Asset leasing is a way for businesses or individuals to use equipment, property, or other assets without having to buy them outright. Instead of purchasing, the lessee (the person or business using the asset) agrees to pay the lessor (the owner of the asset) regular payments over a fixed period. This method is popular because it helps preserve cash flow, reduces upfront costs, and often includes maintenance or service agreements. Leasing can apply to various assets like vehicles, machinery, office equipment, or real estate.

There are different types of leases, including finance leases and operating leases. A finance lease typically transfers most of the risks and rewards of ownership to the lessee, and the asset might eventually be owned at the end of the lease. In contrast, an operating lease is more like a rental agreement, where the asset is returned after use. Accounting standards now require many leases to be shown on the balance sheet, which helps give a clearer picture of a company’s financial obligations.

Asset leasing is also an advanced capability for managing, tracking, and automating financial transactions for leased assets in Microsoft Dynamics 365 Finance. It complies with International Accounting Standards (IFRS 16) and US GAAP standards (ASC 842). The module captures and processes lease information and helps generate journal entries throughout the lifecycle of a lease, from initial recognition and monthly journal entries to impairment and termination. Leasing in Dynamics 365 provides automation, accuracy, and compliance, reducing manual effort and ensuring consistency with accounting standards.

Leasing also provides flexibility—businesses can upgrade to newer assets easily without worrying about selling old ones. It's a strategic way to access modern equipment or property while managing costs and adapting to market changes. In summary, asset leasing is a practical financial tool that supports growth, efficiency, and strong financial planning for many organizations. 

Let's take an example,

This example will give details about what kind of lease it's going to be,

Let's set this in D365 Finance and Operations!

Note: Please enable the Asset Leasing module in D365 Finance and Operations.

I. Create a lease 

To create a lease, navigate to Asset Leasing > Leases > Lease summary. Click on New to create a new lease. Or you can copy the lease from an existing lease.

Enter Lease description, Fair value of the asset, Asset useful life (months), Select lease group, Annuity type, Vendor account, and lease start date. and navigate to the Payment schedule lines tab and enter start date, period interval, periods, and payment amount as shown below,

Note - 

You can select Fixed Asset Number on this screen however, Asset depreciation, asset transactions and impairment need to be processed within the Fixed assets module. The relevant functions will be disabled in the Asset Leasing module.

II. Create, verify and confirm payment schedule

After you've finished entering information for the lease, follow these steps to create a lease schedule.

Select Create schedules to generate the lease books. The lease books include the payment, amortization, depreciation, and expense schedules.

Or

This action will notify that the Expense schedule is created as shown below,

To access the lease books and view the newly created schedules, select the Books tab.

The Book details page shows how the lease is accounted for by the books that have been allocated to it. From here, you can view the lease schedules.

The payment schedule contains the inputs from the Payment schedule lines tab on the Add lease page. You can still change each payment amount and variable payment. The lease liability is calculated based on the modified payment schedule.

After you've finished reviewing the payment schedule, select Confirm schedule. After the schedule is confirmed, the lease is no longer available for editing.

Based on the calculations we did in overview section, calculations looks correct,

To view the calculated period interest expenses, open the Liability amortization schedule page.

To view calculated straight-line depreciation, open the Asset depreciation schedule page.

III. Initial recognition

After you've finished reviewing the calculated amount, the Initial recognition menu item becomes active.

When you select the menu item, an asset leasing journal is created. You can select the menu item “Asset leasing journal” to open the journal.

Since a fixed asset was selected on the lease, the calculated fixed asset acquisition value will be posted on the fixed asset. If accounts and amounts look correct, click on post.

It looked right to me based on my calculations in excel,

IV. Lease transactions

A. Invoice journal -

You can create monthly invoices for individual leases, or you can use a batch process to create them for multiple leases. The following procedure shows how to create an individual lease payment entry when the Pay to Vendor parameter on the Lease book setup page is turned on.

On the Lease summary page, select a lease and then select Books and navigate to the payment schedule.

Select the payment that must be made, then select Create journal. You receive a message that states that a journal was created against the selected payment.

Select Invoice journals, and then select the invoice that must be paid.

On the Lines tab, review the journal entry before you post it to the general ledger

Note - 

For this example, the Pay to Vendor parameter on the lease book is turned on. Therefore, the invoice will be in the invoice journal. The Overview section shows a summary of the journal entry, and the Lines section shows details of the actual journal lines.

The system locks certain financial fields from being edited to prevent any variances between the transactions and the schedules. Some fields that are locked include: Account, Amounts, Financial dimensions, Currency, and Transaction type. Additionally, you won't be able to add or delete journal entry lines in any Asset leasing journal entries, as this might cause variances between the schedules and the transactions.

After the transaction is posted, you can view the transaction information and the carrying value of the lease liability by selecting Liability transactions in the lease book

Voucher transaction,

B. Asset depreciation schedule -

For leases that are recognized on an organization's balance sheet, the right-of-use (ROU) asset is amortized on a monthly basis. This article explains how to create the journal entry for the amortization. The amortization debits the expense ledger account and credits the accumulated depreciation ledger account, based on the setup of your posting profile and the lease type. These entries can be created for each lease, or they can be created for multiple leases by using the batch journal functionality.

On the Lease summary page, select a lease. Then select Books > Asset depreciation schedule to open the Asset depreciation schedule page.

Select the period of depreciation, and then select Create journal. You receive a message that states that the journal that will be used to record depreciation was created.

Select Journals > Asset Leasing Journals to open the Asset Leasing journal page, where you can view the depreciation expense journal entry that was created.

Select the journal entry, and then select Post to record the depreciation entry to the General ledger.

After the transaction is posted, you can view the transaction information under Asset Transactions.

Voucher transactions,

To understand the calculation of ROU asset amortization expense for finance lease, use this link - 

https://learn.microsoft.com/en-us/dynamics365/finance/asset-leasing/record-rou-asset-depreciation#calculation-of-rou-asset-amortization-expense-for-finance-leases

C. Liability amortization schedule -

A Liability amortization schedule is designed to highlight the timing of lease payments and divide them between interest and principal components. It reflects the reduction in the lease liability balance over the period. The basic idea is to break down the net present value of the future lease payment into installments.

On the Lease summary page, select a lease. Then select Books > Lease amortization schedule to open the Liability amortization schedule page.

Select the period of Liability amortization, and then select Create journal. You receive a message that states that the journal that will be used to record amorization was created.

Select Journals > Asset Leasing Journals to open the Lease liability amortization journal page, where you can view the Lease liability amortization journal entry that was created.

Select the journal entry, and then select Post to record the depreciation entry to the General ledger.

After the transaction is posted, you can view the transaction information under Expense Transactions.

Voucher transactions,

V. Summary

Asset leasing in Dynamics 365 Finance offers a robust framework for managing lease contracts with accuracy, automation, and compliance. From initial setup to handling complex lease modifications, the module streamlines processes and ensures adherence to global accounting standards. Whether you're just starting or looking to enhance your lease accounting practices, this quick start guide provides the essential tools and insights to get you up and running efficiently. For more detailed steps and best practices, be sure to explore the full documentation on Microsoft Learn here.

Thank you for your time! If you have any questions, please don't hesitate to reach out!