Asset leasing in Dynamics 365 Finance provides a comprehensive approach to managing the multifaceted aspects of the lease business process. Here’s an overview of its principal components which need to understand first before get into the process in D365

Asset leasing in Microsoft Dynamics 365 Finance is not just another feature; it is a robust capability designed for precise management, tracking, and automation of financial transactions related to leased assets. Aligned with stringent international and local accounting standards, D365 Asset Leasing ensures compliance with IFRS 16 and ASC 842 (US GAAP).

Beyond simple record-keeping, this functionality enables the dynamic capture of lease details and automates journal entries throughout the lease lifecycle—from initial recognition and monthly postings to impairment scenarios and lease terminations.

Seamless Integration

One of the key strengths of D365 Asset Leasing is its deep integration with essential financial modules, including:

Fixed Assets – Ensuring leased assets are managed effectively within the broader asset portfolio.

Accounts Payable – Streamlining lease-related payments and obligations.

General Ledger – Maintaining accurate financial reporting and compliance.

This seamless connectivity enhances financial accuracy and ensures a smooth leasing management experience.

Understanding Asset Leasing in D365

Before diving into the lease process in D365, it is essential to understand its principal components. These foundational elements provide a structured approach to managing leased assets effectively within Dynamics 365 Finance.

• Lease agreement – The lessor owns the asset and agrees with the lessee to lease an asset for specific period in exchange for periodic lease payments. In addition to the legal contract between the lessor and lessee, the lease agreement captures management decisions such as the likelihood of exercising a renewal option and transfer of ownership.
• Commencement date: This is the date that the lessor makes the asset available for use by the lessee. The lessor assesses how the lease must be accounted for.
• Lease: The lease is a contract whereby one party, the lessor, grants the right to use a particular good for a period to the other party, the lessee (or tenant), which will pay for the transfer of the right to use an asset regularly.
• Financial lease: when the full risks and rewards associated with ownership of the asset have been transferred to the lessee from the lessor it is called financial lease under There are a few additional sub criteria used to define this type of lease e.g., net present value (NPV) of minimum lease payments is at least 90% of the asset’s fair value.
• Operating lease: other rental contracts than financial
• Fair market value: The value of an asset if it were to be sold in an arms-length transaction between a willing buyer and a willing seller.
• Incremental borrowing rate (%): The annual % rate charged for borrowing (or made by investing), expressed as a single percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction. If the rate is per month the annual rate must be calculated based on the and used on the lease
• Balloon rental: A large rental payment payable by the lessee upon expiry of a leasing
• Lease calculation and classification per accounting standard – The lease calculation and classification identify the accounting standard that will be applied in the initial and subsequent measurement, as well as the classification test that determines what the lease type will be. A lease can be a finance lease, an operating lease, a short-term lease, or a low-value lease. The net present value of future minimum lease payments is calculated for the purpose of valuation and classification.
• Lease transactions – Asset leasing supports the initial recognition of the right-of-use asset for leases on the balance sheet, as well as subsequent measurement for either on-balance sheet leases or off-balance sheet The initial recognition transaction measures the net present value of future minimum lease payments. This data is used to determine the value of the initial right-of-use asset and lease liability, which affect the organization’s balance sheet. The subsequent measurement of monthly lease transactions involves the accumulation of interest on the lease liability, which increases the lease liability. It also measures the accrual of lease payments that decrease the lease liability, and that will subsequently be paid to the lessor. The measurement also includes the amortization of the right-of-use asset.

 

2 Asset Leasing Setup and Masters’s

2.1  Asset Leasing Feature

 Before accessing the Asset Leasing module in Microsoft Dynamics 365 Finance, the feature must be enabled under Feature Management. Once activated, the module becomes available, allowing users to leverage its capabilities for managing, tracking, and automating lease-related financial transactions.

Security Roles

 Microsoft created three new security roles who grant different access to Asset leasing.

• Maintain Lease: Users in this role can add, edit, delete, and view leases. This role is designed for daily users whose tasks include creating and posting monthly journal entries and adding new This role gives access to all Asset leasing functionality.

 

• View Lease: Users in this role can only view lease records, schedules, and run They cannot create new leases, edit existing leases, or create journal entries against leases. The role is designed for users who just must view leases, lease schedules, and the transactions that occur against those leases.

 

• Lease Clerk: Users in this role can only create new They cannot edit or delete existing leases, view lease schedules, or post leasing journal entries. This role is designed for users who work in a data entry capacity.

 

Main Accounts for Lease Transactions

Microsoft states that separate accounts must be set up for operating and finance leases for each posting type, except Lease Expense Offset and Lease Increase/Decrease. Under IFRS 16, all leases are classified as finance leases, making the operating lease account a required but unused field.

When a scheduled expense invoice is posted, the selected finance or operating account is debited. For executory costs, the Lease Expense Offset posting type is used, posting to the designated Offset Account in the Executory Costs Payment Schedule Lines within the Lease Details or Lease Book form.

To ensure compliance with IFRS 16 and ASC 842, different main accounts in the Chart of Accounts (CoA) are recommended. Microsoft suggests specific account setups for a Contoso legal entity using the Shared COA.

Asset Leasing Parameters-Leases

 Navigate Account leasing -> Setup -> Asset leasing parameters

 Specific journal types are used to post the different type of lease transactions and selected in the Asset leasing parameters form, If they are not created, go to General ledger -> Journal setup -> Journal names. You only must fill out the boxes you intend to use.

 

• Initial recognition journal name – type Asset leasing: used to post present value of the lease payments that are not paid at that date
• Invoice journal name – type Vendor invoice recording: used to post lease and expense payment invoices

when “Pay to vendor” is set to Yes for the lease book

• Lease journal name – type Asset leasing: used to post depreciation, interest, and short-term reclassification

• Allow manual classification override: Allows the lease classification to be overwritten This allows the lease classification to be changed until the payment schedule is confirmed.
• Cross entity batch: Allows you to create and post journal entries using the batch creation process in different legal entities.

 

• Allow depreciation reversals on closed books: Allows posted depreciation transactions to be reversed for a closed book version.
• Allow deletion of confirmed leases: Allows the lease to be deleted if it is

 

• Allow payment amount breakdown: Allows lease payment schedule line amounts to be broken

 

Asset Leasing Parameters-Accounts

The main accounts used for posting lease transactions can be configured separately for various transaction types, as well as for expense accounts associated with different expense categories. It is essential to configure all required posting types to ensure accurate lease transaction postings. This setup closely resembles the fixed asset posting configuration.

Asset Leasing Parameters-Number sequences

Change the number sequences code. You can change the code by clicking on the code or you can create new codes. This is recommended as that will keep all old codes in the system and you can see that you created a new code.

Lease Books

Books are all about which accounting frameworks should be used.

• Posting layers: Each book that is attached to a lease is set for a posting layer that has different
• Lease type: The lease type can be an operating lease or a finance It can also be set to automatic, as this will result in fewer books.
• Accounting framework: The most common ones are IFRS 16 and ASC 842 which set up the principles and rules for asset leasing. ASC 840, IAS 17 and cash basis can also be used.

 

• Lease term/useful life % set up: This field will classify the asset as a finance lease, if the lease term is set to automatic, and if the lease terms are over the asset’s useful life and is equal or greater than the % in this field.
• Present value/asset fair value (%) set up: % of assets fair value. This field will classify the asset as a finance lease if the lease term is set to automatic, and if the present value of future lease payment over asset fair value is equal or greater than the % in this field.
• Leasing convention: Commencement If this is set to none, the start date will be the commencement date.
• Short term threshold: Enter the number of months that will be used as a short-term
• Low value threshold: Enter the amount to use as a low value
• Pay to vendor: Set to yes, it will allow a lease payment to be posted as an invoice to the vendor account specified on each lease.

Lease Group 

A Lease group is mandatory information on a lease, like groups in other modules. Asset leasing -> Setup -> Leasing groups. The leasing groups define the different groups such as building, land, equipment, etc. You can be as specific as you need and define each building, land, vehicle. It is very important that these groups reflect your asset leasing.

Location Details

Location indicates the asset’s location. The location can be cities, counties, states, countries, etc. It can also be

warehouses or inventories.

Index rate type

The index rate is applied to the payment schedule line in the book. The “index rate method” can be set to either “index rate value difference” or “index rate value.”

Index rate value difference calculates lease payments based on the difference between the index rate at the commencement date and the most recent index rate recorded in the designated index rate field.

Index rate value determines lease payments using the percentage specified in the index rate % field.

The remaining fields should be configured based on your asset requirements to ensure alignment with your financial setup.

Expense Types

Usually these are administrative expenses. Expense types are expenses related to an asset and have to be associated to accounts under “Asset leasing parameters | Accounts” on executory costs. For a building, it could be maintenance, insurance, utility, property taxes, etc.

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We are going to use a simple example to understand the whole process in D365 so here below is the example

1. Lease description: BMW 7 Series GT
2. Fair value of the asset: $58,905.48
3. Incremental borrowing rate:69%
4. Lease term (month): 37
5. Asset useful life (month): 37
6. Lease group: Vehicle
7. Lease incentives (taxes): $7,371
8. Start date 03/01/2025
9. Prepayment/1 installment: $12,000
10. Monthly payment: $967 (35 installments)
11. Lump sum including monthly payment: $17500+$967=$18,467 (Last installment equal to 37 months)
12. Note: A lot of fields can be filled out such as vendor or fixed assets, as well as several fast tabs such as index rate, financial dimension, executory costs, payment schedule lines, This has not been included in this example.

Create New Lease

Go to Asset leasing > Leases > Lease summary to create a new lease. Expand the General fast tab and complete the mandatory fields (Which are highlighted by red asterisk)

1. Lease Description: Complete the field with a relevant text to identify the lease
2. Fair value of the asset: This is usually included in the contract however if it is not indicated, enter an amount for an asset of similar market This value is used to classify the lease as either Finance or Operating
3. Implicit rate(%): Enter the implicit rate of the lease; usually not required, if not in the lease terms, where it is not specified, the borrowing rate will be used to discount the lease payments
4. Incremental borrowing rate (%): Must be included for publicly trading organisations to indicate debt with similar profiles and term risks
5. Compounding interval: automatically set to Monthly, however can be modified where required
6. Asset useful life: Calculated from the lease commencement date, enter the remaining periods of useful life
7. Under the Lease Classification group, select Yes for the Transfer of ownership drop down menu; this is to indicate that the lease can be transferred at the end of its term

 

8. Lease group: Select the relevant group from the drop-down menu to facilitate reporting purposes

 

9. Under the Lease Posting group, select the relevant Annuity type for the lease; this is used to determine if the lease is due at the beginning of the payment period or at the end of the period used to discount the lease payments
10. Indicate the Lease start and expiration/end dates

Payment Schedule

Select menu item “Payment schedule” to view and validate the calculated payment schedule. If we find the payment correct, we can “Confirm schedule”.

Click on the +Add Line 1: 1st Installment Line 2: 35 Installment

Line 3: Last installment and final lump sum

Note: – The period interval is 1 day in the beginning and the end

• Complete the Payment amount and the Index rate % columns with relevant amounts
• Expand the Location fast tab and complete the Location number field
• Expand the Financial dimension fast tab and complete the relevant fields
• First you must click on “Create schedules” to activate the book

 

Review /Create Books

Click on Books to review the asset status. Choose the book you would like to use: ASC842 and IFRS are standard books in this model and create new books if not available.

First you must click on “Create schedules” to activate the book

When you click on “Create schedules”, the payment schedule, asset depreciation schedule, and liability

amortization schedule become active.

Process| Create a Lease Schedule

 To view a lease schedule of an asset, navigate to,

1. Asset leasing > Leases > Lease summary to identify the approved asset; click on Books

2. Once the Books screen is open, click on the Function tab

The next few steps have to happen in a specific order. First, click on “Payment schedule”.

The payment schedule includes input from the Payment Schedule Lines fast tab, and each payment amount can still be adjusted if needed. Lease liabilities are calculated based on the modified payment schedule.

 

• To review the calculated periodic interest expenses, click on the Liabilities Amortization
• To view the calculated straight-line depreciation, open the Asset Depreciation

If the numbers are okay, click on “Confirm schedule”, and the confirmed button, to move to confirmed.

3.1           Initial Recognition

 

After confirming the Payment schedule the Initial recognition menu item becomes active. When we select the menu item an asset leasing journal is created. (Note: -After the initial recognition we will receive a message that states that the journal has been created)

 

We can select menu item “Asset leasing journal” to open the journal. After reviewing the calculated amount, you can create the Initial recognition journal entry on the Initial recognition tab.

From the Overview fast tab, click on the Journal batch number to open the journal lines

Once the journal lines page opens, click Lines to review the journal before posting

Return to the journal lines list page and click Post

Lease liability amortization schedule

Select the menu item “Lease Liability Amortization Schedule” from the Asset Book to generate a journal entry for the first period. The generated journal number is automatically recorded in the “Journal Number” column.

Click the hyperlink “11981” or go to Asset leasing journals to view the journal and post is.

Asset Depreciation Schedule

 Select the menu item “Asset Depreciation Schedule” from the Asset Book to generate a journal entry for the first period. The generated journal number is automatically recorded in the “Journal Number” column.

Click the hyperlink “11982” or go to Asset leasing journals to view the journal and post is.

 Expense Schedule

 Select the menu item “Expense Schedule” from the Asset Book to generate a journal entry for the first period. The generated journal number is automatically recorded in the “Journal Number” column.

Click the hyperlink “11983” or go to Asset leasing journals to view the journal and post is.