Incorrect Accounting of Interest Accretion for Guaranteed Residual Value (GRV) Liability - Support Advisory
Issue
Incorrect accounting of interest accretion for Guaranteed Residual Value (GRV) Liability.
When could the issue manifest?
When an on-balance sheet operating lease under ASC 842 (aka Capitalized-Operating lease) includes an estimated obligation to the Lessor towards Guaranteed Residual Value at end of term. This occurs when a shortfall is expected between the net realizable value for the underlying asset at the end of the lease, and the amount guaranteed by the Lessee.
How does the issue manifest?
The monthly accretion of interest for GRV liability incorrectly debits "Accumulated depreciation – Operating Lease" when it should be debiting "Lease Rental Expense". This results in the Accumulated depreciation – Operating Lease balance as well as the Lease Rental Expense to be understated.
Recommended Solution
As part of the fiscal close process, identify leases with GRV liability by reviewing one of the accounting reports that reflect account balances (example: Portfolio Trial Balance).
Review the journal entries for the fiscal period, for the lease schedules that have GRV liability balances, to verify if the leases are impacted by the issue described above.
Record a manual journal entry to debit Lease Rental Expense and credit Accumulated depreciation – Operating Lease to correct the error.
When we deploy a code update to fix the above issue in a future release, if any of the impacted lease schedules are still active within that fiscal year, the manual entries for that fiscal year would need to be reversed, because the code update would generate correcting entries. Alternatively, the relevant adjusting entries for prior periods could be intercepted and be prevented from being posted.