Lease accounting is an incredibly time-consuming, complex endeavor that involves a lot of initial preparation, cross-departmental collaboration and ongoing maintenance. So, how can businesses ensure their lease accounting remains reliable and accurate?  

In our recent webinar, Lease Accounting: Building confidence in compliance efforts, Joe Fitzgerald, SVP of Lease Market Strategy at Visual Lease, and Denise Hinkle, Principal of Business Development at Scribcor Global, covered how businesses can successfully prepare for lease accounting and offered tips about how to feel confident about compliance Many companies struggle to feel confident in their lease accounting compliance efforts with the new standards (ASC 842, IFRS 16 and GASB 87). 

High-level takeaways from the webinar include: 

What makes lease accounting so complex?

There are multiple factors that make lease accounting difficult to both achieve and maintain. Besides the complex calculations required, leases themselves are lengthy and intricate. Typically, lease contracts are detailed documents with critical information such as obligations, clauses, options and dates. If your lease contracts are in different offices or handled by different departments, they may be difficult to locate and identify. 

Further, any changes within your leases must be represented on the balance sheet, or you risk misreporting your company’s lease information.  

Misreporting lease financials can result in increased audit fees and fines, along with damage to your company’s reputation and the risk of legal action. It’s important to keep this in mind as you prepare for lease accounting.

How to prepare for lease accounting success

There are steps you can take that have been proven to set you up for success. In this webinar, you will learn about each one, including but not limited to: 

• Establishing a dedicated team 
  • Who needs to be involved? 
  • What are they responsible for?  
  • Which departments need to be consulted? 

• Identifying your leases 
  • What are best practices to do this? 
  • Where do you begin? 

• Determining a reliable process 
  • What will it take to adopt and maintain the lease accounting standard? 
  • What are the risks of your identified solution? 
  • What should you (and should you not) do? 

• Creating a post-adoption plan 
  • How will you account for ongoing lease data maintenance? 
  • Who will be responsible, and for what? 
  • What will your processes look like? 

For more information about how to be confident in your lease accounting compliance efforts, view our on-demand webinar, Lease Accounting: Building confidence in compliance efforts.  

Do you know if you are overpaying for your leases? Unfortunately, many businesses are, but are not aware of it until after they begin tracking their lease data to comply with the new lease accounting standards (ASC 842 and IFRS 16). This is often due to the lack of visibility into lease terms, such as expiration dates, options and more. 

In particular, businesses in the manufacturing industry often have a large volume (hundreds and thousands) of equipment leases that they lack visibility into. This lack of control often costs them a significant amount of money.  

In our recent webinar, How to optimize your equipment leases while accomplishing lease accounting compliance, Joe Fitzgerald, SVP of Lease Market Strategy at Visual Lease, and Jon Hunke, VP of Accounting and EIT at MDU Construction Services Group, shared why and how businesses should optimize their lease portfolios while accomplishing lease accounting.  

Some key takeaways from the webinar include: 

Lease optimization is the next logical step after lease accounting 

Although lease accounting is an elaborate and complex process, when done right, it can also provide additional advantages beyond compliance. In fact, in a recent VLDI report, 100% of surveyed senior finance and accounting professionals acknowledged that lease accounting compliance comes with real business benefits.   

This is because once all your lease data is in an easily accessible, reliable location, you’ll be in a better position to analyze your leases and identify new opportunities for savings. This is where lease optimization comes into play.  

Lease optimization will help you make strategic leasing decisions 

The process of lease optimization enables you to revisit existing leases and bridge gaps to make better informed business decisions, such as identifying an opportunity to purchase an existing lease rather than continuing to lease a particular asset or property. Optimizing your equipment leases also empowers your business to: 

• Level-set lease rates across your lease portfolio, 
• Improve vendor management, 
• And more (further defined further in the webinar). 

Lease optimization leads to significant cost savings

Having visibility into your leases also enables you to identify areas where you may be overpaying for leases. Before businesses optimized their lease portfolio, many have found that they significantly overpaid for existing leases due to lack of awareness into the contract terms.  

In example, a large manufacturing company lost $105k because they did not realize that their lessor was continuing to bill expenses for surrendered property. 

For more insight about the steps you can take to optimize your lease portfolio, view our on-demand webinar, How to optimize your equipment leases while accomplishing lease accounting compliance.  

The new lease accounting standards have radically changed the way private and public companies record leases on the balance sheet. Naturally, this had a direct impact on lessees, lessors and how they classify lease agreements.

Under ASC 842, lease agreements are defined as “a contract, or part of a contract, between a lessor and a lessee that conveys the right to control the use of identified property, plant, or equipment (an identified asset) to the lessee for a period of time in exchange for consideration.“

Both the lessee and lessor are signatories to the agreement and must abide by its rules. Additionally, both parties will need to classify what kind of lease the agreement is, either finance or operating as defined under ASC 842.

What’s the difference between a lessor and a lessee?

Before we review how both parties classify a lease under ASC 842, let’s take a look at the definitions of a lessor and lessee.

The lessor is the party that either owns or leases and subleases the asset – which can range from property, vehicles or equipment.

The lessee is the party receiving the right to use the asset for a specified period of time, per the lease agreement.

Under ASC 842, the definitions of a lessor and lessee haven’t necessarily changed, however, both parties must change how they present leases in their financial statements.

For the first time, lessees must show all leasing obligations, including operating leases, on the balance sheet – and classify them either as operating or finance leases.

Before ASC 842, operating leases were not included in the balance sheet. This is one of the larger changes lessees must address under ASC 842. Luckily for lessors, this change isn’t as significant because they already had to make these classifications prior to the new lease accounting standard.

What’s the difference between an operating lease and a finance lease?

ASC 842 requires the classification of a lease at the commencement of the lease agreement, based on specified economic criteria. It’s important for both parties to understand these criteria as they determine differences between and classification of an operating lease and a finance lease.

Operating leases are contracts that permit the use of a certain asset without transferring the ownership of that asset for any less than a major part of the asset’s life. For example, the lessee uses the asset, while the lessor provides the maintenance or upkeep of the asset. Expenses related to operating leases were not previously recorded on a company’s balance sheet until ASC 842. The leased asset, along with the corresponding liabilities, are now presented on the balance sheet.

A finance lease is a contract that does not qualify as an operating lease; the risks and rewards associated with the leased asset get transferred to the lessee. In other words, they have full control of the asset. Under ASC 842, finance leases continue to be recorded on the lessee’s balance sheet as an asset with a corresponding liability.

The impact of ASC 842 and the importance of lease accounting software

Although lessees and lessors have not fundamentally changed under ASC 842, the impact of the new lease accounting standard has required both parties (especially lessees) to classify their leases with a higher degree of scrutiny.

Given the transparent nature of ASC 842, whether it’s a finance or operating lease, both parties need to ensure they are properly accounting for them on the balance sheet.

Lease classification is just one of the many complexities of ASC 842. To ensure your lease data and financial reports remain accurate, you’ll want to make sure your lease data is always up-to-date and organized in one centralized location. By utilizing lease management and lease accounting software such as Visual Lease, you’ll be able to leverage the platform as your single source of truth to manage and track your lease data.

Visit our blog to stay up to date on the latest news, trends and tips in lease accounting.

Looking for more information or have a lease accounting question? Get in touch with one of our lease accounting experts. Click here to schedule time with one now.

According to a recent VLDI survey, 35% of private companies were less than halfway through or had not yet started the process of gathering information needed to adopt ASC 842. This puts businesses in danger of misreporting lease financials, which exposes them to serious consequences, such as increased audit fees.  

In our recent webinar, How to Avoid Lease Accounting Compliance Risks, Rosemary Courtney, Manager of Technical Accounting at Visual Lease, and Bill Harter, Principal Solution Advisor at Visual Lease, discussed common challenges and risks associated with lease accounting compliance. They also provided tips to ensure you are set up for a successful audit post-adoption.  

As a result, you should have a better understanding of the risks of inaccurate lease financials and how to avoid these mistakes. Let’s take a closer look.  

Lack of processes

The new lease accounting standards require cross-functional collaboration in order to stay on top of any updates made to leases. Without clear responsibilities and defined processes, some critical lease updates may slip through the cracks – and put you at risk of inaccurate lease information. That’s why it’s important to develop defined, reliable processes that involve the right personnel while clearly identifying internal controls.  

Manual accounting calculations

Manual accounting calculations are not only time-consuming given the complexity of ASC 842, but they are also prone to human error. Automated technology significantly reduces both the risk of miscalculation and time spent on reporting. 

Lack of dedicated resources

It’s rare for companies to have a dedicated resource for lease accounting. So, how do you ensure you stay compliant amidst employee turnover? Our experts agree that naming a project lead in each functional area that contributes to the lease portfolio is the best approach, such as finance, real estate and legal.  

Lack of visibility into maintaining lease information

Leases change all of the time (i.e. extend, terminate) and each change needs to be accounted for on the balance sheet. It can be difficult to ensure your lease data is up to date if your leases are not in an accessible, centralized location.  

For more insight into how to prepare for lease accounting success, view our on-demand webinar “How to Avoid Lease Accounting Compliance Risks”.   

Related Resources: 

• Five Questions That Should Be On Every Financial Leader’s Mind 

Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS solution has been used by over 1,000 companies with a 99% retention rate.   

The Financial Accounting Standards Board (FASB) recently issued an update to ASC 842 that addresses complexities associated with discount rate calculations. In this blog, we share how this update affects private companies and nonprofits.       

What does the discount rate update mean for private companies? 

The update to ASC 842 simplifies the way private companies, nonprofit organizations and employee benefit plans are required to determine the present value of lease payments. Under the new update, these businesses can elect risk-free rates by class of underlying asset, rather than at the entity wide level.  

This update replaces the previous rules within ASC 842 for how private companies and nonprofits handled discount rates to comply with the lease accounting standard.  

 Why was the discount rate update proposed? 

Prior to the update, companies ran into similar challenges when determining the discount rate and present value of lease payments. They had to use the rate implicit in the lease to calculate the right of use (ROU) asset and lease liability. However, the rate implicit in the lease isn’t always accessible. 

Given the difficulties private companies were experiencing, FASB recognized a need to streamline calculation guidance – and in response, proposed and issued this discount rate update.  

 How do private companies apply the new discount rate guidance? 

Organizations may now make a policy election to use a risk-free rate as the discount rate for all leases. This calculation is much easier to run, which helps businesses save time and lowers the impact on the balance sheet.  

 Are you set up to account for lease accounting guidance updates? 

The discount rate update issued by FASB to ASC 842 is just one example of why private companies and nonprofit organizations can benefit from lease accounting technology. Beyond providing lease accounting automation, ASC 842 software like Visual Lease is equipped to seamlessly adapt to changes to the lease accounting standards or a lease portfolio.  

It can also streamline your lease accounting process by automatically generating audit-ready journal entries, disclosures and reports that you need to achieve and sustain compliance.  

Additionally, the right solution will provide you with the visibility you need to thoroughly understand your lease data and use that information to make better informed operational decisions.  

Interested in learning more? See how lease accounting software like Visual Lease can help.