There is power within your lease portfolio. Over the last year, public and private businesses have taken a closer look at their leases – and experienced the downstream benefits of lease optimization. Businesses who must comply with the new lease accounting standards (e.g., FASB ASC 842) are now examining their leases with a higher level of scrutiny than ever before. Additionally, over the last year, companies looked to their leases to reduce the financial impact of COVID-19. In return, these businesses have experienced operational benefits associated with lease optimization.

What is lease optimization?

Optimizing your lease portfolio means:

1. Having a controlled inventory of all lease documentation that is updated to account for all changes and modifications.
2. The ability to capture, monitor and act on all critical lease dates, including end of-term options.
3. Ensuring changes in lease terms are reflected in payment schedules and lease accounting disclosure reports.
4. Conducting regular audits of your leases and the underlying assets by taking stock of your portfolio and identifying gaps and opportunities.

Lease optimization allows your business to uncover savings, streamline lease accounting compliance and accommodate pivotal business needs with agility.

Identify cost-saving opportunities

Over the last year, businesses looking to cut excess business expenses were increasingly mindful of their leases, given leases are the second largest business expense besides payroll. Lease optimization helps organizations identify areas of their leases where they are overspending – and save money through visibility into that data.

Real customer lease optimization examples

Here are some examples of how Visual Lease has helped hundreds of customers save money through lease optimization. Before partnering with us:

• A large manufacturing company lost $105k because they did not realize that their lessor was continuing to bill expenses for surrendered property.
• One of the largest insurance companies in the US lost $185k because they didn’t realize their landlord needed to offset operating expense increases against tax decreases.
• A national bank lost $500k because the tenant forgot to request reimbursement for tenant improvements from the landlord.
• A large tech company lost $210k because the tenant was not aware that tax abatements were not being added back to the base tax amount.

These are examples that with the right information, perspective and tools in hand, lease optimization can be leveraged to materially improve business processes and generate savings in a previously undermanaged area of an organization.

Capture modifications and adjustments that impact lease accounting compliance

Leases change – and adjustments need to be tracked and evaluated under the new lease accounting standards (ASC 842, IFRS 16, GASB 87).

Determining whether a modification has taken place can be operationally challenging, particularly for companies with large lease portfolios or for organizations that do not have the systems and processes in place to properly handle and account for these events. This analysis is complicated and will most likely require a dedicated team and technology to ensure attention to detail.

That said, this is THE perfect time for you to take the extra steps towards optimizing your lease portfolio.

You need to feel confident throughout every stage of the lease accounting compliance journey:

• Day 1 – Compliance (centralizing leases and producing accurate reports)
• Day 2 – Sustainable Auditability (implementing processes and controls)
• Day 3 – Optimization (revisiting and bridging gaps)

Accommodate business needs with agility

Another positive of lease optimization is that it enables your business to pivot and identify emerging lease needs as your organization grows – or vice versa. Having the ability to access your leases in one centralized location – and report on your portfolio in any way helps you to identify the most effective way to scale your lease portfolio to meet your needs.

This article originally appeared here in Forbes.

As a result of Covid-19 and the changing landscape related to leases, private companies have received more time to prepare for and adopt the new lease accounting standards in their financial reporting. Last year, the Financial Accounting Standards Board (FASB) further delayed the deadline for private companies to comply with the lease accounting standard ASC 842, which brings most of a company’s operating leases onto its balance sheet. This delay has given private companies nearly two additional years to comply with the new lease accounting standard. Because public companies have already gone through this process, there are many lessons that can be derived from their journey to help private companies as they move through their own adoption.

Perhaps the biggest lesson learned from public companies, which we’ve seen through our clients’ experiences, is that adopting the new lease accounting standard takes time, can be quite complex and results in a resource-consuming process, particularly if there is a lack of cross-departmental collaboration. With the ASC 842 deadline for private companies looming, there are several things private organizations can do to set themselves up for success.

Know What Lease Data To Gather And Where To Get It

Public companies learned that gathering and validating data was the most challenging part of the lease accounting compliance journey. Companies with large, diverse lease portfolios found lease contracts — and thus the data within those documents — can be scattered across any number of separate sources. Not only is it tedious to gather contracts and relevant data, but it’s also easy to overlook required information if the individuals abstracting the data don’t have an informed sense of what is required for compliance. Failure to properly capture all the relevant data elements can ultimately diminish the value of a company’s financial reporting. Due to this important — and heavy — lift, and despite the deadline delay, getting an early start is key to a private company’s successful adoption.

It’s worth noting that not all required data elements for effective lease accounting compliance will be found within an organization’s lease agreements. In some cases, only about half of the data will be found within contracts, while the remainder will be contained in other sources and require some level of judgment to establish.

When private companies begin down the road to lease accounting compliance, they should first reflect on what the required data is and where it can be found within their organization. These answers can be overwhelming, but in this case, knowledge is power. This is because there can be as many as 70 distinct data elements, such as lease terms, payment schedules, end-of-term options and incentives, that need to be identified and captured to be compliant with the lease accounting standards. To properly collect, organize and analyze all the required data, private companies should get ahead of the process and start to prepare now.

Use A Centralized Data Repository

Another lesson learned from public companies is the importance of a central lease document and data repository. A 2016 survey by PwC found that 39% of companies manage their lease agreements and related accounting in a decentralized manner. While this approach can work for some, it’s time-consuming and can increase the chance of human error during the data collection process. Public companies that had an organized centralized lease portfolio learned that it saved them time on gathering and analyzing required information, which ultimately saved them money in the long run.

When setting up a centralized lease portfolio, public companies were able to streamline and optimize global reporting processes and track lease data in real time, which has proven benefits for lease accounting compliance. By having all of the necessary lease data at their fingertips, these organizations experienced a faster, more efficient lease compliance process while also uncovering cost savings including overpayments, unreceived lease incentives and reduced full-time equivalent costs, among others. Not to mention, centralizing leases can be instrumental in supporting a company’s audit process.

Put Dedicated Teams In Place

Public companies have also seen the value of having the right people in place:

• Cross-departmental collaboration: Working with other internal teams on data collection creates visibility across an organization, streamlining the process and positioning the accounting team as a stronger partner to their business.
• IT assistance: When opting to leverage a centralized data repository or any other dedicated technology, it is critical to enlist one’s IT department from the outset of the project to ensure a smooth implementation, particularly as it relates to the eventual integration with other systems such as an ERP.
• Dedicated players: Bringing in experienced lease accounting, project management and other expert professionals — whether they’re in-house or outside service providers — can minimize the impact on a company’s other resources.

While every organization’s lease accounting compliance journey is different, many public companies discovered that some of the most daunting tasks with the new leasing standards were only tangentially related to accounting. Rather, the most significant challenges were in the preparation process. Once private companies get their leases in order and dedicate the time and resources required, they are positioned to better achieve compliance and drive a positive impact on their business’s financial reporting and compliance.

This article originally appeared here in Forbes.

In 2020, many companies were forced to make tough decisions regarding their leased commercial spaces. From office closures to consolidations and deferrals, many of these decisions will have long-term impacts beyond the pandemic. To survive and thrive in today’s new norm, these same companies now need to evaluate how these decisions will continue to affect the leasing landscape, and what that means for their future finances and operations.  

Lease Market Considerations for 2021 

Covid-19 had a devastating effect on the real estate market in 2020. As organizations continue to adapt to remote work environments, the trickle-down effects will likely play out over the next few years. Unlike the economic downturn in 2008, the commercial real estate market was in a strong position at the start of 2020 — in fact, it was predicted to grow. However, as tenants struggled to meet their rent obligations, and tenant-landlord tensions and lawsuits ensued, the market quickly took a downward spiral. 

Despite this negative trend, several bright spots signal recovery within commercial real estate. We surveyed several hundred companies across retail, manufacturing, health care, financial services and more to gain critical insight into how the leasing market has changed since the start of the pandemic and to help organizations to make better-informed business decisions for the year ahead.  

Revenue Impact of the Pandemic 

By the end of 2020, nearly three in five respondents to our survey reported a 59% loss of revenue in their business since the start of the Covid-19 outbreak in March 2020. Of those that saw a negative impact on revenue, 80%, fortunately, expect that impact to be short-term. As a result, many organizations are more likely to seek and prioritize opportunities to save money — and leases provide a way for companies to do just that. 

Over the past year, many organizations made changes to space and equipment leases. However, most still need to get creative and find other ways for monetary gain. PPP loans, insurance policies and lawsuits were some ways that businesses across all sectors chose to subsidize their company’s overhead in the short-term, but these options are now carrying over into 2021. 

The Future of Office Space 

To cut additional costs, many have turned to their commercial office leases to identify savings. With the pandemic, there has been a monumental shift in the traditional office space, but most companies are not resolved on what that looks like for their businesses in the future. This year, the industry will need to consider several changes to the office market as they make broader business plans: 

• Remote work: The acceleration of remote work has shifted the office environment, resulting in widespread downsizing and a decreased demand in the market. Despite this change in behavior, there are now new opportunities for organizations looking to retain office space in major cities, such as opting for smaller regional offices or expanding office space to allow for social distancing.
• Coworking: Coworking spaces and other short-term rental options may see a rise in popularity as companies continue to explore ways to stay out of the traditional long-term lease options but still provide a home base to employees.
• Subleasing: In addition to coworking, the sublease market has become larger than it was during the dot-com bubble, providing another flexible lease situation for companies to consider.

Important Lease Clauses In 2021 

Lease clauses offer necessary legal protections for both tenants and landlords. However, the onset of the coronavirus pandemic presented unique challenges, which left attorneys scrambling to identify protections for their clients. Many explored force majeure clauses to save costs, only to find that these clauses do not typically extend to pandemics or other public health crises. 

To date, the biggest impact that Covid-19 has had in the market is that it’s suspended progress on new transactions, and by the end of 2020, global CRE deal volume declined 36% YoY. Tenants have been reluctant to sign new leases and because of this, landlords do not have visibility into the future of their buildings. To add to the lack of certainty, where leases are expiring, others could potentially not be renewed until there is more clarity on their business needs, leading to reduction through attrition in the short-term. As such, new leases should include updated clauses to make new and existing tenants feel comfortable with signing their agreements. Our survey identified the most important lease clauses to consider in today’s environment as flexible termination (34%), specific pandemic force majeure clauses (32%) and shorter lease windows (16%). 

To effectively navigate today’s commercial real estate landscape, it’s important to recognize that some changes brought on by the pandemic — such as remote work environments and reimagined workspaces — are likely here to stay. Companies will need full visibility into lease terms and options for negotiation and payment to better manage their businesses in this new climate. Flexibility ultimately creates a win-win scenario for tenants and landlords alike in 2021 and beyond. 

Lease accounting is a massive, cross-functional effort. It involves various stakeholders and systems that impact (and are impacted by) leases. It is not just an accounting problem – and goes further beyond producing a disclosure report.

The dynamic nature of leases prompts constant adaptation, and organizations need an easy way to manage those changes. The bigger the portfolio, the more complicated it becomes, which is why it is important to determine how you will handle accurate lease information and financials.

There needs to be a reliable way to manage leases throughout the year, given lease changes can result in hundreds, potentially thousands of calculations and permutations. While the market offers a wide selection of solutions, not every tool is one-size fits all. Each lease accounting solution offers its own experience – from implementation to daily usage and beyond.

In this blog, we’ll break down the top differentiating areas and questions you should consider (beyond producing accurate calculations and reports) when evaluating lease accounting software.

Configurability vs. customization

Every business is unique with their own processes and leases that contain specific information. Your lease accounting solution should be flexible to match the way you run your business. Weighing the differences between a custom and configurable solution can save you significant time and money.

• Does the solution require customization for unique business requirements? If so, what are the costs and what is the maintenance associated with customization?
• Does the solution support configurable data fields, groupings and financial categories to match your industry and organization?
• Can the solution generate ad-hoc reports on the fly?

Customer experience

At the end of the day, your lease accounting solution relies on the people using it. Make sure you are properly set up and running with thorough, dedicated customer support from implementation and beyond.

• Does the vendor provide in-house, dedicated implementation support?
• Does the vendor offer ongoing customer support at no additional cost? What are their estimated response time SLAs?
• Does the vendor provide ongoing trainings and helpful tools dedicated to various users?
• Is the vendor committed to continuous product enhancements based on customer needs?

Integrations

Your lease accounting software should be able to handle even the most complex lease administration and accounting scenarios, including data imports and exports to various third-party solutions for a true return on investment.

• Does the software integrate with your existing technology infrastructure, such as your ERP and financial systems?
• Does the software offer flexible options to schedule, monitor, manage and automate data imports and exports between third-party applications?

Ease of use

Lease accounting is complex and requires constant adaptation from a variety of stakeholders. You need an easy way to view, track and manage all updates for full auditability.

• Is the user interface intuitive and easy to use?
• Does the solution support the ability to view changes made by various users?

Security

There is a lot of money – and risk – in most lease portfolios. Make sure you feel confident in your solution’s ability to keep your information safe and generate accurate calculations.

• Are there tools for administering individual and group users for system access, roles and permissions?
• Is the solution and calculations backed by a SOC I Type II audit?

Selecting the right lease accounting solution for your business is critical to your success. Evaluating various tools is a necessary part of the process to ensure you are equipped with what is needed to meet ASC 842, GASB 87 or IFRS 16 compliance.

If you’re in search of an all-encompassing lease accounting management software that ensures you’re achieving and maintaining compliance, Visual Lease is the solution you’ve been looking for. Schedule a demo with our team to see if we’re a match.

A daunting process for many healthcare organizations, lease accounting is a large project that demands cross-functional effort. But with the right preparation, it doesn’t have to be intimidating. 

In this blog, we share an excerpt from a recent presentation featuring two major healthcare organizations, Penn State Health and Montefiore Health System, where they share how they transitioned to ASC 842 and maintained lease accounting compliance throughout the year. 

Featured Speakers:

Joe Fitzgerald, Visual Lease: 

Leases are inherently cross functional. There are many stakeholders involved with leasing, each with their own processes, systems and silos – (such as brokers, procurement, legal operations, accounting, tax, IT, you name it). 

You need to make sure you’re maintaining an accurate audit trail and implementing guardrails so the changes being made by everybody are by the book. 

What are some of Penn State Health’s considerations regarding cross–functional changes that affect accounting? 

James Rogers, Penn State Health: 

A lot of times, we found it’s believed that [lease accounting] is just a finance function. But finance relies heavily on supply chain, real estate and other departments when identifying leases. 

To successfully work cross-functionally, we’ve set in place processes and policies, including ongoing communication between the real estate lease coordinators and finance – built around our Visual Lease solution. 

You really have to take some time determining those policies and procedures because the process flow or the workflow will inevitably change with this new guidance, and you will as a finance department be leaning on this to help you stay compliant. 

Joe Fitzgerald: 

Two words come to mind, they both start with C – cooperation and collaboration. How about at Montefiore? 

Fred Berardinone, Montefiore Health System: 

Exactly, very similar to James. The importance of us leveraging automated lease accounting software was to have a centralized lease management system that we can build workflows according to our policies.  

Similar to James, it’s all really finance’s domain, we would say liaison in this. But once again, this goes back to all the parties involved. 

It’s really building the automation from the front end, from the data abstraction to Visual Lease or whatever software that whoever goes with, and into the general ledger and into accounts payable, and it’s all really getting blessed through least admin and finance.  

So just as James mentioned, it’s really building that workflow, building those policies and procedures, and we still go back and test them, we’ll go back. We had internal audit actually take a look at our policies too, just verify that that’s how the system was working.  

Joe Fitzgerald: 

It sounds like what you both did at the start of the project in terms of working with the other folks has really paid off as you move forward in terms of cooperation and collaboration, that’s great. 

To hear more about how Penn State Health and Montefiore Health System successfully use software to get and maintain audit-ready with lease accounting requirements, check out the full panel session here.

Among the many different calculations used in lease accounting, the incremental borrowing rate may be one of the most misunderstood. The incremental borrowing rate (IBR) is the interest rate a lessee would have to pay to borrow funds to finance an asset similar to the lease’s ROU asset in value, over a similar term and in a similar economic environment. 

And according to FASB ASC 842, lessees are now allowed to use the incremental borrowing rate to determine the discount rate used to measure their leases. 

Let’s take a closer look at when and how to use the incremental borrowing rate in lease accounting. 

When is the incremental borrowing rate used in lease accounting? 

All the latest lease accounting standards, including ASC 842, require lessees to determine a reasonable discount rate for establishing the Net Present Value (NPV) of all their future lease payments. Lessees then use the NPV as the basis for determining the different components of lease schedules, including lease liabilities, ROU assets and amortization. 

However, the accounting board also acknowledges the discount rate is not always easy to determine. In many leases, the rate is not clearly spelled out (explicit) or the information that could be used to determine the (implicit) discount rate may be missing or incomplete. 

For instance, a lease might not specify an interest rate used to calculate the payments or the residual value at the end of the lease might be subject to change. 

Therefore, ASC 842 guidelines allow lessees to use the incremental borrowing rate as an alternative method for determining the discount rate when they don’t have access to all the information (explicit or implicit) used to determine lease payments. 

Why is IBR so important in lease accounting? 

The incremental borrowing rate is used to discount future cash flows to reflect the impact of time on the remaining lease obligation. 

For instance, on a lease with payments of $1,000 a month for five years, the organization’s lease accounting needs to recognize not only current payments but also what will be paid in the future, using the IBR to reflect the timing of individual cash flows. 

Using the IBR as the discount rate has a tremendous impact on an organization’s balance sheet. That is because every piece of data in a lease schedule is generated off the NPV, which is determined by the discount rate — in this case, IBR — and the date and amount of each lease payment. 

How is the incremental borrowing rate determined? 

An organization’s incremental borrowing rate is generally a reflection of its creditworthiness based on two components: 

• The risk-free rate, determined by the current rate on Treasury bills (T-bills) 
• The individual organization’s specific credit rating

The current risk-free rate for different term lengths can be found in trusted sources such as the Treasury Department website or publications such as Bloomberg or the Wall Street Journal.  

Ideally, the IBR should also consider an organization’s current credit rating, including its debt structure and capital. This is especially true with real estate and other high-value leases. 

For instance, a small startup company may pose more of a credit risk and therefore pay a higher IBR on real estate leases compared to a larger and more established company. 

In addition, determining the incremental borrowing rate is often more difficult for a private organization than for a public company. 

How is IBR different for public and private companies? 

Public companies typically know what their IBR is, due to the ongoing financial tracking and reporting required from publicly traded companies. By necessity, these organizations usually know their average cost to capital, borrowing interest rates and other factors that affect their credit. 

Private companies are less likely to know those factors and may not have up-to-date credit information readily available. Instead, they may have to pick a theoretical IBR based on a wide range of issues such as: 

• The interest rate paid the last time they borrowed money 
• How much above the risk-free rate they are likely to pay 
• The type of asset — for example, the interest on financing a vehicle vs. financing a building 
• Whether the asset will depreciate or appreciate 
• The length of time over which payments will be made 
• The organization’s borrowing activity and credit risk 
• Market conditions and borrowing costs 

Therefore, for simplicity, private companies often opt to use the risk-free rate as their IBR — for example, basing the IBR for a five-year lease on the rate at which five-year T-bills are currently trading.  

What is the impact of using the risk-free rate as your IBR? 

Looking up the risk-free rate and using it as an organization’s incremental borrowing rate is certainly easy. However, it will inflate the organization’s liabilities. 

The risk-free rate is always the lowest borrowing rate, minus the inflation expectation. But when factored over time, the lower the interest rate is, the higher the NPV will be. That means the risk-free rate has a larger impact on the balance sheet. 

Therefore, while it is less work to use the risk-free rate, it may not be as advantageous as determining your actual incremental borrowing rate. 

When must the incremental borrowing rate be updated? 

The good news is ASC 842 says once a lease schedule is established, you don’t need to recalculate the discount rate unless you need to remeasure future lease obligations due to changes such as: 

• Renewals or options that add time and payments to a lease 
• Abatements or other modification of existing leases 

For example, if you decide to exercise an option for a new five-year term on an existing lease, you will want to calculate the additional time and payments at a current rate rather than use the rate established at the start of the original lease. 

However, it is important to stay up to date on inflation expectations and market rates, as well as the organization’s current credit standing. That way, if and when lease remeasurements are needed, the organization will be prepared to recalculate its IBR. 

IBR is simpler with lease accounting technology. 

To the extent you can determine the discount rates used to calculate lease payments, you should use those rates in your lease accounting. But when you cannot reasonably determine a discount rate, the incremental borrowing rate is a quick and easy alternative allowed by ASC 842. 

Determining the incremental borrowing rate is a complex issue, and there is no simple formula. However, a lease technology solution like Visual Lease makes it easy to manage and track borrowing rates. 

For instance, the platform’s Borrowing Rate table lets you establish a series of IBRs based on type of asset, organization credit rating, country, currency and the remaining lease term. 

With all the necessary values in one place, you can easily track and modify the data points as needed. In addition, when you create a lease schedule, the Visual Lease platform will automatically select the appropriate rate based on the parameters you set up in the table. 

To learn more, contact us at (888) 876-6500 or request a demo to see Visual Lease in action. 

Table of Contents

• What is a lease term?
• Lease lengths defined under ASC 842
  • Long-term leases under ASC 842
  • Short-term leases under ASC 842
  • Month-to-month leases under ASC 842
• ASC 842 Long-term Lease Accounting
  • Best practices for long-term lease renewals
• ASC 842 Short-term Lease Accounting
  • Short-term lease renewal challenges
• ASC 842 Month-to-Month Lease Accounting

Organizations are increasingly seeking flexible lease options, with short-term leases becoming more popular. Lease accounting standards treat different lease lengths differently. This blog explains the ASC 842 requirements for accounting for long-term, short-term, and month-to-month leases.

What is a lease term?

A lease term refers to the specific duration for which a lease agreement is in effect. It is the period of time during which a tenant has the legal right to occupy and use the leased property, as outlined in the terms and conditions of the lease contract. Lease terms can vary widely depending on the type of property, the landlord’s preferences, and the negotiation between the parties involved. Lease terms are typically stated in months or years, and they establish the start date and the end date of the lease agreement. At the end of the lease term, the parties may choose to renew the lease, negotiate new terms, or vacate the property, as specified in the lease agreement.

Lease lengths defined under ASC 842

For organizations that must comply with ASC 842, long-term, short-term and month-to-month leases are defined as follows.

Long-term leases under ASC 842

Long-term leases are at least one year and one day in duration or longer. Note: Long-term leases are defined the same way across all three major accounting standards (ASC, IFRS and GASB).

Short-term leases under ASC 842

Short-term leases are a duration of one year or less. Note: Under ASC 842, the short-term lease classification is a practical expedient you can choose to apply to an entire asset class. (Read more about the practical expedient for short-term leases below.)

Month-to-month leases under ASC 842

Month-to-month leases are a legal status that varies across different leases and different states. For accounting purposes, the key criteria of these leases are there is no set expiration date and they can be canceled by either party.

ASC 842 Long-term Lease Accounting

Long-term leases have a greater impact on financials, given they remain on the balance sheet for an extended period of time. When making contract renewal decisions for long-term leases, you may find yourself examining their impact on your balance sheet.

Generally, lease renewals involve exercising an option in a current contract or negotiating a new contract. When a contract includes a renewal option, you do not have to exercise it; instead, you can seek to renew the lease with new terms.

For example, you might choose to not exercise an upcoming renewal option on an existing long-term lease with a new five-year term and higher rent than the current market rate. Instead, you could try to negotiate a lower price or a shorter lease term that will limit your commitment to the higher rent.

Lately, more organizations have been negotiating their existing contracts to take advantage of lower market rates and/or shorten their lease term.

Best practices for long-term lease renewals

By starting the lease renewal process early — ideally 9 to 12 months prior to lease expiration — you have enough time to explore alternative leases, see what is happening in the market and know what the best rates are. This puts you in a good position to possibly negotiate a new lease.

This is especially true for real estate leases, which are often long-term. Finding a new location and planning a move takes a lot of time and money. If you wait too long, or too close to the lease expiration, you could end up exercising an option you don’t want or changing to a month-to-month lease because there is too little time to move or to negotiate a new contract.

To avoid this, lease management software like Visual Lease can alert you about upcoming renewal deadlines and other critical dates. This is incredibly useful when planning next steps and making timely decisions.

ASC 842 Short-term Lease Accounting

Under ASC 842, the “short-term” lease designation can be applied to an entire class of leases rather than on a lease-by-lease basis. By electing this practical expedient, short-term leases do not need to be reported on the balance sheet. This and other practical expedients simplify the lease classification process and help organizations more easily adhere to the new lease standard.

That means when you are first classifying and entering your leases into a lease management system, you should decide up front whether all leases of a particular asset class will be designated as short-term leases. For example, you might decide to treat all real estate leases or all equipment leases (or a particular type of equipment, such as copiers) of one year or less as short-term leases.

If you elect to apply the short-term designation, all leases that are one year or less in duration will be handled as short-term leases, with no exceptions. If you choose not to elect the practical expedient, then all leases will be considered long-term regardless of their duration.

Lease management software such as Visual Lease makes it easy to set up fields for different asset classes (such as real estate and equipment) and select which (if any) should be treated as short-term leases. With all your lease information in the system, the Visual Lease platform can then automatically determine which leases meet the short-term lease criteria based on the designated asset classes and contract dates and properly report the expense.

Short-term lease renewal challenges

Just like long-term leases, short-term leases can be renewed by exercising an option or negotiating a new contract. However, exercising an option or extending the length of a short-term lease is tricky because it can affect the “short-term” classification.

As an example: Suppose you have a one-year short-term lease with a renewal option, and you decide 3 months before the end of the current term that you’re going to exercise the option and extend the lease for one more year. With the remaining 3 months of the existing lease term plus the 12 months of the renewal term, you now have extended the contract to 15 months — exceeding the short-term lease criteria of one year (12 months) or less in duration.

In this case, the contract would now be considered a long-term lease, and you would need to identify the lease asset and determine the liability for accounting purposes.

But suppose instead you wait until the very end of a lease term before deciding to renew a short-term lease for another year. In this case, is adding a year to the existing term considered a lease extension, requiring the lease to be reclassified as long term?

Although ASC 842 does not provide explicit guidance for this situation, the feedback from the major auditing firms indicates that the one-year renewal could be treated as a distinct short-term lease. So, theoretically, you could be in a space for multiple years but only commit to one year at a time at the very end of each year, resulting in successive short-term leases.

ASC 842 Month-to-Month Lease Accounting

Sometimes organizations allow existing leases to become month-to-month to delay decisions about long-term commitments. Ideally, an organization would have a minimum number of these leases and manage them strategically — making a conscious decision to go month-to-month for a limited time only.

However, organizations may have month-to-month leases because renewals were not completed on time. Or sometimes the organization does not have a good strategy for replacing month-to-month leases and ends up continuing them “by default” rather than by choice.

Regardless, to maintain accurate lease accounting financial data, you should have an easy way to manage month-to-month leases. With Visual Lease software, you can change the status of a month-to-month lease at any time. Lease management and accounting software lets you easily modify lease information, change the commencement date and add a forecasted expiration date and other data to create a new schedule and calculations for month-to-month tenancy.

Visual Lease also makes it easy to track the dollars associated with a month-to-month lease, including any rent that applies during a holdover as well as straight-line rent expenses. The system can even identify month-to-month leases and show them as short-term lease expenses in disclosure reports.

Use lease lengths to your advantage

By understanding how the different lease terms are defined, you can more simply manage them in a strategic way.

Using a lease management software platform like Visual Lease allows your organization to strategically manage lease terms by:

● Applying consistent treatment to leases according to classification, asset class and any practical expedients that are elected

● Providing tools for creating, tracking, reporting and analyzing lease terms and costs

● Alerting decision makers about critical lease dates and deadlines for exercising lease options and renewals

Learn more about how to account for different lease terms from one of Visual Lease’s in-house experts. Check out our on-demand webinar Managing Short-Term, Long-Term and Month-to-Month Leases (and Everything in Between).

What are rent concessions?

Rent concessions are discounts, incentives, or other benefits provided by landlords to tenants. Landlords sometimes offer rent concessions to entice tenants to sign a new lease — or concessions may come up as part of lease negotiations. For instance, due to the impact COVID-19 had on businesses, many companies asked for concessions from their landlords in 2020 to ease costs related to real estate leases. 

Under the lease accounting standards, any lease concession must be captured and accounted for on the balance sheet. While FASB and IFRS offer some flexibility in how to account for rent concessions, including abatements and deferrals, their unpredictable nature presents an ongoing challenge to lease accounting and compliance.  

In this blog, we identify some common lease concessions and offer some helpful advice for handling them. 

What are some common rent concessions?

Common types of rent concessions include abatements, deferrals, short pays, impairments and early terminations. 

What is rent abatement?

An abatement is a temporary decrease in the rental rate. When this option is elected, a landlord and tenant often negotiate a short-term abatement so that the payment reduction applies for a defined period, such as three or six months. 

Therefore, a rent abatement typically changes the total amount of rent the tenant will pay over the full lease term. 

What is a lease deferral? 

A deferral is a temporary reduction in rent that requires repayment of the balance later. This does not change the total amount of the payments the tenant will make but defers the timing of the payments. 

Landlords may be more willing to work with tenants on a rent deferral than an abatement. However, they may agree to an abatement in exchange for some trade-off of rights and obligations, such as extending the lease term.

What are short payments? 

A short pay is a partial payment. A landlord might agree to accept a short pay until the tenant can repay the remaining amount of the lease payments.  

A short or partial payment results in a liability. In addition, since a short pay is considered a late payment (even if it is paid on time), it may be subject to late fees unless both parties agree otherwise. 

What is a lease impairment? 

An impairment is when the current value of a leased asset (such as real estate, vehicles, or equipment) is lower than the balance due according to the lease. The result is the impairment of the ROU asset, which may require a different amortization calculation for operating leases. 

From the lease holder’s point of view, assets may be impaired if the demand for those assets decreases or if rental rates drop significantly.

What are early terminations? 

An early termination is when a tenant decides to end a lease before its expiration date. But unless a lease includes an early termination clause, companies face serious repercussions when they terminate a commercial lease early. 

For instance, if a company decides to terminate a lease early, it may still have to pay some or all the rent due through the end of the lease term. In addition, the landlord might sue for monetary damages. 

Even if a lease does include an early termination clause, it generally imposes a termination fee and may include some restrictions or other reimbursements to the landlord. 

(Learn more about the costs of early terminations and other lease obligations.)

What are best practices for handling rent concessions?

Treat similar leases the same way. 

Both FASB and IASB allow you to choose to treat all lease concessions as either variable payments or a lease modification. This means you can treat similar leases the same way. (Read the FASB Q&A on lease concessions here.)  

In other words, you do not have to comb through the terms of every contract to determine whether it meets the guidance for a lease modification or a variable payment treatment. This is a practical expedient that saves time and simplifies decision-making.  

There are two important things to keep in mind:  

• You should disclose that you elected to treat similar leases the same way, as well as the treatment you chose to apply to lease concessions — variable payment vs. lease modification. (See more on disclosures below.) 
• If a deferral, abatement or other concession requires you to exercise a renewal option that results in a significant change, you may have to account for the concession as a modification. 

There is some flexibility in lease abatement accounting. 

Both FASB and IASB allow you to treat rent abatements as either existing lease obligations or as negotiated modifications to the lease terms. However, if the lease concession materially increases the landlord’s rights or the tenant’s obligations, it must be treated as a modification.  

• If an abatement is considered a variable lease payment, no remeasurement is required and the abatement flows through to any disclosure reporting.  
• If an abatement is considered a negotiated modification, a remeasurement should be run when the abatement term is agreed on and continue through the rest of the lease term. 

For example, a large manufacturing company that reports under IFRS 16 handled a three-month rent abatement by reducing its short-term and long-term liabilities for those months while still showing activity from a balancing perspective. From a P&L perspective, the company showed the benefit of no rent expense for those three months.

Accounting for Rent abatement under ASC 840 and ASC 842

ASC 840

Under ASC 840, lease abatement is treated as a reduction in the cost of the lease over the lease term. The following are some examples of how lease abatement is accounted for under ASC 840:

If a company receives a rent abatement for the first 6 months of a 10-year lease, the rent abatement is treated as a reduction in the cost of the lease. The cost of the lease is reduced by $300,000 (6 months * $50,000 per month). The rent expense is reduced by $50,000 per month over the remaining 9 years of the lease.

ASC 842

Under ASC 842, lease abatement is treated as a lease modification. Lease modifications are changes to the terms of a lease that are made after the lease has been entered into. Lease modifications can be either beneficial or onerous to the lessee.

If a lease abatement is beneficial to the lessee, it is recognized as a reduction in the lease liability over the lease term. If a lease abatement is onerous to the lessee, it is recognized as a lease liability over the lease term.

For example: 

If a company receives a rent abatement for the first 6 months of a 10-year lease, the rent abatement is treated as a beneficial lease modification. The lease liability is reduced by $300,000 (6 months * $50,000 per month). The rent expense is reduced by $50,000 per month over the remaining 9 years of the lease.

Financial statement impact of rent abatement and rent-free periods under ASC 840

The financial statement impact of lease abatement under ASC 840 can vary depending on the specific terms of the lease and the amount of the lease abatement. However, in general, lease abatement can have the following financial statement impacts:

• Reduced cost of goods sold: If the lease abatement is treated as a reduction in the cost of the lease, it will reduce the cost of goods sold on the income statement. This can improve the company’s gross profit margin and net income.
• Reduced rent expense: If the lease abatement is treated as a reduction in rent expense, it will reduce the rent expense on the income statement. This can also improve the company’s gross profit margin and net income.
• Increased right-of-use asset: If the lease abatement is treated as a lease modification, it will increase the right-of-use asset on the balance sheet. This can have a negative impact on the company’s debt-to-equity ratio and financial leverage.
• Reduced lease liability: If the lease abatement is treated as a beneficial lease modification, it will reduce the lease liability on the balance sheet. This can have a positive impact on the company’s debt-to-equity ratio and financial leverage.

Financial statement impact of lease abatement under ASC 842

The financial statement impact of lease abatement under ASC 842 can vary depending on the specific terms of the lease and the amount of the lease abatement. However, in general, lease abatement can have the following financial statement impacts:

• Reduced rent expense: If the lease abatement is treated as a reduction in rent expense, it will reduce the rent expense on the income statement. This can improve the company’s gross profit margin and net income.
• Increased right-of-use asset: If the lease abatement is treated as a lease modification, it will increase the right-of-use asset on the balance sheet. This can have a negative impact on the company’s debt-to-equity ratio and financial leverage.
• Reduced lease liability: If the lease abatement is treated as a beneficial lease modification, it will reduce the lease liability on the balance sheet. This can have a positive impact on the company’s debt-to-equity ratio and financial leverage.

Think ahead when planning for deferred lease payments. 

With a lease deferral, your organization needs to consider a number of variables and make decisions based on how it will impact your company’s P&L statement.  

• If you choose to report a deferral as a variable expense, you will book the benefit of the lease concession today and the expense of the repayment at a future point in time.  
• If you choose to treat the deferral as a lease modification, the immediate impact will be less, but the expense will be spread out and extend into future periods. 

For some companies, it might make sense to push the expense of deferred rent off to next year rather than inflate payments for FY2020. For instance, suppose a company that received a 3-month rent deferral in 2020 wants to defer payment as far into 2021 as possible. If the company treated the deferral as a variable payment, it would have to recognize the rent expense in 2020 even if the payments are made in 2021. 

Be sure to provide disclosures. 

As with much of lease accounting under the new standards, there are a lot of decisions to make. Providing lease accounting disclosures will help auditors and understand your financial statements, including:  

•  Any abatements, deferrals or other lease concessions received 
• Whether all leases (or similar leases) are treated the same way 
• Which practical expedients were chosen 

By providing disclosures, you can clarify decisions you’ve made and demonstrate that you have treated lease concessions consistently. 

Look ahead for ongoing compliance 

During a Visual Lease webinar, a quick survey of the attendees showed roughly half received some sort of rent concession. These and any other companies that receive lease concessions must account for and disclose those concessions if they are going to maintain FASB and IFRS compliance.  

As you plan for lease accounting, keep these key takeaways in mind: 

• You can take advantage of a practical expedient that allows you to treat similar lease concessions the same way. 
• Look ahead to plan whether you should book expenses now or later, and choose a lease concession treatment accordingly (variable payment vs. lease modification). 
• Provide disclosures to clarify your accounting decisions and demonstrate that you’ve applied lease treatment options consistently. 

There are several reasons for this:

Leases are complex, constantly evolving agreements with high-stakes terms often buried in the contracts. Managing leases can be difficult due to data silos and distributed responsibilities across operations, real estate and accounting teams. This means there’s a lot of room for crossed wires, missed deadlines and costly mistakes.

Lease accounting compliance brought the pressing need for lease portfolio management to light. When FASB announced ASC 842, several solutions flooded the market to solve this problem. However, not all of them could.

Technology that attempts to do it all (lease administration, business intelligence, accounts payable, etc.) generally does not. Often, efficiencies promised within all-in-one solutions are lost to mediocre functionality and execution. This is especially true in a software category as new as lease accounting.

The stakes are too high to take chances. Companies require specialized lease administration and accounting tools, and they need those tools to seamlessly integrate into their processes and technology stacks at each stage of the lease lifecycle.

How to Optimize the Lease Lifecycle

From sourcing to contract negotiation to termination, there’s a lot that goes into the lifecycle of the lease – and each stage is dependent on the last.

• Procurement decisions are better when you have informed analytics on asset utility.
• Lease accounting reports are better when you have all your lease management information centralized and accessible.
• It’s easier to manage your leases when you can easily reference important clauses and deadlines embedded in contracts.

There are countless software and service providers dedicated to streamlining every stage of a lease. But they can only maintain accuracy if data flows between them securely, automatically and asynchronously.

With the right solution for each facet of your business and a secure, flexible tech stack, companies can leverage their leased properties and equipment as strategic financial assets vs. overhead expenses.

Integrations are the key to connect those solutions, drive efficiency and unlock insights and financial opportunity.

Introducing the Integrations Hub, a powerful new way to automate workflows, unlock insights and achieve end-to-end compliance across your lease portfolio and your business.

The Integrations Hub offers flexible, open platform access to any third-party application. Users can simply schedule, monitor, manage and automate data imports and exports to and from Visual Lease at any time. (Think of it as a lease lifecycle electrical socket, allowing you to supercharge your tech stack with a simple plug-in.)

Given the complexity and often customized configurations in accounting technology, a one-size-fits-all API isn’t enough. We believe there is no such thing as a silver bullet integration – whether it’s built by us or anyone else.

With the Integrations Hub you’ve got more options to leverage your lease data, including:

• Low-maintenance Managed File Transfers for schedule automated data imports and exports
• An accessible Developer Portal with a comprehensive REST API Library enabling customized, real-time data connectors. With just a few lines of code, a developer can access accurate data along with powerful and complex processes in a repeatable way.
• Track every transfer in real-time with the integrations hub Dashboard to cat ensure data integrity and auditability.

It’s all backed by the industry’s most informed and experienced professional services team.

Imagine the possibilities:

• Align every line in your general ledger by connecting journal entries from Visual Lease or tracking payment information in accounts payable.
• Convert currencies across continents by plugging in currency rate tables to Visual Lease for always-accurate calculations, no matter the location.
• Inform Business Intelligence by surfacing the right data at the right time in the system and format where it’s most helpful.

The technology team at Newmark was instrumental in helping us build and test this new technology, and they’re already using the Integrations Hub to leverage lease data across their tech stack.

Newmark is a Visual Lease customer and a leading commercial real estate firm that provides a fully integrated platform of services to prominent multinational corporations and institutional investors across the globe.

The technology team at Newmark was instrumental in helping us build and test this new technology, and they’re already using the Integrations Hub to connect lease data to their Business Intelligence tool, NavigatorCRE.

According to Carla Hinson, Newmark’s Executive Managing Director, Global Technology, this opens up possibilities.

At our live launch event, Hinson sat down with Bobby Paulus, Visual Lease’s Director of Strategic Alliances, to talk through her experience getting Newmark’s integrations set up, the value they’re are already experiencing and what’s next on their roadmap. To listen to the full conversation, watch the event recording.

If you’re ready to supercharge your tech stack– and integrate your lease data across systems, we’re excited to help you get you plugged in. Check out this page on our website for more information.

How to Abstract, Manage and Report on Lease Data 

When FASB issued its update to the lease accounting standard, the main goal was to increase the transparency and comparability of financial reporting.  

Unfortunately, there are many complex decisions and actions required to successfully achieve compliance. You’ll want to make sure to provide yourself with enough time and resources to get it done right. 

Fortunately, you’re not alone – and hundreds of public and private companies have already gone through this process. With proper insight into common potential obstacles, you can more clearly navigate through the process and achieve success. 

While there is certainly no shortage of difficult tasks to achieve compliance, we’ve narrowed down the top 4 common lease accounting challenges experienced by public companies – and how to solve them.  

Challenge 1: Centralizing all leases in one place   

A crucial first step in the transition to ASC 842 is to identify all leases held by an organization and enter the pertinent information in one location. 

To do so, you will need to start by gathering each lease within your organization, including any leases that may be part of a contract, such as an embedded lease. This effort requires careful analysis and judgment – and typically involves extensive coordination across departments and business units to ensure all leases are included.  

Often a time-consuming and cumbersome exercise, it is crucial to provide your organization with ample time to complete this step. (For help with your project timeline, request a customized milestone planner to outline when to begin).  

Once all the leases within your company have been identified, you’ll need to import important lease information into a centralized location to help you view all your leases in one place and access lease information at any time. 

This step often contains a high volume of labor-intensive work. Extracting lease data (also known as abstracting) from complicated contracts is a complex task that will need to be done for every lease – and any time your company signs new leases and modifies existing lease contracts.  

Depending on the size of your company and resources available, you may need to assess whether it is better to perform this this task in-house or with external professional abstracting resources.

Challenge 2: Identifying technology that does more than calculate  

Your chosen lease accounting technology is just as critical to the lease accounting standard transition and will greatly impact your ongoing ASC 842 compliance.  

While some solutions may sound similar on paper, only a select few are able to provide you with the proper tools to ensure your company’s lease information is accurate at the get-go, and remains up-to-date over time with minimal effort. 

If you are in the market for a system, don’t settle for any solution that promises to produce accounting calculations. You’ll need to make sure it also makes it easy to facilitate ongoing, long-term compliance by properly tracking lease updates. 

From the start, look for a tool that can deliver the following: 

• System Integration Capabilities: Lease accounting data should be able to easily integrate into necessary third-party applications to further automate of journal entries, financial disclosures and accounts payable information. Previously, many companies did not pay attention to integrating their leases within their accounts payable system, but with the advent of the new standard, your business may benefit from re-examining its payment processes through a solution that facilitates integration between accounts payable and the lease information. 

• Lease Management Features: Ensure up-to-date lease information with a tool that makes it easy to track and manage leases on an ongoing basis. With lease information that is searchable and available at a glance, your business can stay on top of payments, renewals and options, as well as compliance requirements. 

• Modern Software Updates: Don’t get stuck using a system that doesn’t prioritize developing new features and capabilities. To keep up with the most current trends in lease accounting, you’ll want to make sure your chosen system is dedicated to helping you achieve your goals and saving you time by releasing new innovative features and functionality. 

Save yourself the trouble and inefficiencies of a tool that under–promises its ability to deliver what you need – and more importantly, consider the long-term impact of lease accounting software to avoid having to start all over again after you’ve already done the hard work of preparing for the lease accounting deadline. 

Challenge 3: Making critical decisions that impact business financials 

In the early stages of transitioning to ASC 842, there are a number of essential, albeit challenging decisions that companies are responsible for, which impact overall lease accounting and reports. 

• Applying the ASC 842 Guidance: When transitioning to the new standard, companies can elect one of two approaches to apply the guidance: 

• • Most commonly, you can retrospectively apply the guidance at the beginning of the period of adoption through a cumulative-effect adjustment, known as the modified retrospective approach. In this approach, you no longer are responsible for capturing leases you no longer hold. However, this option presents its own challenges, requiring all lease data to be current and up to date. 

• • Uncommonly, you can retrospectively apply the guidance to each prior reporting period presented in your financial statements along with the cumulative effect of the initial application, to the earliest period presented. In this approach, you are restating prior periods as the standard had applied to them, which presents an enormous challenge to recalculate and apply the current standard to leases you no longer hold. 

• Determining Discount Rates: Companies need to exercise judgment when determining their discount rates. The elected discount rate can have a substantial impact on your balance sheet. 

• • For lessees, if the discount rate is clearly stated within a lease – called an explicit rate – the lessee is required to use that. However, it is rare for a lease to include this – and nearly impossible to calculate without it. To do so, the lessor would need the lessor’s financial information to determine this discount rate. 

• • If that rate cannot be easily determined, companies can use the incremental borrowing rate (IBR). The IBR is the rate you would have to pay or borrow on a collateralized basis over a similar term. While this is a more common option to select, it also presents its own challenges. IBRs are often easier for big companies, but more difficult for private companies. However, it’s common for private companies to pick a risk–free rate.  

• Payments and Allocations: When calculating lease liability, companies must decide whether to consider renewal periods and termination periods, which ultimately impact the length of liability (and financial obligation) in financial reports.  

• • You may also choose to allocate lease payments between lease components and non-lease components, depending on what practical expedients (see below) your company has elected.  

• Policy Elections: When choosing policy elections, it’s important to consider the current policies and types of lease contracts.  

• • Selecting policy elections help to determine the broader impact, rather than just the immediate impact on your financials.  

• Disclosure Requirements: While the new standard includes quantitative and qualitative disclosure requirements, companies are responsible for more than the minimum reports documented in the guidelines. 

• • Company management needs to consider the disclosure requirements within existing lease contracts and plan how to gather the relevant disclosure information. Organizations must be able to explain the changes made within their balance sheet period–over–period – and may do so through a roll-forward report. 

• Practical Expedients: FASB allows certain practical expedients to facilitate transition accounting and general lease accounting.  

• • You should select the practical expedients carefully after considering your current accounting policies and the broader impact of these practical expedients.  
  • You may need to choose some of these elections as a package, as described in ASC 842 Practical Expedients and Transition Requirements.  

Challenge 4: Meeting ongoing auditing, risk management and tax accounting needs 

Early coordination with auditing, risk management and tax functions of your company is another important element of planning that commonly presents challenges for companies while adopting ASC 842. 

• Auditing – This standard is brand new – and there’s flexibility in the guidelines, which leaves some areas open to interpretation. Meet with your auditors early in the adoption process to help substantiate your decisions – which will only save you time when it comes for the time of the audit. This helps ensure that any questions about system controls are addressed prior to transition to ASC 842, including: 
• • The overall control environment surrounding leases 
  • Automated versus manual controls 
  • System implementation requirements 
• Risk Management – There are now higher stakes to having an accurate balance sheet with up-to-date lease information. Therefore, effective risk management includes a high level of interaction between lease accounting and administration to keep accurate lease financials and ensure payments are made on time. To do this properly, a selected lease accounting system should include the ability to identify and maintain leases. 

• Tax Accounting – While tax accounting is often separate and distinct from financial accounting, recognition of deferred taxes may be a component of lease accounting. So, confer with your tax expert to make sure the general ledger and the lease accounting system properly consider deferred taxes. 

Although there are various decisions ahead that require careful consideration for the lease accounting deadline, there are many resources available to help. Hundreds of public and private companies have already navigated the various requirements – and achieved success, which you can learn from.  

By arming yourself with as much information as you can ahead of time, you too can be prepared to reach lease accounting compliance. Furthermore, a lease accounting system can provide you with an automated, easy transition to the new guidance – and result in significant savings for your business that you may have previously overlooked to help control, reduce or negotiate lease costs. 

Lease Accounting Compliance: Lessons from Public Companies

Although private companies still have some time to adopt the new lease accounting standards, public companies have already had to meet their compliance deadlines. In doing so, these companies have learned valuable lessons that can be applied to:

• Private companies that are in the planning stages of lease accounting compliance
• Public companies that rushed to select a tool and now see they need a better, long-term solution for their lease accounting needs

What are some of the things that helped public companies be successful in implementing the new lease accounting standards? What areas could have been improved?

Below, we share some helpful advice based on the experience of public companies that have already adopted new lease accounting standards.

Challenges in Achieving Lease Accounting Compliance

What lease accounting capabilities do you need for long-term reporting and compliance?

Some public companies found out the hard way that the accounting solution they chose was missing key capabilities that they need to ensure accurate, ongoing lease financials. 

For example, while some companies used a lease calculator tool to meet their initial compliance needs, they now realize it will not help them maintain compliance and do their reporting for the long term. 

That’s because every time a lease changes (which is often), the pertinent information needs to be updated in the lease accounting system so that subsequent reporting will be accurate. However, a lease calculator simply does not provide the tools for updating and maintaining lease data.

Public companies that chose a software-based solution with the following capabilities are better positioned for long-term compliance and accuracy:

• A single source of truth for lease data
• Automated calculations and financial reporting, including disclosure reports
• Tools for backup and verification of calculations and lease data

What is the best way to manage a large and/or complex lease portfolio?

Any public company with multiple locations or a large lease portfolio — including equipment and real estate — quickly learned that manually searching for and reporting on those leases would be a time-consuming and inefficient process.

To save hundreds of hours in time finding and verifying lease information, select a solution that provides a central repository for recording and tracking lease data. Once your leases are entered in the system, you can easily generate the reports needed for compliance — plus use the solution for ongoing updates and to view lease details on demand.

Advice for Successful Lease Accounting Audits

How long does it take to implement lease accounting?

Time and again, public companies learned that lease accounting implementation is a complex and time-consuming project, with high stakes and stakeholders across the business. 

While a lease accounting software solution can be implemented in weeks, the work required before solution implementation can take many, many months. So, it is mission-critical to invest  time up front in both auditing your lease portfolio and evaluating the technology you will use for lease accounting.

For help in planning your lease accounting compliance project, use our Lease Accounting Milestone Planner. 

What are some best practices to satisfy auditors? 

Leases can change fast and it can be hard to stay on top of them. To provide auditors with accurate and thorough lease financials, it is recommended to have checks and balances in place. To do so, you can use a lease accounting system to provide a full audit trail of updates to your changing leases. This helps provide auditors with a clear and complete picture of your business’s finances.

Strategies for Maintaining Compliance

How do you maintain accurate lease financials beyond compliance?

Look at the new lease accounting requirements as an opportunity to get the best solution for the long term — one that will continue to meet your business needs and satisfy auditors year after year.

For example, a technology solution that provides both lease accounting and lease administration capabilities helps public companies:

• Achieve compliance and meet ongoing lease accounting requirements
• Ensure that lease data is always accurate and up to date
• Save time by making lease information searchable and available at a glance
• Control costs by staying on top of all payments and transactions
• Meet important dates for renewals, renegotiations and options

How can you account for a growing or changing lease portfolio?

With the time and cost required to implement lease accounting, it makes sense to choose a solution that does more than just help you achieve compliance. Successful public companies opted for technology that will scale to accommodate any changes that might occur in their lease portfolio and provide ongoing lease management capabilities.

A cloud-based software solution can not only automate and streamline lease accounting and reporting, but also provide tools for making changes to financials, adding documents and clauses, searching for lease clauses and editing existing leases.

The Simple But Important Lessons Learned

As the experience of public companies are shown, there are some fundamental lessons that can help you to achieve lease accounting success:

• Get started now — start planning for your lease inventory and your lease accounting technology ASAP
• Do your research — get input from across the business, and perhaps consult an accounting firm, to identify leases and reporting requirements
• Think ahead to your lease management needs beyond compliance — to get maximum ROI from your lease accounting technology
• Set yourself up for success — choose a comprehensive lease accounting and lease management technology solution, such as Visual Lease

Want to hear directly from a public company about their experience preparing for and managing ongoing lease accounting compliance? View our on-demand panel discussion.

When companies think about purchasing lease accounting and lease administration software, many make the mistake of considering these tools as a cost of doing business. The mistake is understandable, because the decision to invest in these tools is often driven by the need to get compliant with the new lease accounting standards. Organizations are focused on this goal without understanding what else they stand to gain, and the potential for a significant return on investment. 

If you’re not actively looking for that ROI, you might miss the chance to recoup your investment, plus a lot more. By taking full advantage of the full capabilities of lease management software, you can save much more money than you spend. 

Here’s how.

PROBLEM: Paying more than you owe for leases

If you’re not tracking all the details of your carefully-negotiated leases, you’re almost certainly paying for things you shouldn’t. By properly managing leases and auditing lease payments, companies have uncovered millions of dollars in hidden waste and overpayments, such as:

• Making extra payments. Many property leases will include a free month’s rent at some point during the lease. Even though it’s clearly stated in the contract, chances are the landlord will bill you anyway. If you’re not checking payments against contract terms, you are paying more than you owe. 
• Continuing to pay for expired leases. Even worse, we see companies continuing to make automatic payments on leases that expired or were canceled. That happens when you’re not checking the lease end date before making the payment.
• Paying for things that are the lessor’s responsibility. Maintenance and repairs are often needed on leased assets. For real estate, you’ll need HVAC, plumbing, and electrical work. For vehicles, you’ll need oil changes, tires, and repair work. Computer equipment and copiers need maintenance and software updates. If you automatically pay for these services without checking the contracts, you might be paying for things that the lessor is responsible for.
• Paying an inflated share of CAM expenses.  In a leased building, shared operational charges (also known as common area maintenance or CAM expenses) get divided among the tenants of the building. For example, you pay a CAM charge covering utilities, landscaping, and cleaning based on the percentage of usable space you occupy in the building. But what happens when that percentage changes? You might think to reevaluate your CAM expense if you give up some space, but what if the landlord added a new wing or otherwise added more usable space to the building? That reduces your percentage of space and should change your CAM charges. 
• Paying for things you didn’t get. In the process of negotiating lease terms, especially for property leases, it’s common for a landlord or agent to throw in the initial cleaning, new carpet or a paint job. However, these “freebies” often don’t end up being free, because you get charged after the fact. If you’re not tracking what you are obligated to pay, no one questions the bill and you pay for something you shouldn’t.   
• Paying inflated rent increases. Real estate leases often include yearly rent increases. These escalations might be based on a percentage, a percentage of sales, or complicated formulas based on market factors. If you’re not checking rent increases to make sure the amount agrees with the lease contract and is calculated correctly, you could be paying too much for many leases in your portfolio. Even worse, the wasted expense gets compounded every year with new rent increases.

The point is, if you are not tracking all the terms of your lease contracts and regularly validating payments against those terms, you’re definitely paying more than you owe.

SOLUTION: CAM audits catch lease payment mistakes

If you’re guilty of overlooking many of these lease payment mistakes, you’re not alone. Before ASC 842 came along, few organizations were tracking the details of lease contracts and the accuracy of payments. However, now that leased assets are on the balance sheet, and making a much bigger impact on financial reporting, that’s changing quickly. Those mistakes are coming to light and getting noticed by financial leadership as well as auditors. 

Don’t wait for your CFO to question your leasing expenses and uncover payment errors. Your lease accounting and lease administration software can help you uncover lease payment errors by flagging payments that don’t match your contracts with CAM audits. Armed with that information, you can correct the situation with your lessors and recover overpayments. Plus, moving forward you can proactively validate every payment so you never pay too much again.

PROBLEM: Missing lease renewal deadlines

Many lease contracts include renewal options that allow you to renew at a favorable rate as long as you notify the lessor by a specified date. If you miss that date and fail to notify the lessor of your intention to renew, you lose the chance to get that locked-in rate. At that point, you’re forced to pay market rate to renew the lease. If you have made that mistake before, you know that one instance can cost you millions.

SOLUTION: Critical date alerts prevent costly errors

Your lease software can track all the deadlines and notification dates for exercising options (not just renewals, but options to cancel or purchase). You can set up customizable alerts to let key staff members know when deadlines are approaching so they can take action in time. 

This brings up an important point: you need to track ALL the details of your lease contracts to get these cost-cutting benefits. If you’re only tracking the minimum data needed for accounting calculations, you’re missing out on the true value of lease management software. 

PROBLEM: Poor lease vs. buy decisions

Speaking of purchase options, basing a lease vs. buy decision on incomplete and inaccurate payment data can lead to poor choices. You could decide to purchase assets that would cost less to lease, and vice versa. 

SOLUTION: Lease data analytics deliver reliable intelligence

When you’re deciding if it makes sense to exercise a purchase clause within a lease, you need accurate data about the costs associated with the lease. When ALL your lease data is centralized within a lease accounting and administration platform, you can create reports that show every payment and every cost associated with that lease. Armed with that reliable data, you can compare the cost of continuing to lease with the cost of exercising the purchase option.

PROBLEM: Scattered lease data

When lease data lives in multiple, unconnected systems throughout your organization, there’s no easy way for everyone to access complete, up-to-date information about your leases. Without that complete picture of all your lease-related expenses, it’s easy to make poor financial decisions.

SOLUTION: An integrated, single source of truth

With leases now having a much bigger impact on your company’s financial picture, your financial leaders need visibility into lease data. The various teams that work with leases, such as Real Estate, IT, and Legal, also need access to all the details associated with leases. A complete lease platform provides a single source of truth that integrates with your other enterprise systems, including your ERP, facilities and asset management systems, contract management tools, and analytics platforms.

Your lease platforms provides more value when it can help to drive better decisions related to leases across your organization.

If you’re a private firm just beginning to prepare for compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16), consider yourself extremely fortunate. While you certainly face a big challenge ahead in 2019, you have the advantage of learning from the pitfalls that many public companies made with lease accounting implementation in 2018.

Last year, Visual Lease worked with hundreds of global public companies going through lease accounting implementation. In this article, we’ll explain the missteps and oversights we saw that resulted in wasted time and effort, caused project delays, and opened up these firms to significant risk of inaccurate financial reporting. We’ll also share advice to help private firms avoid these pitfalls and experience a smoother (and less stressful) transition.

Costly lease accounting implementation pitfalls by public firms (and how private firms can avoid them)

1. Underestimating the time and resources required

Ask anyone who spent 2018 helping public companies through lease accounting implementation projects, and they will all tell you the same thing: many firms underestimated the time and the resources needed to get it done. So they waited too long to get started. And they failed to engage the help they needed early enough. We actually had a company come to us only 4 weeks prior to their January 1, 2019 implementation deadline! We were able to help, but needless to say it was a difficult period for them that stretched right up until their first quarterly reporting date in March.

Before accounting teams fully understand the scale and the scope of transitioning to FASB ASC 842 and/or IFRS 16, they often assume it will be a simple matter to gather data, do a few calculations, and produce journal entries. In reality, there are many more accounting complexities, logistical issues, and technical details than you may expect. If you wait too long to start or fail to plan for adequate resources, you can easily be blindsided by unexpected issues and wind up not being ready in time to meet the compliance deadline.

Read this for details you might not know about lease accounting implementation: Lease Accounting Compliance Deadline: Will You Be Ready?

2. Choosing the wrong implementation team

Because lease accounting implementation is a complex project with high stakes and many stakeholders, we highly recommend having an experienced project manager spearhead your effort. That person could be someone from your own internal project management team, an outside consultant, or even a representative from your accounting advisory firm.

When it comes to putting together the rest of the team, don’t go too big or too small. With a team of 15 people, you’ll face analysis paralysis and take too long to make decisions. However, if you leave out key stakeholders, you run the risk of making mistakes that are costly and time consuming to fix later.

For example, it’s essential to include representatives from Real Estate and others who manage your leases. These lease experts can make sure you are collecting important data that you’ll need for performing calculations and journal entries. For example, we worked with one company that came to us thinking they had all their data ready for importing. However, they missed an important component: they had no commencement dates for their property leases. That happened because they collected payment information with no input from the Real Estate team.

Read this to learn more about putting together your team: FASB Lease Accounting Changes: How to Assemble Your Readiness Team

3. Configuring your lease database too soon

It’s certainly smart to engage your lease accounting technology vendor early in the process. However, software implementation starts with gathering your requirements and building a database. If you have not yet made accounting decisions and begun to gather your lease data, you might not be ready to configure your database just yet.

Your vendor will ask questions during this process that you might not be ready to answer. If you guess wrong, you could make errors that mean re-work later.

The most efficient strategy (both for optimizing time and choosing the right software) is to make accounting decisions and gather data while you’re shopping for technology.

4. Making accounting decisions too late

We have seen too many companies jump into data collection before making the important accounting decisions that affect exactly which data points are needed for lease accounting calculations.

Practical expedients are a good example. The practical expedients you elect to take have an impact on how your data needs to be structured and broken down. We saw a company that had centralized all their lease payment data only to realize that due to a practical expedient they needed to break lump sum rents down into lease and non-lease components. That caused considerable re-work very late in the process, eating up the time they had planned for testing (more on testing to come).

Discount rates are also frequently overlooked. Some firms decide to use the same rate across the board for all leases, while others use a complex table of rates for different types of calculations. To avoid time consuming re-work and costly delays, It’s important to make those decisions BEFORE running your lease accounting calculations and producing journal entries.

5. Failing to validate your data

When it comes to testing, many firms focus on validating the mathematical calculations produced by their lease accounting software. Of course we don’t recommend skipping this due diligence, but remember that software vendors, global public companies, and major accounting firms have already completed this process thousands of times over in 2018, and the platforms do work. Here’s the part you must focus on: making sure your lease data is complete and accurate.

Under the previous standards, more than 80% of leases were operating leases with little impact on the books. Under ASC 842 and IFRS 16, the impact is much greater. Now you will have both an asset and a liability on your balance sheet for nearly all leases. If your data is wrong, the accuracy of your financial reports is compromised. We don’t need to tell you how serious the consequences can be when that happens. You could end up violating a debt governance. Reporting errors often require time-consuming investigation and adjustments to fix. That’s why transitioning to the new standards requires a higher level of lease data accuracy than ever before.

Are you sure you have a complete set of payment data from all leases? Are start and end dates valid? Have you included lease amendments?

Here’s what we’ve seen: companies are assuming all their calculations are correct until they run their first set of live reports shortly before the end of the first quarter. Then they realize the numbers are way off as compared to the actual expenses for that time period.

We recommend developing models and testing with your actual lease data to uncover anything that you might have missed. If you find inconsistencies, you need to dig into what’s missing or incorrect in your data.

How can you avoid this last-minute panic?

• Include all lease stakeholders in the process so you capture accurate and complete data from the outset.
• Start collecting data now and get it your lease accounting database as early as possible.
• Plan for plenty of time for data validation.

If you work for a public company, you are probably breathing a sigh of relief after achieving lease accounting compliance with the new standards just in time for the deadline this month. Congratulations! You’ve earned a few moments to take a deep breath (or better yet, a vacation).

However, even though you have achieved the immediate goal of lease accounting compliance, there’s still more work to do.

In this article, we’ll reveal what you overlooked in your lease data collection process for FASB, why you need it, and how to get on track for Day 2.

Lease accounting compliance is the first step toward better lease management

Chances are, your accounting team started late on the FASB lease accounting project because you were tied up with other critical priorities, such as compliance with the revenue recognition changes. Then the pressure got worse as you realized the amount of effort that would be required for lease accounting compliance.

Like many, you were forced to collect just enough lease data to meet the FASB requirements, and put off collecting the additional data needed to better manage your leased assets moving forward.

Why do you need to track more data than FASB requires? Because now that leases have been brought onto the balance sheet, they are more visible and have a much bigger impact on your organization’s financial health. Lease management has been overlooked by most organizations until now, but that’s all about to change.

For both companies who have achieved lease accounting compliance and for others who are still working toward the 2019 deadline, it’s time to begin the next phase: tracking more lease data and using the intelligence to reduce the cost of leased assets.

While organizations benefit from better management of all leased assets, it’s particularly important to get control of real estate leases. Why? For most organizations, real estate represents the second-largest item on the P&L. Also, real estate leases are extremely complex and challenging to interpret. There are many ways to waste significant money if you’re not tracking all the details.

Let’s take a look at what you are risking and what you are losing without a comprehensive lease management system in place.

The risks and consequences of ignoring lease management

Wasted money

If you are not tracking all the details of your real estate leases, it’s just about impossible to avoid wasting money. Chances are, you’re paying for things that are not your responsibility. You may be paying the wrong amounts for variable rents and expenses. You might be still be sending payments for leases that expired years ago.

Even worse, you could be missing critical lease notification dates, including required renewal and exit notifications. Missing these dates can mean greatly increasing the cost of leasing space for years to come. We’re not talking about small change: just one mistake can cost you millions.

Your financial health

For organizations that depend heavily on real estate (such as retail), your bottom line is closely tied to property expenses. You invest a great deal of time and effort developing models to optimize location profitability. Without tracking all the details of your real estate leases and expenses, how can you tell which locations are profitable and which are not? It’s likely you have locations that cost much more than you think.

Tracking all your lease expenses not only helps reduce waste, it also helps you understand the true cost of your property choices and provides the intelligence to improve decision making.

Your career

As we mentioned, until now lease management has been largely overlooked by corporate financial officers. That’s going to change in a hurry now that lease expenses are prominently displayed on the balance sheet and the true cost of leases becomes visible.

CFOs and Controllers and auditors are now going to be looking at how lease expenses are being managed. They will ask you about cost differentials, improving efficiency, reducing cost and even managing the legal aspects of lease contracts.

Auditors will also be investigating the details of your financial reports, asking how you are managing your lease information and what controls you have in place. How can you be sure your data is correct, and do you know precisely what your obligations are?

Will you be able to answer those questions with the data you are currently tracking in your lease accounting software? Especially if you’re a part of the real estate team and you report into the CFO’s office, your job may depend on your ability to provide this information.

6 types of lease data you should be tracking (beyond FASB)

These are some of the important details you probably didn’t track for FASB lease accounting compliance, but you will need to track for Day 2 ongoing lease management.

1. Option notification dates

What happens when you don’t notify a landlord on time about your intention to renew a lease? In the worst case, you could lose a key location, or one you have heavily invested in. Even if that doesn’t happen, you will lose your right to renew at the negotiated discount rate. Instead, you’ll be forced to pay market rate, which can cost you a fortune.

You can avoid those nightmare scenarios when you track dates in your lease software, and get notifications about upcoming critical dates.

2. Responsibility for maintenance

When there’s a maintenance issue like a plumbing problem or a leaky roof, your staff will likely call in a contractor and pay to get it fixed. But what if the lease contract states that the landlord is responsible for paying for these repairs? If you’re not tracking those lease clauses, your staff have no way of knowing that they should not be paying for the work.

3. How rent amounts change

When it comes to rent payments, are you automatically paying what the landlord bills you, or are you checking the rent amounts against your lease contracts? You can’t do that if you’re not tracking all your lease terms and exactly how rent payments should change over time.

We’ve seen many cases where companies pay too much for years. Even if it’s a small amount, if you’ve got the same issue for hundreds of leases, that overpayment can add up to real money.

4. Operating expenses

Lease costs include operating expenses in addition to rent. Operating expenses vary over the course of a long lease and change for all kinds of reasons, including market conditions and changes in the building.

If you’re a tenant, are you being billed according to the negotiated lease terms, or are you being overcharged?

If you’re a landlord, are you charging enough to cover your costs?

When you fail to track all the aspects of your lease and how they impact operating expense charges, you have no way of knowing.

5. Insurance

Overlooking insurance coverage for leased space can lead to devastating consequences in the event of a loss. If you haven’t tracked who is responsible for paying, what notifications are required and when they are due, you can end up with lapses in coverage. And a huge unexpected expense if you have an unpaid claim.

6. Cost efficiency of leases

Can you identify properties incurring costs that far exceed your projections? Your lease accounting software can tell you what you’re paying, but it may not be able to identify which expenses fall outside the norm. You want to be able to compare costs within your portfolio and also compare costs to what’s expected in the area or within your industry.

Having that information lets you dig in to find the mistakes that are driving up your costs. How do you get it? By tracking all the relevant clauses of every lease contract, and by using lease management audit technology.

In an upcoming blog, we’ll explain more about lease audit process and how you can save millions. Don’t miss it!

What if your lease software doesn’t track this data?

If you purchased lease software solely based on the ability to do lease accounting calculations, you may now find yourself without the ability to track other critical lease data. If so, not to worry. You can easily migrate your data to a more comprehensive lease management system like Visual Lease.

However, as we move into 2019, it’s important to understand the market conditions and make your migration plan accordingly. There are still many private companies still working toward lease accounting compliance, and you may find a shortage of available resources to help with analyzing and abstracting the lease data you didn’t capture the first time.

If your goal is to get started on this initiative come Jan 1, now is the time to identify and book those resources.

As always, Visual Lease is here to help.

For public companies who must comply with FASB ASC 842 and/or IFRS 16 within a few short months, how to get ready FAST is the critical question. The fact is, if you are not well into your implementation process already, you are running a big risk of not being ready in time. Private companies have until January 1, 2020, but should be in the planning stages by now.

A shortage of internal resources is another challenge. Typically, companies do not have personnel to dedicate to FASB compliance, or the experience and technical accounting understanding to support this type of project.

For many, taking advantage of lease accounting implementation services from an expert consulting firm may be the ideal solution to both problems.

In this article, we will address how you can benefit from third-party lease accounting implementation services, the range of services available, and the value you can expect to gain from working with experts who have already helped numerous companies through this process.

Learn more:

Changes in Lease Accounting: Don’t Risk Missing the Deadline

Why work with an outsourced lease accounting implementation services provider?

Understanding the timeline to FASB and IFRS compliance

Every organization is going through the FASB ASC 842 lease accounting process for the first time. That is why it is so difficult to predict how long it will take to achieve compliance.

Experts providing lease accounting implementation services, on the other hand, have been through this process many times with clients in a wide range of industries and with a variety of lease portfolios. As a result, they understand the complexities and the workload extremely well, and can more accurately predict the time and effort it will take for each client to be prepared to comply with the new standard.

“The lease implementation effort is underestimated by many companies,” said Steven Sayewitz, a Manager at Riveron, focusing on lease accounting system selection and implementation, “especially when taking into account the data collection effort, policy decisions, and future workflow requirements. Because of our methodical process and experience, asking the appropriate scoping questions on the front end and performing a rigorous portfolio sampling helps to collect accurate accounting data and project a realistic timeline to compliance.”

Avoiding false starts

Part of the reason companies underestimate the timeline is because they do not know what they do not know. There is a learning curve involved in this process and a great many decisions to be made. Companies jumping into the process without the guidance of an expert often make mistakes that waste time and money. With lease accounting implementation services, you gain the advantage of experience and avoid those mistakes.

“Often companies need to pivot from work already performed after months of effort,” said Sayewitz. “By getting into the details and discussing policy decisions and approach, areas of consideration come to light which may not have been initially considered.”

“Companies can limit re-work by engaging with experts early on to help them through the initial questions and planning.”

Learn more:

IFRS & FASB Changes: a Lease Accounting Quick Reference Guide

Sharing the load

A great deal of time-consuming work is needed to get prepared for the lease accounting changes. Collecting lease data and preparing the data for your lease accounting system is probably the biggest task. However, there are additional tasks that may prove surprisingly difficult for those who are not experts, such as choosing the right lease accounting software, and developing new processes and procedures for gathering, updating and reporting on lease data post-compliance.

Consultants providing lease accounting implementation services can take some or all of those tasks off your plate, freeing up your staff to focus on other tasks and initiatives.

Preparing for day 2 (Post-implementation)

The right lease accounting implementation services partner can facilitate development of policies and procedures that not only get you ready to “flip the switch” to ASC 842, but also help you maintain compliance for years to come.

What implementation steps can you outsource?

Lease accounting implementation services can include any or all of the following steps:

Initial assessment: reviewing your complete lease portfolio and identifying everything that qualifies as a lease.

Controls and policies development: developing processes and approvals to ensure valid data, and advising on policy decisions that minimize time while mitigating risk, such as decisions about when to take practical expedients.

Project management: overseeing your lease accounting implementation process and keeping all involved parties on track for meeting the compliance deadline.

Software selection: knowing the strengths and limitations of software providers and identifying the ideal solution for your specific needs.

Gathering data: collecting lease information from decentralized sources throughout your organization.

Lease abstraction: extracting the relevant clauses from your contracts.

Data preparation and transfer: aggregating and normalizing lease data from many sources, centralizing and moving into your lease accounting database.

Testing and validation: robust accounting testing and checks and balances to make sure your reporting results accurately represent your lease portfolio.

Process development for Day 2: developing a plan for maintaining compliance, including policies and processes for ongoing collection and updating of lease records.

Cost and value of lease accounting implementation services

Given the looming deadline, escalating the timeline is enough of a reason to consider lease accounting implementation services. But, companies also want to understand the value they are getting for the expense.

Sayewitz emphasized that when you choose an experienced advisor, lease accounting implementation services can easily pay for themselves by giving time back to your internal staff.

“If internal resources are tasked with figuring out what the guidance requires, systems to adopt, and creating new processes for day 2, inevitably some productivity loss around day-to-day responsibilities will occur,” said Sayewitz.

And, there is additional ROI that comes from using lease accounting implementation services that most organizations overlook. It creates the basis for accurate financial reporting, and helps develop streamlined processes, enabling those responsible for accounting of leases to focus more on the financial impact and opportunities for lease spend cost savings.

In next week’s blog post, we will continue this discussion with details about using lease data to drive cost-saving decisions, as well as other lease accounting tips from implementation experts. Do not miss it!

Want to learn more?  Schedule a demo today to get started.