations, monthly rollforward, interest / amortization
• Accounting System – ROU asset, lease liability, and expense entries
• Lease Documentation Repository – Lease contracts and calculation support
• Month-End Close Checklist – Includes lease journal entry and reconciliation tasks

6. Exceptions and Special Cases

• Short-Term Leases (<12 months): May be expensed straight-line without capitalization if organizational policy allows.
• Embedded Leases: If contracts include embedded lease components (e.g., equipment in service contracts), consult Controller for treatment.
• Variable / Usage-Based Payments: Record variable amounts to expense as incurred; do not include in present value unless required.
• Multiple Locations: If lease benefits multiple programs, allocate expense across classes per usage or other appropriate allocation method.

7. Risks and Controls Summary