Managing leases has undergone considerable change as commercial plans became more flexible and customised, with payment holidays introduced to prompt customer payments temporarily. Although billing and accounting for leases are already very sophisticated in modern Enterprise Resource Planning (ERP) solutions like Oracle Lease Management and SAP Leasing, a question still divides finance and tech folks: Should accrual schedules continue to be separate from billing, or should they be updated to conform to the new billing schedules during payment holidays? The key isn't to change accounting laws; it's to increase the power of the system to accommodate changing business requirements.
Typically, most leasing systems have two separate schedules. The billing schedule is when invoices are issued to customers, and the accrual schedule is when lease income or expense is recognised. Usually, these schedules stay in sync as there are no payment holidays in place and the invoicing and revenue recognition are on the same timeline. The problem comes when the payment holidays change the billing schedule while accruals are still being made based on the original accounting plan.
Accrual normalisation involves making billing schedules comparable to accrual schedules after a payment holiday. This should not be confused with abandoning accrual accounting or replacing it with cash-based accounting. Rather, it provides an operational perspective that reflects on the customer's billing without compromising on statutory accounting obligations. This idea acknowledges that finance departments need different reporting to comply with regulations and to run their businesses.
During times of economic instability, payment holidays have grown more frequent and are still given as a form of business dealings in various other trades. Customers will receive a temporary break from the payments, although the lease normally continues. As a result, the finance team is faced with a challenging decision. Should the revenue keep rolling in during the holiday period based on accounting principles, or should accrual stop while billing is adjusted, and start again? These are not mutually exclusive views, as both have merits, and it's more of an operational design question than an accounting problem.
{{/usCountry}}During times of economic instability, payment holidays have grown more frequent and are still given as a form of business dealings in various other trades. Customers will receive a temporary break from the payments, although the lease normally continues. As a result, the finance team is faced with a challenging decision. Should the revenue keep rolling in during the holiday period based on accounting principles, or should accrual stop while billing is adjusted, and start again? These are not mutually exclusive views, as both have merits, and it's more of an operational design question than an accounting problem.
{{/usCountry}}Most leasing companies continue to recognise revenue based on accounting standards, despite the deferral of customer billing. This method facilitates compliance with the requirements of financial reporting, and also promotes the economic substance of the lease rather than invoice timing. But many organisations also design manual reports, spreadsheets or customised ERP extensions to provide operational perspectives that are aligned to billing. The prevalence of this practice shows how common it is that most standard ERP systems are unable to meet the needs of everyday business operations.
Lease modifications, billing adjustments, deferral of payments and standard accrual accounting can all be supported by modern ERP solutions like SAP Leasing and Oracle Lease Management. They, however, typically do not offer out-of-the-box accrual schedule normalisation, which syncs the accrual schedules as per the revised billing schedules. Billing schedules can be changed with standard configuration, but in organisations looking for synchronised accruals, they may need to have custom development, user exits, extensions or external reports. Similar structures are in place at other leasing software, with most accounting compliance and some scope for flexibility in the reporting of accrual accounting.
This restriction is more apparent when there is a separation between billing and accrual schedules. Revenue reporting might not be reconciling with customer invoices as smoothly, meaning that finance teams will need to do extra reporting reconciliations at each reporting period. Internal balances can be different from invoice history, and customer service representatives may find it difficult to explain. It can get quite complicated to report on receivables, and portfolio managers lose sight of customer payment patterns. Auditors typically accept timing differences when properly documented, but maintaining such documentation adds complexity to operations.
Some say that accruals should only be made after billing since accounting should always take precedence. This position is correct for statutory financial reporting. Revenue recognition is about economic substance, not about payments received, and ERP systems should still serve that function. But the business users often need operational reports which are in sync with customer billing, collections, and servicing processes. If you are reconciling every difference you make with payments, then you are following the wrong process, and you should be working with a modern enterprise system that eliminates the need to continue to do this.
The solution is not to switch over to billing-based accounting instead of accrual accounting. Rather, ERP vendors must think about offering a standard option for accrual normalisation. Organisations can move to old accrual policies for statutory reporting, and, at the same time, create a billing-aligned accrual schedule for operational reporting, customer servicing, management analytics and reconciliation activities. This flexibility would enable finance departments to comply with regulations while maintaining user-friendliness and operational performance.
Leasing is growing highly dynamic, and ERP systems need to go beyond just the accounting point of view. Payment holidays, flexible payment plans, and commercial terms tailored to the customer are no longer special cases, but a standard business practise. Supporting multiple configurable accrual policies acknowledges this reality while preserving financial integrity. The road forward in managing leases is providing accuracy in the accounts coupled with operational clarity. The true innovation lies in being able to operate the two accrual streams – statutory and operational- to satisfy regulatory mandates and business expectations without impacting compliance, efficiency, transparency and the ability to make informed decisions.
(The views expressed are personal)
This article is authored by Ganesh Puvvula, senior enterprise finance technology expert.