• What is lease management?
• What are lease management tasks?
• Who is responsible for lease administration?
• How can you optimize your lease management strategy?
• Why is lease management important?
• Lease Management Software

Until recently, many companies were not paying much attention to their property and asset leases beyond paying the bills. Leases were simply considered a cost of doing business, and managing lease terms and obligations was not a priority. 

With the establishment of new lease accounting standards that take effect for private companies in 2021, and took effect for public companies in 2019, that mindset is changing fast. Lease management has now become an essential practice that impacts financial reporting and the bottom line. 

If your organization is working toward FASB/IFRS compliance, you’ll need to establish lease management policies and procedures. Below, we dive into why now is the best time to do it and how to create a streamlined lease management process flow. 

What is lease management?

In a corporate or non-profit organization, lease management means tracking and optimizing every aspect of your portfolio of leased assets. Properly tracking leases (not only real estate but also technology, vehicles, and even assets you control as part of service agreements) can help you significantly reduce the expenses associated with leasing. We’re not talking about small change here, but a chance to add millions to your bottom line. 

What are lease management tasks?

Lease administration requires a coordinated effort between the various teams performing these tasks: 

• Lease negotiation and decision making, including lease structure, lease length, and lease-vs-buy options  
• Lease tracking tasks, such as keeping track of upcoming renewals and exercising options, managing operating expenses, and updating lease data 
• Lease accounting tasks, including payment of lease-related charges, recording journal entries, calculating asset and liability figures, generating reports, and performing remeasurement when leases change 

What is a lease management system?

A lease management system is a software solution designed to streamline and automate the management of lease agreements throughout their lifecycle. It helps organizations efficiently handle the tasks and processes associated with leases, such as tracking lease details, monitoring key dates, generating reports, and ensuring compliance with lease terms and regulations. 

Where does responsibility for lease administration sit within an organization?

Depending upon an organization’s size, lease administration can be cross-functional, spread across various departments such as accounting, real estate, legal and procurement, or handled by a single dedicated resource within any of these departments.  

Companies that have a significant concentration of a specific asset type, like real estate, will most likely have an individual or even an entire department dedicated to the management of those leases. Further, with real estate leases, it is not uncommon for companies to outsource all or some portion of its real estate lease administration to a third-party broker or company. This same concept applies to other lease types, including fleet and IT equipment.

How can you optimize your lease management strategy?

Why has lease management process flow become so important? Under the old lease accounting rules, leases were not included on balance sheets and had little impact on financial reporting. Under the updated lease accounting standards, organizations must record both right-of-use assets and payment liabilities associated with leases on their balance sheets.  

This is a big change: adding the value of the entire leased portfolio can make a huge impact on the outcome of financial reports. It also means the risks associated with poor lease decisions and management are magnified. That’s why financial leaders must now carefully scrutinize and manage leasing decisions, administration practices, and expenses. 

Before you make the move to the newest standards, here’s how to get everyone on the same page and your lease management process flow in order. 

How to establish a cross-functional lease tracking process 

In the past, lease negotiation, administration, and accounting were done in silos with little to no coordination between the teams handling each task. That led to inconsistent lease decisions, scattered data, and often, overpayment of lease expenses due to lack of centralized records and audit capabilities. 

An effective lease management process flow requires cross-functional collaboration as well as centralized access to lease data and lease management tools.  

STEP 1: Centralize lease data and management tools

For teams to work together on lease tracking, the first step is to gather all lease data in a central repository that creates a single source of truth as well as an audit trail for all lease decisions and changes. 

Chances are, you’re in the process of centralizing lease payment data for FASB/IFRS compliance right now. To set your teams up for effective lease management process flow, choose a lease management software platform (like Visual Lease) that allows you to centralize ALL data related to lease contracts and provides tools for automating lease tracking tasks and auditing expenses. 

When everyone managing leased assets is using the same system to update lease data, schedule payments, and create accounting journal entries, everyone is always working with the most current data. And you eliminate data integrity problems that can occur when data is moved between systems. 

STEP 2: Develop leasing policies

With centralized tracking tools and technology in place, you can now analyze your lease data and find out which leases are working well and which are costing you more money than you realized. Use those insights to determine how you want to standardize leasing decisions across the organization. 

Best practice is for financial leaders to work with lease negotiators, administrators, and accountants to understand current practices and to establish cost-effective policies for leasing. 

STEP 3: Create lease requisition and update processes

To ensure your accounting team always has accurate lease information to feed balance sheets and financial reports, it’s essential to establish standard practices for every group that’s involved in acquiring and maintaining leases, including processing new leases, documenting lease changes, and handling lease terminations.

Here’s what you might not know if you’re still in the process of consolidating lease data for FASB ASC 842 implementation: every time leases change, your accounting must be updated. So, it’s smart to minimize the burden on your accounting team by choosing lease accounting software that automates lease modification and re-measurement. 

STEP 4: Set up controls  

Adding leases to the balance sheet has increased the complexity of financial reporting. That means more oversight is needed to ensure accounting accuracy. Also, internal monitoring and process validation are required to ensure your policies and procedures are being followed and are driving better decisions and reduced expenses. 

Your lease management software can aid that process in several important ways: 

• Documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms 
• Providing audit tools to find overpayments, late fees, and payments that shouldn’t have been made at all 
• Allowing you to customize approvals required for lease administration and lease accounting tasks 
• Providing an audit trail for all lease changes  

Why is lease management important?

Lease management is critically important to ensure your business remains confident in sustaining lease accounting compliance.
Tackle lease tracking along with the lease accounting changes

Leases are ever-changing. Terms are constantly modified as businesses renegotiate their lease contracts, take on new spaces or terminate their leases.  

Under the new lease accounting standards (ASC 842, IFRS 16 and GASB 87), each of these modifications must be accounted for.  

Lease management software provides businesses with a single source of truth to easily view and access your leases.

What are the benefits of lease management?

Lease management offers several benefits for organizations that have a portfolio of leased assets. Here are some key advantages:

• Improved efficiency and time savings
• Enhanced visibility and control over lease portfolio
• Cost savings through optimized lease terms and space utilization
• Compliance with lease accounting standards (ASC 842, IFRS 16)
• Streamlined reporting and analytics for informed decision-making
• Better collaboration and communication among stakeholders
• Reduced risks of penalties and non-compliance
• Proactive management of lease renewals and important dates
• Minimized manual effort and administrative tasks
• Data-driven insights for strategic planning and portfolio optimization.

Lease Administration Software

Your lease management software can aid the process in several important ways: 

• Documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms 
• Providing audit tools to find overpayments, late fees, and payments that shouldn’t have been made at all 
• Allowing you to customize approvals required for lease administration and lease accounting tasks 
• Providing an audit trail for all lease changes  

FASB recently voted to extend the deadline for private companies to implement the new standards to December 15, 2021, and chances are you are breathing a sigh of relief. However, don’t make the mistake of underestimating the effort and putting off the problem. Instead, take this opportunity to examine and overhaul your lease management policies and process flow while you’re working toward lease accounting compliance.

Are you beginning to plan for your transition to ASC 842? Learn about the biggest ASC 842 balance sheet changes, the important implications of the changes, and get access to a helpful resource that explains the details and the transition process.

WHAT’S NEW in ASC 842: balance sheet changes

Here’s an overview of what has changed under the new standard, and how the ASC 842 balance sheet changes will impact your financial reporting.

Most leases are now included on the balance sheet.

Prior to ASC 842, only capital leases (leases that are essentially purchase agreements) were recorded on the balance sheet. 

Under the new standard, companies must report right-of-use (ROU) assets and liabilities for almost all leases (including operating leases), with the exception of short term leases with terms of 12 months or less. That means not only high-value real estate leases, but also leases for IT and office equipment, vehicles, construction equipment, and other leased assets. 

This is the biggest change in ASC 842, and it’s why the transition will be a major project for most companies. You will need to find, extract, and centralize all your lease data so you can add assets and liabilities to the balance sheet.

Leases have a much larger impact.

For any firm with more than a few leases, the total of all leases that must be reported under ASC 842 represents a significant value that was not previously visible on your balance sheet. When you add that value to your total assets and liabilities, the overall picture will look very different than it did in the past.

That’s one reason it’s important to start your transition well in advance. Your financial leadership will want to understand the impact the ASC 842 balance sheet changes have on your company’s financial statements and make decisions accordingly.

Embedded leases must be reported.

To complicate things further, it’s not only property and equipment lease contracts that you’ll need to include on the balance sheet. You will also need to report on embedded leases, which are components within contracts that entail the use of a particular asset, where the user has control over that asset. 

A lease may exist within a contract even though the contract may not contain the word “lease.”

For example, many service contracts include assets that are supplied by the vendor as part of the service. 

Examining your contracts and identifying embedded leases can be a complex and time consuming task, so this new requirement is another good reason to get started on your transition sooner rather than later.

Revised lease type terminology.

FASB has adjusted the terminology for leases that represent a purchase agreement, formerly known as capital leases. In the ASC 842 standard, these leases are now called finance leases. The treatment of finance leases under 842 is essentially the same as treatment for capital leases under the previous standard.

Revised lease classification test.

A fifth lease classification question has been added in ASC 842, as part of the test to determine whether a lease is a finance lease or an operating lease:

Alternative use test: Is the asset so specialized that it is only useful to the lessee? 

This new test question means that after the asset is returned to the lessor, will it have no value to anyone else without a major overhaul by the lessor? 

As in the previous standard, if you answer YES to one or more of the lease classification questions, the lease must be classified as a finance lease.

In addition, the “bright lines” for lease classification tests have been removed in ASC 842. Previously, a “major part” of economic life was defined as 75%, and “substantially all” of the fair market value was defined as 90%. In ASC 842, these percentages are now considered guidelines under the new standard and you can elect what percentage you choose to use.

New treatment of operating leases on the balance sheet.

In the past, operating leases were unrecorded liabilities, with the balance sheet only including prepaid or deferred rent. Adding operating leases is the biggest of the ASC 842 balance sheet changes.

Under the new FASB standard, operating leases are capitalized on the balance sheet in a similar way we previously would record capital leases under ASC 840: by recording an asset and a liability. Liability is accounted for using an amortized cost basis. Amortization of the ROU asset is calculated as the difference between straight line rent and interest expense for the period.

These two expenses added together give you the total lease expense to book on your P&L.

New requirements for disclosure reports.

Under ASC 842, disclosure reports must include more qualitative and quantitative details, including:

• weighted average discount rate
• weighted average remaining lease term
• cash paid for amounts included in lease liabilities
• a more descriptive maturity analysis (which must be tied back to the balance sheet)

What is an embedded lease?

Simply put, embedded leases are components within contracts that entail the use of a particular asset, where the user has control over that asset. You might be surprised at some of the types of contracts that often contain embedded leases, even though the contract may not contain the word “lease.”

Accounting for Embedded Leases represents one of the trickier aspects of implementing the new FASB and IASB lease accounting standards.

In this article, we’ll review the definition of embedded leases for ASC 842 and IFRS 16. Then we’ll go over guidelines for determining if an embedded lease exists, clarifying with an embedded lease example.

The impact of embedded leases under the new standards

For organizations with hundreds to thousands of leases, the need to be ready to comply with ASC 842 and/or IFRS 16 is keeping accounting teams busy. And private companies that have not yet adopted ASC 842 and must do so by December 15, 2021, still have a big task ahead, including:

• Gathering all the necessary data about property and equipment leases
• Implementing technology to do all the calculations and create journal entries
• Deciding how to amend your policies and procedures

Complicating the problem still further is the requirement to report on embedded leases that may be found in other types of contracts, especially those with service providers.

Although you may have done some embedded leases accounting in the past, it’s now a much bigger issue because the new standards bring operating leases, and even some types of service contracts, onto the balance sheet.

That means embedded leases accounting has a much bigger impact on your income statement under the new rules. Streamline this tedious process by utilizing our lease accounting software to save time and ensure embedded leases meet the new lease accounting standards

Common areas for Embedded Leases

• Service agreements: Contracts for services may include the use of specific assets. For example, a maintenance agreement that includes the use of equipment or a service contract for the use of a photocopier.
• Supply agreements: Contracts for the supply of goods may include the use of assets. For instance, a contract to purchase goods that includes the right to use storage or warehousing facilities.
• Construction contracts: Contracts for construction or infrastructure projects may involve the use of equipment or other assets. The contract may grant the lessee the right to use specific machinery or vehicles during the construction period.
• IT contracts: Contracts for software licenses or IT services may include the use of underlying hardware assets. For example, a software license agreement that also provides the right to use specific servers or computer equipment.
• Franchise agreements: Franchise agreements often involve the use of leased premises, such as a retail store or restaurant, as well as the use of other assets, such as equipment or vehicles.
• Licensing agreements: Agreements for the licensing of intellectual property rights may include the use of assets. For instance, a licensing agreement that grants the right to use specific manufacturing equipment to produce licensed products.
• Marketing or sponsorship agreements: Contracts for marketing or sponsorship activities may involve the use of assets. For example, an agreement that provides the right to use certain advertising displays or event equipment.

Embedded leases accounting: 3 questions for identifying embedded leases

In preparation for the new lease accounting standards, you’ll need to review the content of all your existing contracts to determine if they include embedded leases.

As you review those contracts, ask the following questions to decide if they contain embedded leases and make judgments on a case by case basis with the assistance of your advisory partners.

1. Does the agreement entail the use of one or more specific assets?
If no assets are specified, then no lease can exist within the contract. However, if an asset is explicitly or implicitly identified within an agreement, then a lease may exist.

Keep in mind that a lease may exist even if not specifically labeled as a lease within the contract. For example, power purchase agreements may include the use of a specified plant. Oil and gas drilling contracts may specify the use of equipment and pipelines.

2. Does the supplier have the practical ability to substitute a different asset?
If your agreement does specify the use of an asset, can the supplier easily substitute a different asset? And would the supplier benefit economically by doing so?

On the other hand, if the asset is an office copier, it’s not likely that the supplier can easily swap out one machine for another. And it’s also not likely that the supplier would benefit financially from doing that even if they could. In that case, a lease may be present.

In an example related to real estate, today’s corporate property portfolios often include the use of co-working space. If a co-working agreement doesn’t guarantee the use of a specific space within a building (such as hot desking), then the agreement may not be considered a lease.

3. Do you have control over use of the asset?
If you have physical control and decision making authority over the use of the asset, then a lease may be present.

Real World Examples of Embedded Leases

• Office Space in a Service Contract: A company enters into a service contract with a facility management company for various services, such as cleaning, maintenance, and security. The contract also includes the use of specific office space within the facility. The right to use the office space would be considered an embedded lease.
• Equipment in a Software License Agreement: A company purchases software licenses from a vendor, and the agreement also grants the right to use specific hardware equipment required to run the software. The use of the equipment within the software license agreement would be considered an embedded lease.
• Vehicles in a Franchise Agreement: A franchisor grants a franchisee the right to operate a fast-food restaurant under their brand. The franchise agreement also includes the use of specific vehicles for delivery purposes. The right to use the vehicles within the franchise agreement would be considered an embedded lease.
• Storage Space in a Distribution Agreement: A company enters into a distribution agreement with a logistics provider to store and distribute its products. The agreement also includes the use of specific storage space within the logistics provider’s warehouse. The right to use the storage space would be considered an embedded lease.
• Manufacturing Equipment in a Licensing Agreement: A company licenses a patented manufacturing process from another company. The licensing agreement includes the right to use specific manufacturing equipment required to implement the process. The right to use the equipment within the licensing agreement would be considered an embedded lease.

Embedded leases accounting: next steps

Once you have determined which contracts do contain embedded leases according to the new lease accounting standards, what’s your next step? You’ll need to extract and get that data into a lease accounting software solution.

Learn more:
Data Collection Tips for ASC 842 Transition and IFRS 16 Compliance
Can You Trust AI for Lease Abstraction?

When implementing the new FASB and IFRS lease accounting standards, it’s easy to overlook the ongoing maintenance of your lease data. To avoid an unexpected burden on Day 2, be sure to choose lease accounting software that will make it easy to accommodate changes to existing leases and automatically update your accounting accordingly.

Questions? Let us show you how easy it is to manage your lease data and accounting in Visual Lease.

Recently, we have talked a lot about ways that companies can understand their lease obligations and reduce costs  in light of COVID-19. What many businesses have discovered during this time is that a lack of insight into these responsibilities and costs has huge implications — not just for lease accounting, but also for day-to-day business decisions and ongoing cost management.

As companies look ahead to recovery from the economic impacts of COVID-19, it is more important than ever to have a technology solution in place to help avoid financial issues and better manage the obligations associated with leases.

That is where a robust lease administration solution can help businesses avoid risk and realize benefits beyond lease accounting in three crucial ways.

1. Gain Greater Visibility into Leases with Lease Administration Software

As many companies have recently learned, the ability to find leases and uncover the important details buried within them — including clauses, due dates, and options that have an effect on lease obligations and costs — can be a complex and time-consuming task. This is especially true for organizations with multiple locations and, potentially, hundreds of leases to manage.

A lease management solution such as Visual Lease, which combines lease administration and lease accounting capabilities, makes it easy to manage lease data and determine your rights and responsibilities. The software provides the ability to search for specific lease parameters and gather the information you need to:

• Track payments and analyze costs
• Identify overpayments or opportunities to cut costs
• Get a complete picture of leases as part of the company’s bigger financial picture
• Make informed business decisions related to lease obligations and overall costs

2. Keep Track of and Manage Changes Related to COVID-19

With the closures, disruptions, and cut-backs to businesses related to the COVID-19 pandemic, many companies are coping with another new challenge — the need to keep track of any changes made to their leases during this time, such as:

• Lease modifications
• Lease terminations
• Lease impairments
• Variable payments
• Operating expense pass-throughs

Finding every affected lease and manually updating each one is cumbersome and time-consuming. Plus, it opens your business up to the risk of manual errors.

Lease administration software makes it easy to change lease information when you need to — providing the tools to find the pertinent leases and quickly update them with changes to payments, terms, options, and other information you will need later for lease accounting.

3. Stay Current on All Leases with Lease Administration Tools

A lease administration system also helps you stay current on critical dates and upcoming events within your leases — including opportunities to make changes and save money.

Lease administration software provides tools for tracking changes, alerting you to important  dates and events, and keeping your critical lease data up to date at all times. For instance, you can have the solution automatically alert you to deadlines for exercising lease options.

Find More ROI in Your Leased Assets

A combination lease accounting–lease administration software solution not only helps you organize, track, and report on lease data in accordance with the latest lease accounting standards. It also provides ready access to accurate, up-to-date information that can help you get the most value from your leased assets.

So, while some lease accounting deadlines have been pushed back, it makes sense to implement and use a lease management solution now. It will empower you to not only handle lease issues related to COVID-19 lease, but also manage lease financials in a way that can help you maximize lease ROI, improve liquidity, and plan for the future

Ready to get started ASAP? Request a demo of Visual Lease today!

Across industries, sectors and organizations of different sizes, the COVID-19 outbreak has touched virtually every business in some way. Between stay-at-home orders, emergency closures, and supply chain disruptions, companies are coping with a lot of operational and financial challenges posed by the crisis. 

In the middle of all this uncertainty, the deadlines for compliance with the latest lease accounting standards have once again been extended. That means: 

• Private companies have an additional year to adopt new lease accounting standards in their financial statements. 
• Public not-for-profit companies that have not yet issued financial statements also get an extension. 
• Government entities that comply with GASB 87 postponed the effective date and subsequent reporting deadlines for 18 months.  

That’s good news for businesses that have yet to fully implement the new lease accounting standards or are still in the process of updating their accounting practices. But just because there has been a reprieve does not mean you should delay implementing a lease accounting software. Furthermore, implementing a tool to track your leases can be incredibly helpful.  

Stay Ahead of Compliance with Lease Accounting Software 

Like we’ve been saying, getting ready for compliance with the new lease accounting standards is a time-consuming and intensive process. That’s because the reliability of your financial reporting depends on doing a thorough lease inventory and accurately consolidating all your lease data. 

Our advice is to continue moving forward as quickly and efficiently as possible on these compliance efforts. That includes implementing lease accounting software to help you organize and report on your lease data in support of the new standards. 

Having access to accurate lease data is also crucial to business and accounting decisions related to the pandemic. 

That means lease accounting software will not only help you meet the compliance deadline down the road. It will also enable you to search for and manage critical lease information right now — and even find ways to save money in circumstances related to COVID-19. 

Leverage the System to Save Time and Money  

Now more than ever, companies need to understand their lease obligations and rights so they can manage costs and find areas where they might have some flexibility. (Read more in our blog COVID-19 and Lease Accounting: Understanding Your Lease Obligations and Costs.) 

A lease accounting and management solution such as Visual Lease can help your company save time and money by providing greater control over your leases. It provides the tools to search for and view important information needed to stay on top of your lease requirements in three crucial areas: 

Better Manage Your Financial Responsibilities 

Visual Lease tracks the relevant language of all your leases, to help you determine what rights and options you have regarding rent and other payments. For example: 

• What are your monthly payments obligations across all your leases? 
• Are you paying for assets that the business no longer uses or needs? 
• Do the leases include a grace period before any late fees apply? 
• Do any leases allow you to defer payment and if so, for how long? 

• Is the company overpaying for services that it is not receiving during a business closure? 

Having this and other lease information readily available can help you better manage costs and cash flow. It can also save valuable time when you are looking for lease clauses and other helpful information you need to effectively negotiate with landlords (or with tenants, if you are a landlord). 

Understand Your Legal Responsibilities 

Are there any lease clauses that protect your business from potential casualty, force majeure, or even bankruptcy? 

Without a lease accounting and management solution, you would have to look for that type of information by manually reviewing all of your leases. But with a solution such as Visual Lease, you can easily search for pertinent clauses to help determine what the business’s legal rights and responsibilities are. 

Keep Track of Lease Options and Notices 

You can also use Visual Lease to find options that will help you improve liquidity and reduce expenses during a business closure or slowdown. For example, you can search leases to find out what options you may have for downsizing or relocating a space — or for rent abatements or lease renewals, impairments, or terminations. 

You can even set up the lease management solution to automatically alert you to important events, such as: 

• Options that must be exercised by a certain date 
• Notifications that must be sent about upcoming lease options 

The alerts will continue to be important as companies reassess how they do business, the resources they need, and the options they will exercise moving forward in what may be a very different, post-COVID environment. 

Lease Accounting Software: Beyond Compliance 

How leases address defaults, terminations, options, rent abatements, and other issues can have a big impact on the decisions that a business must make, under all sorts of circumstances. 

Having lease accounting technology that puts these and other lease details at your fingertips will not only prepare you for lease accounting compliance — it will also empower the business to make more informed and timely decisions, both during the COVID-19 pandemic and in the days, weeks, and months to follow. 

In addition, lease accounting software provides the tools a business will need to calculate and report on lease modifications, deferrals, and other changes post-COVID. 

Deciphering financial and contractual obligations of a lease can be a challenge. And that is especially true during an unprecedented event, such as the COVID-19 pandemic. All you really want to know is, what are you responsible for?

Below, we answer questions about some of the common lease provisions that may pertain to COVID-19 and how they could affect your lease obligations — and ultimately, your lease accounting.

Provisions That May Pertain to COVID-19 and Lease Accounting

Since every lease has different language, obligations and consequences, we always recommend talking to your legal counsel to get help interpreting lease provisions and determining if and how they pertain to your business.

Regardless, the common lease clauses below may include language that will have an impact on tenant/lessee or landlord/lessor responsibilities during unusual situations such as the COVID-19 crisis.

What is a Force Majeure provision?

Force Majeure is a clause excusing nonperformance by the landlord/lessor or tenant/lessee, with specific lease language that defines what events trigger an exclusion. This lease provision typically also defines whether or not specific types of performances are covered — for example, a landlord’s obligation to perform certain maintenance and repairs.

The lease language might provide different definitions of “Force Majeure” events, but they may include acts of God, terrorism, natural disaster, governmental action, riots, or more generally, events out of the party’s reasonable control. The more specific the language is, the less likely you can rely on the clause to postpone or cancel obligations under the lease.

What does Force Majeure excuse or not excuse?

The Force Majeure clause may excuse things such as a landlord’s requirement to make repairs or a tenant’s requirement to maintain janitorial services within the premises. Note that the payment of rent is often not excused.

What is an example of a Force Majeure clause under which rent payment is not excused under COVID-19? 

“This Lease and the obligation of Tenant to pay the due rent hereunder and perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease . . . if Landlord is prevented or delayed from so doing by reason of strikes or labor troubles or by accident, or by any cause whatsoever beyond Landlord’s control, including, but not limited to, laws, governmental preemption in connection with a national emergency or by reason of any Requirements of any Governmental Authority.”

What is a casualty provision?

Most leases have a provision regarding what happens when the building, premises, or property is damaged by a casualty such as a fire, flood, hurricane, earthquake, and similar events.

What does a casualty provision mean in a pandemic like COVID-19?

Casualty provisions rarely cover government shutdowns or pandemics. Usually the only events covered are those that would physically damage or destroy a building or asset in some way.

What kind of obligations are included in leases regarding landlord vs. tenant responsibilities?

Generally, leases may include obligations such as maintenance and repairs, how common areas are handled, building hours, base-building cleaning, and extra cleaning. Specific lease language will differentiate what responsibilities fall on the landlord/lessor versus on the tenant/lessee for tasks such as:

• Maintaining the building
• Maintaining the specific tenant space
• Emergency repairs/maintenance
• Common area maintenance (CAM) and use

Are there specific lease obligations that may be more relevant during the COVID-19 pandemic?

Due to the nature of the virus, any lease clause concerning maintenance and cleaning of the building and tenant’s premises is relevant. Additionally, clauses concerning any “above and beyond” maintenance and cleaning are relevant.

For instance, specific lease language may include expenses that the landlord can choose to undertake but then pass on to the tenant — such as extra deep-cleaning that might be required during the pandemic (or at other times).

Are there any third-party agreements that should be reviewed?

Depending on the specific lease language requiring tenants to maintain and clean their own premises, any third-party agreements concerning the “Supplemental Cleaning of Tenant’s Premises” would be relevant. Other obligations with third-party contracts may include construction or renovations and other premises maintenance.

Most supplemental cleaning contracts can be terminated with 30 days’ notice, which means a tenant can potentially renegotiate scope and pricing changes depending on how the current situation develops.

What insurance provisions are included in leases?

Most leases contain requirements for both the landlord/lessor and the tenant/lessee to obtain and maintain certain insurance policies. While not all are applicable during the COVID-19 pandemic, some may be, depending on the exact policy and what coverage it includes.

Some policies — such as business interruption insurance — may help with rent, operational costs, lost profits, and similar issues. However, the policies must have been put in place prior to the current COVID-19 pandemic.

What is a business interruption insurance policy?

This is usually an add-on to a business’s property/casualty insurance policy to cover loss of business income in a disaster that is covered by the main property/casualty policy. However, since it is usually applicable to a natural disaster or fire, the policy would have to be reviewed and interpreted to determine if the current COVID-19 situation is covered.

Do government orders, regulations, or laws concerning COVID-19 take precedence over lease provisions?

Any government order, regulation, or law issued concerning the pandemic may take precedence over any lease provision. This could include anything from the payment of rent and the status of evictions to the physical use of buildings.

For example, the governor of New Jersey issued a lockdown order for nonessential businesses, requiring them to close to the public. But whether this action cancels lease performance or obligations would depend on the specific Force Majeure language contained in the lease.

As time goes on, there may be additional government actions that supersede any lease language to allow for delayed performance and even delayed evictions. New York, for instance, delayed all commercial lease evictions until at least June 20, 2020, and there are proposals to consider delaying rental payment obligations for 90 days.

What is a Continuous Operations clause?

A Continuous Operations clause is lease language that requires a retail tenant to be open and operational for a certain number of hours per day and/or days per week. This provision generally applies to retail tenants, although it does not necessarily appear in all retail tenant leases. The provision is rarely found in other commercial tenant leases.

Are there exceptions to a Continuous Operations clause?

Specific lease language may give exceptions, such as Force Majeure events, that allow for not continuously operating. But again, this depends on the specific language in the lease. In most cases, Continuous Operation provisions still require payment of rent.

What are some other lease provisions that may be relevant during COVID-19?

• Notice provisions provide guidance for ensuring that notices between tenant and landlord are legal and binding — for example, regarding lease renewal, lease termination, lease options, and general requirements for providing official notice of any action to the other party.
• Gross-up provisions state that if a building is shut down for an extended period, landlords must credit back the costs of any unprovided services when issuing their year-end reconciliations. Tenants should keep an eye on this issue when reviewing their year-end statements.
• Percentage or profit-sharing rent provisions specify a rent charge based on the gross income of the tenant rather than a fixed monthly or annual value.

Get Help from the Experts

Your legal advisor and accounting advisory partner can both help you understand how lease provisions may pertain to COVID-19 and result in lease concessions and other changes that will affect your lease accounting.

In addition, a lease accounting and administration software solution such as Visual Lease can help during this process — providing abstracted clauses and tools for organizing your lease data.

Visual Lease is providing the information above for informational purposes only and should not be construed as legal or accounting advice.

The COVID-19 pandemic has impacted every company in some way. With “social distancing” and all the emergency regulations that are in place, many offices and nonessential businesses are shut down entirely — or at the very least, their brick and mortar locations are closed while employees work from home.

One of the business effects of COVID-19 that does not get a lot of attention is its impact on leases and the related financial obligations. Whatever leases a company holds — not just for office, warehouse, manufacturing, or retail spaces, but also for equipment, vehicles, and other assets — the pandemic-related shutdowns complicate lease obligations and the associated lease accounting and administration.

What should you look for in your leases to understand your obligations and manage costs?

1. Review Your Leases to Know What You Owe, and When

Although many companies are not using their leased assets while business is “on hold”, they may still be required to pay rent through the end of their lease terms, as well as any other costs spelled out in their lease agreements.

That is why now more than ever, it is critical to understand exactly what is in each of your leases and make sure you don’t miss payments and important events during closures or cutbacks due to COVID-19. Otherwise, you could be subject to late fees or nonpayment penalties — or worse, face eviction and still have to pay the rent.

What to Look for in Leases

The table below shows some examples of categories, events, and obligations to look for and review in your leases — given there may be changes to how and if your business is using leased assets.

Every lease will have different language, obligations, and consequences for the lessee/tenant and for the lessor/lease holder — and few, if any, probably anticipated anything quite like COVID-19.

2. Evaluate Your Lease Financials and Options Under COVID-19

With the timetable to get “back to normal” still to be determined and so much that remains unsure, it is also important to conserve business spending wherever possible.

For instance, now is a good time to print out a general ledger to date and review all of the recorded transactions to get an overview of your current expenses. You might even find some unnecessary or optional recurring charges you can cancel or put on hold.

In addition, by understanding your leases and being clear about your rights and obligations, you may be able to find areas where your company can avoid overpaying or incurring additional fees during this time.

Where You Might Save

For example, part of your monthly rent may go toward front-desk/lobby security or other services you are no longer receiving because the building is closed. If so, you may be able to negotiate with the lease holder for a lower monthly payment.

Or, your building may be reopening with some restrictions and now requires more intensive cleaning and sanitation in all public areas. Are you obligated to pay that additional cost under the term of your current lease? You’ll want to check before you agree to pay anything extra.

Does your lease include any language around rent abatements or what happens if the space cannot be used due to circumstances beyond anyone’s control (Force Majeure)? Ideally, your leases are clear and thorough — though, of course, even the best lease cannot include every “what if” scenario.

When an area of cost concern is not covered in a lease, having a good relationship with the lease holder will improve your chances of being able to negotiate a term that will satisfy both parties.

Reflecting Changes in Your Lease Accounting

If you cannot get out of a lease and must abandon an asset, you will need to write down its value over a short period of time while still retaining the liability and making the payments. If the landlord will let you out of the lease, you will need to account for any termination fee you pay, as well as write down the asset and the liability in your lease accounting.

In these and other circumstances,you can account for changes in lease payments, such as the remeasurement requirements for abandoned or terminated leases.

Next Up: How These Changes Will Affect Your Lease Accounting

In this series of blogs, we will talk about the impact of COVID-19 on lease obligations and your lease accounting practices moving forward.

In the meantime, if you have a lease accounting system already in place — or better yet, a lease management solution that combines lease accounting and administration functions in one system — you have tools that will make it easier to identify your current lease obligations and understand their financial implications.

For many businesses and their accounting departments, the recent move to the new ASC 606 revenue recognition rules from the Federal Accounting Standards Board (FASB) was eye opening. The process of implementing these changes regarding when and how to report customer payments on income statements proved to be more difficult than a lot of people anticipated.

And now, for private companies, the deadline for compliance with the new FASB lease accounting standard, ASC 842, is right around the corner.

What lessons can these companies learn from the transition to ASC 606 and apply to ASC 842? We’ve put together 8 key tips that are applicable as you work on achieving ASC 842 compliance.

1. There’s no time to waste.

When the deadline for private companies to implement ASC 842 was extended to January 2021, some companies put the task on the back burner so they could concentrate on adoption of ASC 606. 

But consider this: While ASC 606 was issued in May 2014, the rules did not go into effect until fiscal year 2018 for public companies and a year after that for private companies. That gave companies years to prepare — yet, many still found themselves scrambling to meet the implementation deadlines.

The message for companies still getting ready for ASC 842 compliance is clear: It is critically important not to underestimate the time and effort that will be required to meet the new lease accounting deadline.

Depending on the size of your business, simply finding the most current version of all leases can be a daunting task — and that’s before lease analysis, data input, and any software implementations get underway.

So, if you have not already begun the ASC 842 compliance process, we can’t say it enough: You need to start right now. 

2. Lease contracts are complex, so you’ll need more time than you think.

For many companies, the move to the ASC 606 took more time than expected due to the intrinsic complexity of contracts. With differences in compensation plans, commissions, terms, and other details, no two contracts are exactly alike — which means it takes time to read through and identify all the pertinent details.

The same is true of the lease contracts included under ASC 842. People often underestimate the task of accounting for all their leases, including facilities, IT and office equipment, vehicles, and other assets. 

For example, although almost all leases must be capitalized on the balance sheet under ASC 842, you still need to classify them as either finance leases or operating leases, because they are calculated differently.

In addition, once you start breaking down the details of a lease, you may be surprised at the level of complexity that is revealed. For instance, real estate leases often include common area maintenance (CAM) charges and additional items that must also be calculated and reported. 

Therefore, go into the process knowing that some leases you thought would be easy to analyze might end up taking more steps or revealing unexpected details that will affect your accounting decisions. 

3. Cast a wide net and enlist other departments to identify leases.

Under ASC 606, organizations quickly discovered that a team approach was necessary to account for all contracts pertaining to customer revenue.

With the vast amounts of data pertaining to leases across a business, the ASC 842 accounting team cannot go it alone either. It’s crucial to talk to many other departments within the company to track down all the possible sources of leases. 

Working with a team made up of all the key stakeholders from areas including Facilities, Real Estate, Legal, IT, and Procurement staff, as well as Accounting experts, will help you:

• Locate all the leases that the business holds
• Make sure you have the most up-to-date and accurate records
• Understand all elements of the contracts so that the standards can be applied correctly and consistently
• Determine whether it is likely that renewal or purchasing options will be exercised
• Find important related documentation, such as contract addendums, commencement letters, and interest rates

4. Examine all contracts for embedded leases.

With revenue streams often coming from many different sources and contract terms varying so greatly, ASC 606 adopters often found crucial details in surprising places.

To avoid surprises in ASC 842 adoption, be sure your lease analysis includes reviewing all your contracts thoroughly to identify embedded leases — components within a contract that provide for the use of a particular asset. 

For example, the portion of a service contract specifying the use of on-site equipment provided by the service vendor might be considered a lease, even if the word lease is not used.

5. Create a process for collecting lease data.

The need to review every contract for ASC 606 compliance made it clear that creating a data collection process in place helps to ensure all team members understand the task at hand.

With an ASC 842 team including stakeholders from different areas of the business, not everyone will be an accountant or a lease expert or both. Providing a process for lease data collection and making sure all team members understand what they need to do will ultimately help to ensure the accuracy of your financial reporting.

For example, you can create a process that includes guidelines such as:

• The types of data points you need for calculations
• Suggestions of where to find lease data in complex contracts
• Any supporting documents you may need
• The types of payments that need to be broken out, like base rent, CAM, taxes, and insurance

6. Evaluate early to assess long-term potential impact.

Another important reason to start analyzing your leases as soon as possible is that decisions you make now will affect your lease accounting practices for the long term.

This does not just include deciding how all your leases should be classified and, accordingly, how they will be recorded on the balance sheet. It also includes decisions such as which ASC 842 practical expedients you will utilize and the impact they will have on your financial reporting. 

Learn more: ASC 842 Practical Expedients and Transition Requirements

Making these strategic decisions before you collect your lease data will save you from discovering later that you need to backtrack and search for additional information to complete your lease calculations.

7. Implement new policies for leases moving forward.

While evaluating their contracts for ASC 606, many organizations found ways to change the way they were doing things and improve how contracts are written moving forward.

The same can be true of ASC 842 and lease accounting. By putting these standards in place, you have opportunities to make accounting decisions and create new practices that can help to ensure the best financial outcome for your company.

This process can serve as a learning experience that can help you bring greater standardization to new contracts, avoid complexity wherever possible, and make lease accounting more efficient. In addition, a review of all your current leases can uncover opportunities to consolidate expenses, exercise purchasing options, or renegotiate prices to save the business money. 

8. Get the help and tools you need.

As with ASC 606, many companies will need assistance making the transition to ASC 842. This is especially true with the deadline fast approaching and the time to train an internal team slipping away.

Perhaps you are short of staff who know how to interpret and extract data from complex lease documents. Maybe you are unsure how to weigh the time savings of practical expedients against their impact on your balance sheet. 

An accounting advisor can help to guide you through the ASC 842 transition requirements and all the important decisions you need to make. In addition, you can take advantage of abstraction services, project management, and other third-party support for ASC 842 compliance.

Most companies will also benefit from lease accounting software that serves as a central repository for lease data and performs lease accounting calculations. Or, you can opt for a lease management system — an all-in-one solution that provides full lease accounting plus lease administration capabilities for ongoing management of your lease portfolio.

To learn more, download the guide Lease Accounting and Lease Administration Software: Why You Need Both. 

The start of the new year means planning for what you need to accomplish in 2020. For accounting teams in private companies, there’s a big task on your plate this year: getting ready to comply with the new lease accounting standard, ASC 842.

Last July, private companies got a reprieve when the Federal Accounting Standards Board (FASB) made the decision to extend the deadline for compliance to January 2021. Chances are, that was welcome news since you were likely immersed in preparing for adopting the revenue recognition standard. Now that’s done, and you have less than 12 months to prepare for becoming compliant with ASC 842.

How are you going to utilize the upcoming year to become ready in time? Based on helping hundreds of public and private organizations through this process, you are going to need every bit of the months ahead. This process has repeatedly shown to take longer than companies expect, and the impact is much greater than originally anticipated.

That’s why we’ve put together a lease accounting guide for 2020. With these 5 steps, you can better plan your compliance project, establish a timeline for the year, and effectively accomplish your goals across the upcoming months as the deadline approaches.

This lease accounting guide is organized into 5 steps that encompass the major tasks and milestones required for ASC 842 compliance.

1. Schedule the months ahead.

With a complex project involving many stakeholders, it’s easy to get confused about what needs to be done – and when. Building a plan and a roadmap will guide you toward your goals.

In the early months of 2020, start by developing a plan that documents exactly what you need to accomplish, the resources you will need, and the timelines for meeting each milestone. It’s smart to set a deadline ahead of your final deadline, in case of unexpected delays or setbacks.

Part of developing that plan is making accounting decisions that will impact the scope of your effort. For example, what practical expedients do you plan to take? You’ll need to think through the pros and cons of saving time vs. the potential negative financial impact of electing certain expedients.
It’s critical to make these decisions early on, since your choices will impact the lease data points that your team will need to collect for every lease in your portfolio.

2. Determine who will be involved in the project.

This step does not need to take place subsequent of other steps. In fact, you may already have an idea of who to involve in your lease accounting project. If not, preparing for the lease accounting changes must involve additional stakeholders within your organization (along with your accounting team).

Any departments that may be responsible for leases within your lease portfolio, such as facilities, procurement, IT, and legal can help with gathering lease information. There will be users of any new technology you implement for tracking and reporting on lease data. And there will be whoever is responsible for changing their ongoing practices related to lease management in order to maintain compliance with the new lease accounting standard.

Many organizations will also benefit from involving an accounting advisory partner early in their compliance project, to help evaluate the potential impact to financial statements and make accounting decisions accordingly.

It’s smart to get your stakeholders involved from the outset, identify their roles and responsibilities with the project, and begin to work together on creating and implementing the remaining steps in your compliance project.

Learn more: FASB Lease Accounting Changes: How to Assemble Your Readiness Team

3. Conduct a lease inventory and compile data points.

The most time-consuming part of the process, you will want to get started on this as early as you can in 2020. Once you know what lease data you’ll need for lease accounting calculations, make an inventory of all your leases and extract the relevant data for each one.

You will need the help from the various teams who work with your organization’s leases. They can help find any lease documents that may be more difficult to find – whether they are tucked away in drawers, or existing in various spreadsheets and databases.

To do this step, you can also take advantage of lease abstraction services, which provides you with the added benefit of working with people who understand lease contracts.

No matter who is doing the work, having a streamlined process will make sure everyone knows what to do with the lease data as they collect it.

As you compile data from a variety of sources, you’ll need to reconcile lists, look for duplicates and investigate discrepancies. It will save a lot of time later if you make sure you’re working with data that’s complete and accurate BEFORE you begin the implementation of your lease accounting software.

IMPORTANT: According to the new standards, it’s not only the typical property and equipment leases that must be brought into the balance sheet. You must also examine all your contracts for embedded leases, or portions of contracts that meet the definition of a lease and must be reported on.

Learn more:
5 Tips for Smooth Lease Data Collection in Preparation for ASC 842
Embedded Leases Accounting: Do Your Contracts Contain Leases?

4. Implement lease accounting software.

Lease accounting software is a necessary part of successfully achieving compliance with ASC 842. The effort and the risks of managing all your lease data without it are simply too great.

The process and amount of time advised by lease accounting software providers for implementation may vary, but you will want to ensure you leave enough time for your organization to work with the provider you select, so your information is accurate and organized in a way that works for you.

This year, you should plan to begin implementation as soon as possible. It’s never too early to begin – and you will be very wise to not push this off until the very last minute, which could expose you to risking achieving compliance by the deadline.

A Deloitte poll from June 2019 found that only a quarter of public companies report that their lease accounting implementation projects are complete. Since the deadline for public companies passed in January of 2019, that indicates a lot of failures.

This is particularly concerning. At Visual Lease, we have not one failed implementation. Our dedicated team is committed to the success of your organization.

Working with a trusted implementation partner is a large part of achieving success and can make all the difference in meeting your deadline. However, you also need to be sure you are giving you and your partner enough time to work through the implementation.

5. Adjust policies and procedures.

Lease accounting compliance is not a one-and-done exercise, but a new way of working with leases that will impact your business for the long-term. Adopting ASC 842 is a big change to not only accounting. There will be a ripple effect that will require changes to many internal policies and operating procedures related to leased assets. For example:

• Leases can change during the course of a lease term. Variable payment amounts increase or decrease. Leases get renewed. Additional space is added to a lease contract. Specific underlying assets (such as computers or vehicles) may be removed from an umbrella contract. When these changes occur, the staff members involved with the change must alert the accounting team, because they will now impact your financial statements.
• Prior to ASC 842, few organizations had standards and controls around lease management and leasing decisions. Now leases have a much bigger impact on finances. So it’s important to put standards in place to ensure the best financial outcome for the company.

While you’re working toward gathering data and preparing to report under the new standards, take steps to create new practices and controls and train everyone involved, ideally before you go live with your new system.

Learn more: How and Why to Improve Lease Management Practices

The bottom line: don’t delay these crucial steps before the 2021 deadline. Everyday you delay starting your ASC 842 compliance effort, you’re increasing the chance that you won’t be ready in time to meet the deadline for reporting under the new standard.
There is only so much time you have this year. By following the steps above, you can be on your way to being prepared for implementation.

Need help? We’ve been through this process hundreds of times. We’re happy to talk through your questions.

If you’ve been reading up on preparing for the transition to FASB’s new ASC 842 accounting standard, you may have heard that lease data collection is complex and time consuming. In fact, it’s common for those who have not done it before (most private companies) to underestimate the effort required. Visual Lease has helped more than 300 organizations through the lease accounting process so far, and has helped over 700 organizations in managing their lease data. We can tell you from experience that lease data collection will take longer than you expect.

Here are some tips that can expedite the process, prevent mistakes, and save your sanity.

1. Line up resources for lease data collection 

The first thing to know is that lease data collection is not something your accounting team can handle on their own. This effort must involve other departments that work with leases (such as Real Estate and Procurement) to track down contracts and other documentation. You will also need help from your IT department to assist with technology implementation and systems integration.  

Learn more: FASB Lease Accounting Changes: How to Assemble Your Team

Many companies will also need outside expertise to get the job done. For one thing, to extract the relevant data from your lease contracts, you will need people who understand how to read and interpret these complex documents. If you don’t have employees with this expertise, you may need lease abstraction services. Most companies will also need lease accounting software to serve as a central repository for lease data and perform lease accounting calculations.

At the outset of your project, plan for the resources you will need (both internal and external) and get the necessary approvals in advance.

2. Make accounting decisions early 

We have seen too many companies make the mistake of doing lease data collection before choosing their practical expedients and making other strategic accounting decisions. Many of them had to scramble to collect additional data later and break it out into the components needed for calculations, putting their compliance readiness in jeopardy.

You need to make these accounting decisions early so you know exactly what data you need to collect, and how you need the data broken down. You’ll also need that information to configure your lease accounting system and technology integration.

It’s important to fully understand the standards and the implications of the decisions you need to make. For example, electing a practical expedient may save time, but it is important to understand the potential consequences for your financial reporting.

We recommend consulting your accounting advisory partner, who can guide you through these decisions and might even be willing to lead your compliance effort.

Learn more: Lease Accounting Decisions: Why It’s Smart to Partner With An Accounting Advisor

3. Create a process to collect lease accounting data

We can’t repeat it often enough: this is a big project with a lot of moving pieces and a great deal riding on the outcome — the accuracy of your financial reporting. Make sure you have an organized and well thought out plan for lease data collection. And make sure everyone involved understands the process, their role, and the deadlines.

Be sure to include the following in your project plan:

Documents and data points to collect for each lease. With your accounting decisions made, you can confidently decide exactly which data points you need for calculations. You may need to provide guidance about where to find them, especially for complex real estate leases with many associated documents such as addendums and commencement letters in addition to the master lease. Before beginning to extract data, make sure you have the most up-to-date and accurate records. You may need help understanding the links between the various documents, so you can tell which include the relevant data.

Learn more: Data Points You Must Collect for FASB Calculations

Plan to identify embedded leases. This is one of the trickier aspects of transitioning to ASC 842. In addition to lease contracts for property and equipment assets, there are other things that qualify as a lease that you may not be aware of. For example, if a service vendor provides equipment that you control (such as IT equipment or vehicles) as part of a service contract, that portion of the agreement may be considered a lease, even if the word “lease” never appears in the contract. So, your lease data collection plan must include reviewing all your contracts to find any embedded leases. 

Learn more: Embedded Leases Accounting: Do Your Contracts Contain Leases

How to get data points that aren’t in the contracts. Certain data points you need for accounting calculations can’t be found in the contracts. Interest rates are one example. Also, you need to know whether your company is “reasonably certain” to exercise renewal or purchase options. You’ll need to talk to the teams that manage those leases to get that information.

How lease data needs to be broken out. For example, lump sum rent payments must be broken down to show base rent, CAM charges, and taxes and insurance. You might need to work with lessors to work out how to separate gross payments into their components.

Process for getting data it into your lease accounting software. Make sure everyone understands what to do with lease data as they collect it. Here’s an article that explains several methods for centralizing and migrating lease data: How to Get Lease Data Into Your Lease Accounting Tool.

4. Don’t overlook ongoing lease management

Complying with the new lease accounting standard is something you are required to do; it’s not exactly a choice. But that doesn’t mean you can’t use this opportunity to your company’s benefit. 

This effort can actually help you reduce leasing expenses. How? By providing the intelligence and the tools to better manage your leasing practices and make more cost-effective decisions. And also by giving you the tools to audit lease payments and find out where you are overpaying. Here are just a couple of examples:

• Accounts payable continues to make monthly payments on outdated leases.
• You pay for building repairs that are the landlord’s responsibility according to the terms of the lease.

You’ll be surprised how easy it is to save millions of dollars with better lease management.

So, while you are collecting the required data points for lease accounting calculations, collect additional lease details that can help you manage leases and cut costs. And be sure to choose a complete lease system that provides management and expense audit tools.

5. Validate lease data quality

Remember that your ultimate goal is to pass accounting audits with complete and accurate balance sheets and journal entries. That’s why your lease data collection process must include data validation.

Chances are, your lease data currently lives in many different places and is managed by many different people, all with their own way of doing things. In some cases, you might have the same data in multiple places (and inconsistencies between different sources). 

As you work on lease data collection and aggregation, you need to make sure your data is complete and accurate. If you skip this step, you may have an unpleasant surprise as you begin running your numbers for the first time.

Learn more: Lease Data Validation Steps for FASB/IFRS Accounting & Reporting 

Now is the time to get prepared for lease accounting implementation

As you can see, just collecting your lease data is going to be a big job. And there are many other aspects of transitioning to the new standard that you need to understand and prepare for. Watch our webinar to find out what you need to know.

With the new FASB/IFRS lease accounting standards, significantly more assets and liabilities must now appear on the balance sheet. Yet, some businesses still aren’t using lease accounting software to help with the complex task of managing their lease portfolios. 

What are some of the lease accounting auditing risks that arise when you don’t use a software solution?

Exposure of lease accounting auditing risks

The new standards are designed to expose lease accounting auditing risks and reveal if an organization lacks the proper checks and balances in their accounting process.

No one wants to find out through an audit that they’ve been doing their lease accounting all wrong. Yet that is exactly what can happen when you do your accounting manually or with a spreadsheet application.

 The truth is, the risk of failing an audit is greatly increased when you don’t have a software system in place that mirrors your lease accounting policies and procedures.

Underestimating lease complexity

People often underestimate the difficulty of accounting for all their lease assets and liabilities. Even for businesses with a relatively small lease portfolio, facilities and equipment are the second biggest cost (behind the #1 cost, people).

 Once you start breaking down a portfolio and digging into the details, you may be surprised at the complexity of the leases and the costs associated with them. Not only are there different classes of assets (such as real estate and equipment) and different types of leases (operating and finance), but all are calculated differently.

 For example, real estate lease are very complex transactions, with common area charges and other details that must be reported accurately. Leasing office space might require complex calculations for how the building’s tenants divide costs such as:

• Cleaning the lobby and other shared areas
• Trash removal
• Parking lot maintenance
• Lawn/Landscape care

 There are many other important lease details that are easy to overlook. For example, you may have some embedded leases that are part of a larger contract, such as an IT support services agreement included in an equipment leasing contract.

 Unlike manual accounting, Visual Lease puts a proven process in place for capturing all these pertinent data points.

No audit trail for tracking change management

When you use a spreadsheet or calculators, there is no audit trail to help you track your change management process. That means you have no proof you’ve followed the policies and procedures you’ve put in place for change management, approval flows, and other lease accounting requirements.

 For example, lease data changes need to be recorded and tracked as they happen, so that if an audit takes place — for a credit evaluation, a bank loan, shareholder reporting, or other purposes — you can prove that everything is in order and up to date.

 Visual Lease reduces lease accounting auditing risks by providing an audit trail that thoroughly documents your change management process, including:

•  Who made a change
• The date and time the change was made
• Whether approval was needed for the change and, if so, who approved it
• If the change was required due to a data error or to show a change in lease management

 (Read more about changes to leases in our blog on lease accounting remeasurements.) 

Lack of controls

In lease accounting, everything is about controls and making sure you are consistent across your accounting process.

But with a spreadsheet or manual accounting process, there is not much you can do to control who can see the data or make changes to your lease records, which exposes your business to lease accounting auditing risks.

Visual Lease software helps to keep your data secure with password protection and a wide range of authentication features you can use to manage access, user roles, and permissions for your lease accounting system.

(Read more about lease accounting data security features.) 

No one place for your data

If you’re using a spreadsheet or calculators and manually entering the information in your balance sheet, you lack an important resource: a single data repository that includes all the supporting evidence behind it.

 With Visual Lease, you get a single-source repository that brings all your lease data together for easier tracking, change management, reporting, and verification should an audit need to be done.

Lack of notifications for important events

When you’re doing your lease accounting manually, you don’t have the ability to flag events and set notifications for important dates and events, such as:

•  Lease renewals
• End dates
• Payment increases
• Opt in/out deadlines

 With Visual Lease software, you can have the system alert you to important dates so you can stay on top of lease changes that have an impact on your liabilities.

Lack of visibility into location-level costs

Without software for administering and maintaining your lease portfolio, you may not be fully aware of the cost of leases at the location level.

For example, one customer had a warehouse that was paying $1,600 a month to lease a forklift — and had been doing so for eight years! For that amount of money, the company could have purchased the equipment several times over or leased a newer forklift with all the latest features.

Visual Lease provides visibility into these types of expenses so you can identify business risks as well as leasing accounting auditing risks. You can also set up the system to alert you to lease renewals and remind you to review the costs, to see if they still make good business sense.

Human error and incomplete data

Recording all your lease data and doing calculations by hand is not only difficult and time consuming — the chance of human error increases your lease accounting auditing risks.

A single typo or a misplaced decimal point can throw everything off. If you do business in other countries and must deal with multiple currencies, having to figure out the calculations on your own is an added challenge, with added risk of human error.

In addition, with the new lease accounting standards, more than 40 different types of data must be tracked to do the required calculations. Unless you have a very simple lease portfolio, how do you know which fields you need?

Visual Lease software guides you through the process using tried and true calculations that have been validated by more than 700 customers and our industry-leading accounting partners.

Plus, having already helped public companies successfully transition to the new FASB/IFRS standards, Visual Lease has best practices built into the solution.

 To learn more about how the Visual Lease platform can help you avoid common lease accounting auditing risks, give us a call. 

With the big push to achieve compliance, a lot of businesses have been laser-focused on making the transition to the new FASB/IFRS lease accounting requirements.

While that is understandable, it’s important to also think beyond the transition and look to what is next — namely, keeping up with the required lease accounting remeasurements.

In this blog, we’ll take a look at the common types of lease accounting remeasurements and offer some tips on how to make sure your data stays up to date.

1. What are lease accounting remeasurements?

The work doesn’t stop once you’ve done your initial lease accounting based on your knowledge of all your existing leases. That’s because, while you might think of contracts as being inflexible, the truth is that leases often require changes.

And according to FASB and IFRS codification and guidance, whenever there is a material change to a lease, the way in which you do your accounting must also be adjusted to reflect that change.

So, when circumstances cause changes in either the payments or the value of the lease assets themselves, it triggers the need for these lease accounting remeasurements.

2. Why is doing remeasurements important?

According to FASB/IFRS, if you don’t do lease accounting remeasurements as required when material changes occur, you are no longer in compliance, and your financial statements will be materially misstated.

It’s that simple — and that critically important.

3. What types of changes require lease accounting remeasurements?

Material changes are major events that can commonly occur during the life of a lease and require you to change the accounting pattern that you set up initially.

Both FASB and IFRS require lease accounting remeasurements when the following changes happen. Additionally, IFRS has some unique and somewhat more subtle requirements, which we will discuss a bit later.

Amendments

When a lease is renegotiated, a remeasurement must be done to reflect the changed terms of the lease. For example:

• At the 2-year mark in a 5-year contract, you’re confident you will want to remain in the same space beyond the current lease term. So, you decide to renegotiate to extend the lease term for an additional 5 years.
• Just 2 years into a 5-year contract, your mall loses a key anchor store — and potentially, a lot of foot traffic. So, you decide to renegotiate with the owner for better terms.
• Halfway through a 10-year lease, a neighboring office on your floor becomes available. Your needs are growing, so you and your landlord amend the lease to add the extra space for the remaining 5 years of the lease.

In each case, your accounting was set up based on the previous lease pattern, so you now need to adjust the numbers in accordance with the renegotiated lease terms.

Impairments

Changes to the leased assets themselves can also require lease accounting remeasurements. For example:

• Your building is damaged in a flood, making part or all of the office space unusable.
• A leased truck is damaged in an accident. While your driver was not at fault and the truck is still drivable, it is no longer as described in the contract.

In circumstances like these, you have the opportunity to write down some portion of the asset value because the asset is no longer worth what it was before.

Events Related to Unused Space

Here, there are two common scenarios that trigger the need for remeasurements:

• Abandonments — When you are not using a space but cannot get out of the lease, you must continue to pay and account for the space. Here, remeasurement requires you to write down the asset value over a short period of time while still retaining the liability and making the payments. 
• Terminations — When you are not using a space and the landlord is letting you out of the lease, remeasurement requires you to include any one-time termination fee you might pay, along with writing down the asset and the liability.

4. What are the unique remeasurement triggers under IFRS?

As we mentioned above, the new IFRS standard requires lease accounting remeasurements based on some additional, and more subtle, lease changes.

Index-based Change of Payments

Under FASB ASC 842, indexed-based changes to payments are considered variable rate payments and do not materially change a lease; therefore, those changes don’t require remeasurements.

However, IFRS requires lease accounting remeasurements whenever you have changes to lease payments based on indexes. For example, if the amount of your payment changes every 6 months or yearly based on inflation according to the CPI, you must do a remeasurement to reflect that change.

Interest Rate Changes

Under IFRS, if the interest rate under which your lease payments are made is changed — due to changes in the market rate, your credit rating, or some other factor — you must do a remeasurement.

That’s true even if the interest rate change is small, because the appreciation schedule you had before was based on an interest rate to which you no longer have access.

An interesting difference: Under FASB, most lease accounting remeasurements must be updated to reflect the current interest rate. However, a change in the interest rate in itself does not trigger a remeasurement requirement.

5. How can you spot the need for lease accounting remeasurements?

Lease accounting is not a one-and-done process, and keeping track of remeasurement requirements is an important part of the ongoing task.

Here are some tips to help you stay spot events that might signal the need for lease accounting remeasurements:

• Stay on top of the data and monitor lease information for changes in key areas. For example, changes in key dates usually happen when there has been a material change to a lease. So, new commencement and expiration dates might indicate an event such as signing a new or renegotiated lease, exercising a termination option, or other adjustments to the length of a lease.
• With real estate leases, keep an eye on information related to the rentable area. For instance, look for changes indicating that area has been given up or new space has been added.
• Monitor the payment structure. An unexpected change in payments might suggest there is a new contract or a change in lease terms that requires a remeasurement.
• Partner with your real estate team. With lease remeasurements triggers such as impairments and abandonments, the signs can be hard to spot through data monitoring alone. Keeping the lines of communication open between the accounting team and the real estate team — the people who typically handle the lease administration tasks — helps you stay on top of important yet subtle events.
• Use Visual Lease for lease administration as well as lease accounting. That way, you’ll have all the key fields set up for tracking lease modifications, events, and activities on an ongoing basis. Plus, you’ll have all the tools you need to do the necessary calculations, including remeasurements.

6. How does Visual Lease make lease accounting remeasurements easier?

Visual Lease not only helps you transition to the new standards. We’re here to help you stay compliant, with data tracking, reporting, and notifications for the life of every lease.

The Visual Lease implementation team uses a structured, robust process to set up the system the way you need it, to track the data points that are important to you. As part of the process, the team works with you to set up any system notifications you might need based on key fields.

The Visual Lease system also provides the ability to upload your own accounting schedules as your needs change or as new scenarios arise. This helps to ensure that Visual Lease always contains a complete picture of your portfolio for creation of your consolidated reporting for the SEC or investors.

In addition, Visual Lease continuously enhances the system, adding new scenarios and nuances to your data tracking and reporting capabilities so that you can keep up with changes over time — including events that require remeasurements.

To learn more about lease accounting remeasurements and other capabilities of the Visual Lease platform, contact us today and we’ll be happy to help.

You did it! You made the smart decision to purchase a lease accounting solution to help you ensure compliance with the latest accounting guidelines and reporting requirements.

Now comes the exciting — and somewhat intimidating — part: the process of lease accounting implementation.

You’re probably wondering where to begin. So, let’s start by taking a look at the basic steps that are vital to implementing a lease accounting platform.

What are the basic steps in platform implementation?

Visual Lease has created best practices for platform implementation. The steps in this process will guide you through your own implementation project, for lease accounting or virtually any software solution.

• Analysis: evaluating the requirements of the business
• Configuration: setting up the platform to meet the identified requirements
• Conversion: compiling lease data and populating the information into the platform
• Validation: ensuring that the platform as set up meets the business requirements
• Production: going live — this is where you actually start using the platform

Wrapped around all of these activities is training, the step in which users are educated on how to work with the platform. Unlike the steps above, which follow a progression, training should begin on day 1 and continue throughout the implementation process, alongside the other steps.

What tasks will help you prepare for lease accounting implementation?

Having helped more than 700 organizations implement their lease accounting platforms, Visual Lease knows what it takes to make the process run smoothly, so that businesses can start reaping the benefits as quickly as possible.

The following are 7 essential tasks that will help you get a jump on your lease accounting implementation project.

1. Take a lease inventory ASAP.

The first step is to locate and list all the leases that the business holds — checking finance, HR, operational groups, legal, IT, procurement, and other areas.

• Reconcile lists across the business.
• Identify the tools that are holding lease information. Is it in a Microsoft Access database, Excel, or some other spreadsheet application?
• Identify any embedded leases. For example, check your service contracts to see if they give you control of an asset. If so, those contracts are considered leases.
• Identify the impact of any bank covenants.

2. Determine what kind of lease data to track.

You want to identity which data points are important to the business — and which ones are not.

• Select expedients as soon as you can, so you know which data points you need to capture.
• Work with the different departments to identify data points for future operational needs — helping you pinpoint which lease information is important to those stakeholders.
• Assess any overlapping data — identifying which source is the best one, so you can streamline the process of compiling lease data.
• Determine how data points affect other data points — identifying which data points are part of other data sets, to consolidate and simplify data collection.
• Test data integrity and fix errors ASAP. You want to be sure everything is accurate and up to date before you migrate the data.

3. Build a strong team.

The most effective lease accounting implementation team is one that is representative of all the lease stakeholders across the business.

• Identify the individuals who are managing leased assets.
• Define everyone’s role and responsibilities in the implementation project.
• Assign a Project Manager. Doing so helps to promote team accountability and organization.
• Assign various Power Users for the platform — so the Project Manager or other leader has backup.
• Determine if you need an Accounting Advisor to fill project gaps or supplement your internal team.
• Engage everyone when implementing best practices — including the accounting team, advisors, and power users.

4. Educate your team.

Like training, education is an ongoing and vital part of lease accounting (or any) implementation.

• Become familiar with guidance for the new lease accounting standards.
• Determine how guidance will impact your lease portfolio.
• Build test scenarios.
• Ask your Accounting Advisor for help as needed.
• Take platform training ASAP. The earlier you begin training, the more smoothly the implementation project will go.

5. Build a realistic timeline.

The process of identifying leases and compiling lease data can take a lot longer than you think it will. (Just any public company that had to meet the new lease compliance requirements by 2019.) So, it’s smart to create a timeline that takes the following recommendations into account.

• Evaluate potential roadblocks and issues that may cause delays.
• Determine internal meetings that will be needed outside of platform implementation meetings, such as planning meetings for individual teams or departments.
• Estimate the time needed for project segments, such as the time to inventory leases and deg fine data points.
• Set a deadline ahead of your final deadline. This gives you a cushion of some extra time in the event of unexpected delays or setbacks.

6. Sharpen your communication skills.

Sharpening and deploying your best communications skills — and encouraging your team to do the same — will go a long way in helping everyone stay engaged and positive throughout platform implementation.

• Actively listen on implementation calls, to make sure you are getting all the details you need.
• Ask questions. Remember, there is no such thing as a dumb question.
• Be honest about how you feel. Sharing how you feel the implementation is going will help to encourage the team or help them make improvements as needed.
• Provide feedback to strengthen configuration.
• Meet internally to make decisions as needed.
• Stay organized.
• Involve your Accounting Advisor and other partners in calls and meetings.

7. Get started NOW!

We can’t say it enough: preparing for lease accounting implementation is a long and often complex process. So, the sooner you get started, the better!

• Have time on your side. Again, if possible, set a deadline with a cushion (some extra time) built in.
• Don’t be tied to the order of these 7 tasks. They are interrelated and often overlap, so it is fine — in fact, it’s good — to do multiple tasks at the same time.
• Ask your peers about their implementation experiences. You can learn from their good experiences, as well as from their mistakes.
• Make sure you allow enough time to do it right! A failed implementation is far more expensive and disruptive than taking the time up front to get the job done correctly.

Need more help?

Visual Lease is not only happy to help with your lease accounting implementation — it’s an important part of our business.

To learn more about our implementation services and the Visual Lease platform, contact Jenn Orlando, Director of Implementation, at jorlando@visuallease.com.

Extending the deadline makes sense. Many private companies expressed concerns about adopting 842 standards by the originally-proposed 2020 deadline. ASC 842 came on the heels of another FASB rule change, ASC 606, which required companies to change the way they recognized revenue. ASC 606 placed a huge burden on accounting and finance teams and many companies are still scrambling to comply.

In addition, the new lease accounting rules will require a huge amount of work. As public companies can attest, private entities will have to identify every one of their leases, including contractual arrangements that don’t look like leases, but are considered leases under the rules. They need to hunt down the documents, including amendments and letter agreements for each lease, many of which are buried in file drawers in remote offices. Also, they will have to identify the key terms and data points to extract from those leases in order to perform their lease accounting calculations. Those who have a significant quantity of leases will need to select and implement lease accounting software to manage and process that data. And when all of that is done, they have to generate and validate the asset and liability values for their financial statements’ disclosure schedules.

Each of these tasks individually can take months to accomplish. FASB recognized this, understanding that most private companies do not have teams and advisors in place to get this done (something else they have to do).

FASB made a wise decision in recognizing these challenges in its recent board meeting, and in deciding to extend the compliance deadline to 2021. But private companies beware: don’t use the extra time to sit back and relax; you will need every single day of this newly-found year to get this all done.

MARC BETESH, ESQ., MCR.H
Founder of both KBA Lease Services and Visual Lease, Marc leverages his knowledge of leases with technology to improve the management and performance of leases for both companies’ clients.
Marc received his BA from Temple University and his JD from Georgetown University. He is a member of the New York and New Jersey bars. Prior to establishing Visual Lease (1996) and KBA Lease Services (1985), Marc practiced law in New York City where he negotiated commercial leases.

Until recently, Corporate Real Estate (CRE) and Accounting departments had little reason to talk to each other. 
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CRE is primarily responsible for obtaining space and managing facilities-related issues. The Accounting department’s job (related to real estate) has been to pay the bills and record the expenses in the ERP. Before FASB ASC 842 and IFRS 16, accounting for leased property assets was straightforward. And for most companies, there was little effort to manage the expenses associated with property assets; those were considered necessary costs of doing business. So there was not much for CRE and Accounting to talk about. 

Because of the new lease accounting standards, that situation has changed dramatically in the past year. Companies must now account for leased assets and liabilities on their balance sheets. Real estate lease portfolios often represent many millions of dollars, and that value can have a big impact on financial statements. 

Plus, the new lease accounting standards make leasing costs more visible, and companies are realizing how much money they stand to save by better managing real estate leases.

That’s why, as companies assemble their teams and work toward compliance with the new accounting standards, it’s critically important that Accounting and Real Estate teams work together. 

What Accounting needs from Real Estate for lease accounting compliance

As a lease accounting and lease management technology provider, Visual Lease is often involved in the initial meetings as organizations begin planning for adopting the new standards. Because this process is new to them, many organizations make the mistake of thinking Accounting can manage it on their own. Many times, CRE is not even included in those early meetings.

The first thing that’s important to understand is how much time and effort it will take to gather all your lease data in one place. Few organizations have a central repository for lease information. Lease contracts are filed away in drawers, and lease data lives in spreadsheets on the computers of the people who manage those assets. Especially for a distributed organization, finding it all and centralizing lease data will be a big job. 

To further complicate things, accounting for real estate leases under the new standards requires much more information about leases than was needed in the past: information that Accounting does not have access to. We’re not only talking about the details of lease contracts, but also information about property decisions, such as whether or not leases are likely to be renewed at the end of the term. 

This information can only come from the CRE team. That’s why Accounting will need the help of the keepers of real estate lease data and the decision makers, to achieve compliance with the new standards. 

And there’s more: getting compliant is not a one-and-done exercise. Real estate leases change often: they are revised, renewed, and canceled as the space needs of the business change. Payment amounts for rent and maintenance may also change over time. Every time that happens, Accounting must update journal entries and balance sheets. So organizations need to set up processes for CRE to keep Accounting in sync with lease changes that impact financial reporting.

What CRE gains from working with Accounting on compliance

As Accounting teams begin to understand the magnitude of the effort required to collect and report on lease data (especially for complex real estate leases), they reach out to CRE for help. 

At first, lease accounting data collection may seem like a burden on the CRE team. However, it’s important to realize that this is an opportunity for CRE to “gain a seat at the table,”  become a more valued part of the organization, and demonstrate to the C-suite that their work is directly tied to business performance.

As I mentioned, the new lease accounting standards make real estate leases much more visible financially, and therefore a higher priority for the organization. Real estate lease information will now be needed for business planning and forecasting, and will affect not only the books but also things like debt covenants and borrowing capabilities. Suddenly, CRE has important expertise, control over critical assets and essential data, and their decisions have a much larger financial impact than ever before. 

And, due to the complexity of the new lease accounting standards, almost every organization with more than a few leases will need a central repository for lease data and software to perform calculations. Some software platforms, like Visual Lease, include tools that help manage leases and optimize lease expenses. 

So, that puts CRE in a position to become real heroes: they will have the data, the tools, and the status to drive process and policy changes that save the organization millions of dollars. 

How will organizational relationships evolve after FASB compliance?

At the very least, Accounting and Real Estate teams will communicate and collaborate more effectively during and after implementing the new lease standards. 

For example, we’re seeing two different strategies emerge for sharing the responsibility for lease accounting calculations between Accounting and Real Estate:

• Real Estate is responsible for collecting raw data (including details about options and other decisions) and generating the necessary lease accounting calculations. The Accounting team has the ultimate responsibility for financial reporting, so they must vet the numbers from Real Estate and use them to create the journal entries that feed reports.
• Real Estate collects only the raw data and passes that to Accounting to perform the calculations and create journal entries. In that case, Accounting will need to work closely with Real Estate to make sure the data is complete and broken down into the level of detail needed for calculations.

Changes in responsibility are also leading to changes in the organization’s reporting structure, with more Real Estate teams now reporting into the CFO’s office. That’s happening because Financial leaders want more visibility and involvement in Real Estate decisions. It’s not only lease-or-buy decisions that are important, but also choices about lease length and the availability and structure of lease options. When the two groups work more closely together, Accounting can calculate the financial impact of various alternatives before the decisions are made. 

Instead of moving Real Estate into the Accounting department, some organizations may choose instead to handle decision making related to property leases, including negotiating the leases, through the Finance and Legal departments. In this scenario, Real Estate will keep only the responsibility for facilities management tasks, and in companies where this is an important focus, for culture and employee experience.

Either way, it seems likely that the new lease accounting standards will drive changes in skill sets, responsibilities, and collaboration between the CRE and Accounting teams.

Over the past few years, Visual Lease has helped hundreds of public companies achieve compliance with the new lease accounting standards. For many organizations, real estate lease accounting turned out to be much more complex and time-consuming than they anticipated.

Part of the problem was that adopting IFRS 16 and FASB ASC 842 for real estate leases and other leased assets was a new challenge; every company was working through the process for the first time and had little idea what to expect.

At this point, public companies have successfully worked through the process, albeit somewhat painfully in some cases. The good news for private companies facing the compliance process this year is that you have the opportunity to learn important lessons from their experience.

To help ensure your compliance process runs smoothly and delivers the best possible outcome, we’re sharing some advice about the common mistakes and oversights we saw and how you can avoid them.

1. Overlooking the cost-saving potential of real estate lease accounting

For most companies, real estate leases represent the bulk of leased assets (not necessarily in number, but in terms of financial value). That’s why it’s smart to think bigger when setting your goals for real estate lease accounting. This exercise can bring more benefits than merely achieving compliance with the new accounting standards. The data you collect for real estate lease accounting calculations, together with your lease software, is a powerful business planning tool that can help you take control of property costs.

Thinking about these larger goals as you begin to plan for your compliance project will impact what data you collect, the team you put together, and the tools you select.

Learn more:

Lease Accounting Changes: The Silver Lining You’re Overlooking

2. Putting the entire compliance burden on the Accounting team

At first glance, it may seem like moving to the new standards is something the Accounting team can handle on their own. We can tell you from experience that you’ll need more than Accountants on your team. And the sooner you get them involved, the better.

If you fail to include the people who negotiate and manage leases, you’ll miss key insights about how leases function and where to find critical data. We’ve seen Accounting teams operating in a silo overlook important pieces of data and end up scrambling to collect it as their compliance deadline approached.

When it comes to real estate lease accounting, you’ll need the expertise of the Real Estate team. Real estate leases are extremely complex, and some of the data you need for lease accounting calculations will need to come from the people who are making property leasing decisions. Here’s just one example: for each real estate lease on your balance sheet, you’ll need to know the likelihood of that lease being renewed at the end of the current term.

Beyond Real Estate, you may also need to include representatives from Procurement, IT, and Legal on your compliance team.

Learn more: FASB Lease Accounting: How to Assemble Your Readiness Team

3. Underestimating the task of gathering real estate lease data

Here’s a promise: it will take more time and resources than you expect to collect all the lease data you need for lease accounting calculations. That especially true for real estate lease accounting, due to the complex nature of those leases and the fact that you can’t get all the data you need from the lease contracts. Our advice: don’t delay!

Organizations make the mistake of hearing an estimated implementation timeline from a software vendor (ours is 90 days) and assume they have plenty of time to get started. However, that 90 day timeline starts when your team is ready with lease data abstracted, assembled, verified, and ready for importing into the system.

Not having your data ready for software implementation (i.e. incomplete data and incorrect data) can result in significant delays.

Learn more: Lease Accounting Compliance Deadline: Will You Be Ready?

4. Lacking expertise about the standards

There are many policy and accounting decisions (such as electing practical expedients) that need to be made early in the compliance planning process. If you’re not thoroughly grounded in the nuances of the new standards, you might make the wrong choices, or fail to make them at all until so late in the process that you delay your compliance project. It’s important to consider how those decisions will impact your financial reporting and your business in the long term.

Our advice? If you don’t trust your own knowledge of the standards, turn to your accounting advisory partner for help and include them on your compliance team from the beginning.

And, you may also benefit from getting advice from Real Estate partners for your real estate lease accounting.

Learn more:

Lease Accounting Decisions: Why It’s Smart to Partner With an Accounting Advisor

5. Failing to plan for post-compliance lease management

To gain the true value of real estate lease accounting and complying with the new standards, you may need to re-think leasing policies and procedures and plan for post-compliance changes.

For example, you will likely need to put new procedures in place to keep Accounting informed about new leases as well as any lease changes that impact financial reporting. Real estate leases do change frequently: space is added or given up, maintenance charges change over time, and leases may be canceled mid-term or renewed with modified terms.

With the increased impact of leases (especially real estate leases) on the balance sheet, many companies are taking a closer look at their real estate leasing policies and making adjustments that help them make better business decisions.

Learn more: Lease Accounting for Real Estate: How Will the New Standards Impact Leasing Practices?

Lastly, you’ll want to take advantage of your lease software and the lease data you’ve worked so hard to collect. With the right tools, you can find and prevent overpayments, which can easily save you millions on property expenses.

Learn more:

How Lease Accounting Software Can Help You Save Money on Leases

Visual Lease has decades of experience with real estate leases, so our platform is designed not only to help you achieve lease accounting compliance, but also to help you manage leases and optimize your real estate expenses.

Want to see how Visual Lease can make lease accounting and lease management work for you? Schedule a demo now.

The stakes are high when it comes to choosing a lease accounting platform, because it directly affects the accuracy of your company’s financial reporting. Just about every firm working to implement the new lease accounting standards (FASB ASC 842 and IFRS 16) will be working with a new technology vendor to accomplish this project. How can you be sure you can trust what that vendor says about their own internal controls and practices, and how they will be handing your company’s financial information?

That’s exactly what Visual Lease’s SOC 1 Type 2 certification provides: proof (for both you and your independent auditors) that our internal controls are appropriately designed and properly executed to ensure safe and accurate processing of our clients’ financial transactions.

What is a SOC1 report?

A SOC 1 report is a comprehensive assessment conducted by an independent auditor to evaluate the internal controls of a service organization that could impact the financial statements of its clients. This report focuses on the organization’s ability to maintain accurate and secure financial reporting processes and provides assurance to clients about the effectiveness of these controls.

What’s required for a SOC1?

The requirements for a SOC 1 audit vary depending on the type of report being issued. However, there are some general requirements that all SOC 1 audits must meet, including:

• The service organization must have a written description of its internal controls over financial reporting.
• The service organization must have a process for monitoring the effectiveness of its internal controls.
• The service organization must permit the auditor to have access to all relevant documentation and personnel.
• The service organization must cooperate with the auditor’s investigation.
• The auditor must test the operating effectiveness of the service organization’s internal controls over financial reporting.
• The auditor must obtain written representations from management about the effectiveness of the service organization’s internal controls over financial reporting.

What does a SOC 1 Type 2 certification tell you?

Your lease accounting software vendor is a service organization that acts as an extension of your own company in the sense that they perform processing of your financial data, adding lease accounting journal entries to your GL and calculating lease assets and liabilities. That’s why your technology vendor’s controls and practices need to stand up to the same level of scrutiny that your own do.

Service Organization Control (SOC) assessments and reports, created by AICPA (American Institute of Certified Public Accountants) and performed and generated by an accredited audit firm, provide the assurance that a service organizations controls are properly designed to meet their stated control objectives at a specific point in time.

A SOC 1 report specifically addresses a service organization’s controls that relate to internal control of financial reporting. The Type 2 certification adds an assessment of the service organization’s execution of their own controls (whereas a Type 1 audit assesses only the design of controls). Auditors can come in at any point during or after the report’s specified time period to test and verify the service organization’s compliance with controls.

Because a SOC 1 Type 2 report covers a specific time period, it’s important to look for continuity of coverage over time. Chances are you will rely on your lease accounting technology for many years to come, so your auditors need to be satisfied that your chosen vendor continues to follow their stated controls and practices for the long term.

Visual Lease’s SOC 1 Type 2 certification services as assurance that your data is secure in our system and your lease accounting calculations are accurate.

Controls examined in Visual Lease’s SOC 1 Type 2 audit

Every SOC 1 audit is not the same; service organizations can have differences in their stated objectives and controls.

Visual Lease’s SOC 1 Type 2 audit covered data security, acceptable use of data, physical security of our offices, backup and recovery, and continuity planning. Our audit also went above and beyond policies and business practices to validate the most critical aspect of our service: our lease accounting calculations engine.

The following are the specific controls and business practices that auditors assessed and certified in Visual Lease’s SOC 1 Type 2 report.

• Organization administration.  These controls provide reasonable assurance that individuals employed are qualified, experienced, and trained for the job functions they perform.
• Client onboarding and administration.  These controls provide reasonable assurance that client and related lease data will be supported, authorized, accurate, and reliable.
• Lease calculations.  These controls provide reasonable assurance that lease data will be processed completely and accurately.
• Governance and compliance.  These controls provide reasonable assurance that risk identification and management, as well as relevant laws and regulations that impact operations, are identified, known, understood and implemented into business operations.
• Physical security.  These controls provide reasonable assurance that physical access to the system is restricted to authorized personnel.
• Environmental controls.  These controls provide reasonable assurance that the system is protected against fire and smoke and that temperature and humidity is maintained within predefined ranges.
• Logical access:  These controls provide reasonable assurance that logical access to systems is restricted to authorized personnel and is based on job responsibilities.
• Vulnerability management.  These controls provide reasonable assurance that the Visual Lease infrastructure is adequately secured from vulnerabilities.
• Backup and recovery.  These controls provide reasonable assurance that appropriate backups of critical systems are made to enable recovery from an outage or data center failure.
• Change management.  These controls provide reasonable assurance that changes are tested, approved, and documented prior to implementation.
• Website availability.  These controls provide reasonable assurance that service levels are defined between Visual Lease and its clients and that application availability and the hosting environment are monitored.
• Third party providers.  These controls provide reasonable assurance that third-party service providers are monitored.

How has SOC 1 Reporting Evolved Over Time?

Before, the absence of standardized reporting allowed companies to share information as they pleased, favoring insiders but leaving consumers and shareholders in the dark about internal controls and investor safeguards.

The American Institute of Certified Public Accountants (AICPA) stepped in to standardize this process, introducing auditing standards for compliance. In 2011, these standards evolved into SSAE 16, later renamed SOC 1, effective from June 15, 2011.

SOC 1 aimed to align US reporting with international practices, introducing two key changes:

1. Requiring a comprehensive “system description” in place of the prior control description.
2. Mandating a management-crafted assertion outlining control standards and responsibilities.

This new framework focused on reporting the service organization’s financial control internals, including risks from internal personnel and processes in the system description.

The challenges of lease accounting data collection for distributed firms

Getting ready for compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16) is a complex and time-consuming process. But the challenge is greater for companies who have widely distributed lease data, such as firms with many physical locations, and parent companies with many subsidiaries.

If your company is facing this challenge, you’re probably wondering how to accomplish some important pieces of the process:

• Collecting lease accounting data from many different people, systems, and locations.
• Setting up a lease accounting and lease management system that meets everyone’s needs.  

In this article, we’ll share some tips to help you find and collect all your lease data, as well as strategies to make your compliance process faster and smoother.

Lease data collection tips: how to find all your lease data

One of the reasons lease accounting data collection is so complicated is the wide variety of assets that companies lease.

It’s obvious to look for real estate leases, office equipment leases, and vehicle leases. But there are other leases that may not immediately come to mind, such as furniture or construction equipment. And, there are items that are considered leases even if the contract doesn’t say so, such as assets that are included with service agreements.

When those assets are distributed across many locations and regions, it’s even more difficult to find everything.

Here are the lease data collection steps we recommend. Share this process with each stakeholder collecting data for their respective subsidiary company or location.

STEP 1: Start with Accounts Payable

Your Accounts Payable teams can provide a list of all recurring monthly payments. This will identify the lease holders and finance companies you are paying. Depending on your records, you may be able to drill down and find information about the leases covered by these payments.

STEP 2: Reach out to those who negotiate and manage leases

If you need more information than you can get from Accounts Payable, contact those who obtain and manage leases. Real Estate, IT, and Procurement should all have records for the leases they manage. Be sure to ask for all the documents related to each lease. For example, Real Estate should provide commencement letters along with the lease contracts.

STEP 3: Turn to Procurement and Legal to find embedded leases

Embedded leases can be found in service contracts and other types of agreements. Ask your Procurement and Legal teams to check all contract records for assets you use as part of a contract, even if the contract doesn’t specify the word “lease.”

Learn how to identify embedded leases: Embedded Leases Accounting: Do Your Contracts Contain Leases?

STEP 4: Ask lessors and finance companies for lease records

If you don’t have records of all the leases covered by a recurring payment, OR you don’t have all the data you need to track for each lease, it’s time to turn to the lessors. Since they need to do their own accounting for leases, they should be able to provide the details you’re missing.

Now that you know how to tackle lease data collection, here’s what you need to know to implement the project throughout your organization.

Tips for lease accounting project planning

Plan your timeline conservatively

As you work out your timeline to lease accounting compliance, plan for more time than you think you’ll need, especially for lease accounting data collection. Those of us who have been through this process with hundreds of public companies over the past year know that most companies underestimate the effort required for lease data collection. Consider the steps involved in collecting lease data:

• Identifying everyone in your organization who may have lease data somewhere.
• Figuring out what data you need to collect for every lease.
• Devising a method for collecting the data in a central location.
• Reaching out to stakeholders and asking them to find leases (and waiting for them to do so, when they also have other jobs to do).
• Having lease contracts abstracted to collect all relevant data points.
• If necessary, obtaining translation services for contracts in foreign languages.
• Figuring out where you’re missing data points and doing the research to find that information.
• Testing and validating lease data.

The point is, for most accounting teams there is more to do than you realize at the beginning of the project. And many dependencies and stakeholders to manage. So take that into account in your planning process and start early.

Related Article: Lease Accounting Compliance Deadline: Will You Be Ready?

Make decisions at a global level

When you have a distributed organization, you often have different groups operating independently. That means each subsidiary or location is tracking and using lease data in different ways. If you don’t have visibility into what everyone is doing, you may be considering sending out a survey or otherwise collecting input from everybody about how to set up your lease accounting system. Or every getting everyone involved in choosing the tool.

Here’s our advice based on lessons learned over the past couple of years. Going that route can significantly delay your project. The time it takes to wait for the responses, then figure out how to include every field that everyone asks for, is time you’ll wish you had back later on. Instead, make the decision at a global level about what data you need to track for accounting and lease management purposes (ideally with the help of your accounting advisor and key stakeholders), and move forward from there.

Read the last tip for advice on getting buy-in and cooperation from all those who will be using the new lease system.

Set up spreadsheets for lease data collection

The simplest way to do lease data collection in a distributed organization is by using spreadsheets. Once you know the data fields you need to collect, create a spreadsheet for each stakeholder collecting lease data.

As you receive the spreadsheets, you can import the data into your lease accounting system. Once you have data in the system, you can begin to test and validate.

IMPORTANT: Be sure to make accounting decisions that impact data collection (such as practical expedients you plan to take) as early in the process as possible.

Share the benefits of your lease accounting and management system

Once you’ve chosen and configured your lease accounting system, you can show it to all your stakeholders when you ask them to collect their lease information. Demonstrating the lease management capabilities and reporting they stand to gain once their data is in place can encourage them to make data collection a priority.

We know that complying with the lease accounting changes is new to most private companies. However, it’s far from new to us at Visual Lease. We have been through this process hundreds of times over, and we are here to help. Don’t hesitate to reach out to us with your questions.

For private companies faced with adopting ASC 842 and/ or IFRS 16 this year, there are many complex lease accounting decisions to make. These decisions impact not only your compliance project, but ultimately your balance sheet, financial reporting, and ability to pass audits.

How will you make those decisions, especially if you’re not an expert on the new standards?

Many companies will benefit from advisory expertise to guide them. Here’s why.

Private Companies Are Underestimating the Complexity of Lease Accounting

For private companies who do not have massive global lease portfolios, adopting the new lease accounting standard (FASB ASC 842) might appear to be a simple exercise. We are seeing many who assume they can purchase software, load in some data, click a button, and achieve compliance.

The reality is, even with a smaller lease portfolio, adopting the new standard is complicated. Simply adopting software and putting data into it does not make you compliant.

For one thing, software can only perform calculations and create journal entries from the data you put in. If you’re missing data, or your payment entries are not properly broken out, what you get out of the system will be incomplete and inaccurate.

Getting compliant with the new standard requires making accounting decisions that have big implications for your financial reporting. Those decisions impact what data you will put into your lease accounting system, and in what format. We’re talking about decisions about practical expedients, discount rates, and other factors that impact your calculations and reporting.

If you’re not an expert on the new standard, it may be tempting to rely on advice from your software vendor to help you make those decisions. Keep reading to learn why that’s a mistake.

Why Trust Accounting Advisers for Advice About Accounting Decisions?

When it comes to adopting the new lease standards, there are gray areas that may force you to make decisions about how you want to handle your lease accounting. When it’s time for an audit, you’ll need to justify your decisions. That’s why you need to carefully consider who you rely on to help you make them.

Here’s an example. We worked with a large public energy firm that has many thousands of leased port-a-johns in its portfolio. According to ASC 842, any lease longer than 12 months needs to be included on the balance sheet, and therefore in lease accounting calculations. Even though these leases were longer than 12 months, they comprised less than 1% of the firm’s total lease disclosure dollar amount.

The head of financial reporting decided that these leases were not significant enough to include in lease accounting calculations. He felt that making the effort to collect all the data and perform complex calculations didn’t make sense, given that the result would make little impact on the financial statements.

When this company faces an audit, they will need to defend that position to an auditor. If you’re in that position, how will you do it? Here’s what won’t fly: telling an auditor your lease accounting vendor said it was okay. It’s very likely the auditor will be concerned about a conflict of interest with advice from a software vendor, even if they are experts.

If you have carefully studied the standards, you may be comfortable relying on your own expertise. Otherwise, citing advice from recognized experts from major accounting firms is the safest way to make sure your decisions are sound (and justifiable to an auditor).

7 More Reasons to Get an Accounting Advisory

If you’re on the fence about whether it’s worth getting help from an accounting advisory partner, consider that they can help you with much more than decisions about what to include in your calculations. Here are just a few areas where an advisory partner can ease the burden of getting ready to adopt the new lease accounting standard.

Technical accounting. Advisory partners can steer you through the process of making the important up-front accounting decisions about practical expedients, discount rates, and other gray areas.

Tax implications. Your lease accounting decisions can have significant tax implications. Advisers can help you work through that and be prepared.

Centralizing lease data. An adviser can help with the complex and time consuming process of gathering distributed data into a central location for importing into your lease accounting system.

Data validation & analysis. You’ll need to understand exactly what data points to collect for each lease, and validate the completeness and accuracy of your data. An advisor can expedite your data collection efforts and help you avoid mistakes.

Vendor selection. An adviser can help you define software requirements based on your specific needs and priorities, and recommend appropriate tools.

Policies and process control. Getting compliant is only the beginning of adopting the lease accounting standards! Going forward, you’ll need new policies and procedures for approving lease financials and getting the data into your accounting systems. Advisers can help you design new controls.

Change management. Once everything is ready, companies will need to manage the change process with communication and training. Advisors can help put that into place.

We Are Committed to Your Success

Like many lease accounting software providers, Visual Lease has technical accountants and CPAs on staff. However, we’ve made it a policy not to make accounting decisions for our customers. Not because we can’t give good advice, but because advice from a software vendor will not satisfy an auditor. It’s just too risky for our customers.

We want you to be successful in adopting the new lease standard, with complete and accurate reports that don’t draw flags from an auditor. That’s why we highly recommend doing your due diligence and getting credible and reliable advice from advisory experts.

Learn more from these related articles:

FASB Lease Accounting Changes: How to Assemble Your Readiness Team

Lease Accounting Implementation for Private Companies: 5 Pitfalls to Avoid

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.

For private companies just beginning to think about adopting the new lease accounting standards, it may seem like you’ve got plenty of time. The lease accounting compliance deadline for a calendar-year private company is January 1, 2020. FASB ASC 842 takes effect for fiscal years (and interim periods) starting after December 15, 2019.

That might seem very far away right now. Let me assure you that it’s not!  Based on our experience going through the compliance process with hundreds of public companies over the past two years, the best advice we can give private organizations is to start on your lease accounting compliance project NOW rather than later.

Lease accounting compliance deadline: waiting too long will cost you

There’s a limited pool of talent and resources available to help organizations gather data, abstract lease contracts, and handle systems integration. It’s a question of supply and demand: as the lease accounting compliance deadline approaches, the cost to obtain those services can rise significantly.

Also, if you wait too long and end up cutting corners by skipping over the planning stages, that can come back to bite you in both re-work and extra expense later. For example, we’ve seen companies jump in and collect lease data before they have considered their practical expedients and how that impacts the data needed and how it must be broken out. The result? They had to scrap their first set of data and pay to do it twice.

Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

Why you need more time than you think

Gathering your lease data requires a massive effort.

In the beginning, many companies underestimate the time and resources that will be needed to find, collect, and aggregate lease data. If your data is decentralized, the effort will be even greater. Think about your own internal resources. How much time will they have to devote to this effort on top of their other responsibilities? I can tell you this: even if you start now, dedicating an hour a day won’t get it done.

Here’s an example to illustrate my point. Let’s say you have 400 real estate leases where you’ve negotiated lump sum rent payments for the sake of simplicity. That might have been a great strategy until now. However, as you prepare for lease accounting compliance, it may turn out that you need to break down gross rent payments into lease and non-lease components. How will you do that? You may need to ask landlords for copies of their invoices. You may need to seek out the advice of real estate brokers. Now imagine doing that 400 times for each of your property leases. Now you should begin to understand why this exercise takes a long time.

Learn more: Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance

It’s smart to build in time for the unexpected.

The lease accounting compliance effort is a complex project and unexpected things inevitably cause delays. As I mentioned, decentralized organizations are the most at risk. When lease information has never been collected in one database, companies often have no idea how far out to cast the net to find all their lease contracts. Here’s what ends up happening: invoices for a recurring payments turn up that weren’t accounted for in the calculations. If that happens late in the process, it can cause a lot of re-work and significantly delay your project.

Tips for getting started on your lease accounting compliance project

Engage reputable resources now.

As I mentioned, there’s a limited pool of vendors and consultants with the expertise to help you pull together and abstract lease data. In 2018, resources were tight handling the public companies racing to achieve compliance by Jan 2019. This year, four to five times as many private companies will be trying to engage those same resources before the upcoming lease accounting compliance deadline of January 2020.

If you have limited internal resources and a lot of leases, it’s in your best interest to engage the help you need right now. And, be sure to invest the time to properly evaluate those services. Get samples of lease abstracts to check for the quality you need. The old saying “garbage in, garbage out” should guide your due diligence efforts. Poor data will ultimately lead to inaccurate financial reporting.

Decide on practical expedients.

The practical expedients you decide to take for your financial reporting have a big impact on the way your data needs to be collected, broken out, and organized. If you collect data without making these decisions, you may have to backtrack and start all over again. Or in the best case, delay your project while you manually rework your lease data.

Divide and conquer.

Many companies struggle with which task to do first: collecting lease data or choosing a lease accounting system. It’s a tough question, because it’s kind of a chicken-and-egg situation. You need to understand your data to choose a system, and you need the system to know how to organize the data.

In our experience, the most efficient way is to do both simultaneously. Gather your lease accounting compliance committee and create two teams: one to spearhead the data collection effort, and one to evaluate lease accounting technology. Have your teams regularly touch base to report on progress, compare notes, and share helpful information.

When ASC 842 and IFRS 16 were first announced, there was quite a bit of uncertainty about how the accounting would work for variable rent leases. Large public companies found themselves in the role of early adopters, and had to work out many complex accounting calculations and processes that had never been done before.

FASB and IASB have since provided revised guidance, and accounting advisors and technology providers (like Visual Lease) have learned valuable lessons from the experience of helping public companies move toward compliance in 2018.

If you are part of the next wave of organizations ramping up your lease accounting compliance efforts for the 2019 deadline, you’re in luck. You can benefit from the best practices developed over the past year, and avoid time-consuming mistakes and delays.

What are variable payments?

Variable payments are payments that can fluctuate or change in amount based on specific factors or events. These factors could include variables such as usage, sales volume, market conditions, or other predefined triggers. Unlike fixed payments, which remain constant over time, variable payments can vary up or down depending on the circumstances they are tied to. These payments can be found in various contexts, including lease agreements, loans, contracts, and other financial transactions where the payment amount is subject to change based on certain conditions being met.

Why are variable rent leases so complex from an accounting standpoint?

In the past, the difficulty with variable rent leases was only about calculating the correct payment, whether that was based on on a variable interest rate, CPI increase, a percentage of sales, or some other variable factor.

Under ASC 842 and IFRS 16, variable leases require much more complicated accounting. You’ll need to understand how to break out all the components of variable rent leases, including non-lease components, so you’ll be able to properly represent them on your balance sheet. Also, you need to consider how the accounting treatment will change over time.

Here’s just one example to illustrate some of the issues that will arise with variable rent leases:

Let’s say you have a lease that starts at $10,000 per month, with straightforward CPI increases over time. That base rent of $10,000 goes into the calculation of your ROU asset and liability, and the CPI increases are treated separately as variable payments.

That process continues the same way (although the amounts of CPI increases may change each year) until something happens that requires a remeasurement of the lease, such as exercising an option. Upon remeasurement, all those CPI payments that were variable before now get treated as fixed payments that go into the calculations for ROU assets. Only the future CPI increases (after the remeasurement) qualify for the variable payment treatment.

That’s just for leases with simple CPI increases. What happens if your increase has a floor? Let’s say each increase can’t be less than 2 percent. In that case, the 2 percent becomes part of the fixed payment, and only increases above 2 percent are treated as a variable payment. To complicate matters further, if you also report under IASB or other non-US GAAP standards, CPI increases are handled differently.  Your accounting standard must be capable of handling multiple methods simultaneously.

Needless to say, there’s a great deal to learn. When it comes to handling all the complicated scenarios for variable rent leases, you will need guidance from your accounting advisors. Here’s what is critical to know now as you begin preparing for compliance with the new lease standards:

How are variable rent leases accounted for under ASC 842 and IFRS 16?

Under both standards, variable rent leases are classified as finance leases. This means that the lessee must recognize a right-of-use asset and a lease liability on the balance sheet. The lease liability is calculated as the present value of the future lease payments, including any variable payments. The right-of-use asset is calculated as the cost of the lease, less any lease incentives received.

The variable payments under a variable rent lease are treated as part of the lease liability. This means that the lease liability will increase or decrease each time the variable payments are adjusted. The lessee must also recognize interest expense on the lease liability over the lease term.

The main difference in the treatment of variable rent leases under ASC 842 and IFRS 16 is how the variable payments are estimated. Under ASC 842, the variable payments are estimated using the most recent information available at the commencement of the lease. Under IFRS 16, the variable payments are estimated using the best available estimate at the commencement of the lease.

The difference in the treatment of variable rent leases under ASC 842 and IFRS 16 can have a significant impact on the lessee’s financial statements. For example, if the variable payments are estimated to be higher under ASC 842 than under IFRS 16, the lease liability will be higher under ASC 842 and the lessee’s interest expense will also be higher.

What are the key considerations for tracking and reporting variable rent lease data?

• Identifying all of the variables that affect the lease payments. This includes the index or rate that the rent is tied to, the amount of usage of the leased asset, and any other factors that are specified in the lease agreement.
• Tracking the values of the variables over time. This will allow you to accurately calculate the lease payments and update your accounting records accordingly.
• Recording the lease payments in your accounting system. This will ensure that the lease payments are properly reflected in your financial statements.
• Reporting the lease payments to your stakeholders. This may be required by law or regulation, or it may be necessary for internal reporting purposes.

What are the challenges of accounting for variable rent leases?

There are several challenges to accounting for variable rent leases, including:

• Complexity: Variable rent leases can be more complex to account for than fixed rent leases because the lease payments can fluctuate over time. This can make it difficult to accurately calculate the lease liability and right-of-use asset.
• Volatility: The value of variable rent leases can be more volatile than the value of fixed rent leases. This is because the lease payments can be affected by changes in the index or rate that the rent is tied to, or by changes in the amount of usage of the leased asset. This volatility can make it difficult to forecast the future cash flows from the lease and to manage the lease risk.
• Data management: Variable rent leases require careful data management to track the variables that affect the lease payments and to calculate the lease liability and right-of-use asset accurately. This can be a challenge if the lease agreement is complex or if the variables that affect the lease payments are not well-defined.
• Compliance: Variable rent leases can be complex to comply with accounting standards and regulations. This is because the accounting treatment of variable rent leases can vary depending on the type of lease, the index or rate that the rent is tied to, and the amount of usage of the leased asset.

Despite the challenges, it is important to properly account for variable rent leases. This is because variable rent leases can have a significant impact on a company’s financial statements. By carefully managing the challenges of accounting for variable rent leases, companies can ensure that their financial statements are accurate and that they are in compliance with accounting standards and regulations.

Best practices for recording and tracking variable rent lease data

1. Identify all the variables in your lease payments

It’s not enough to capture the fact that a lease obligation has a variable component. Different variable payment structures qualify for different accounting treatments. And to further complicate things, under the US standard (ASC 842) variable leases may be treated one way, whereas under the international standard (IFRS 16) variable leases may be treated differently. If you must comply with both, you may need to apply two different accounting treatments to the same lease. That’s why it’s so important to understand and capture every parameter that affects how lease payments change over time.

You’ll need the advice of your accounting partners to decide how you’ll treat different variable payment scenarios as well as what practical expedients you plan to take. Then you can work out what data you’ll need to create the calculations.

2. Isolate every variable in your lease management and accounting system

Create separate line items for every variable; don’t make the mistake of combining them with the overall obligation that’s being increased over time. If everything is lumped together, when a remeasurement occurs you’ll be forced to go back and spend a lot of time making manual accounting adjustments.

3. Creating the data right structure

It’s essential to create the right relationship between your fixed rent components and your variable payment components in your lease system.

On one hand, you need to connect them so that you can combine them for payment purposes. But you must also be able to treat them separately as needed for accounting purposes that change over time.

When a remeasurement event occurs, you’ll be in the best position to make a smooth and easy transition to a different accounting treatment.

Visual Lease accommodates complex lease structures and makes your workflow simple

It’s no secret that accounting for variable rent leases (or any leases that have a variable payment component) is complicated. That was true even before the new lease accounting standards, but under ASC 842 and IFRS 16 the complexity has increased exponentially. Plus, with leases more visible on the balance sheet and making a bigger impact on your financial reporting, the stakes are higher and you need to be sure you get it right.

That’s why Visual Lease has taken what we’ve learned working with the early adopters and built best practices into our tools that adapt to the complexities of variable rent leases. With our smart and flexible data architecture and the ability to change accounting treatments automatically, you not only get to compliance fast, but you do it right so you avoid re-work later. Your Day 2 workflow is simple and efficient

Ready to see how it works? Request a demo now.

FAQs:

What are the different types of variable rent leases?

There are two main types of variable rent leases:

1. Index-based leases: These leases tie the rent payments to an external index, such as the Consumer Price Index (CPI) or the London Interbank Offered Rate (LIBOR). The rent payments will increase or decrease in line with the index.
2. Usage-based leases: These leases tie the rent payments to the amount of usage of the leased asset. The rent payments will increase or decrease depending on how much the asset is used.

How are variable lease payments treated in accounting?

Variable lease payments are handled differently based on lease type. For operating leases, they’re recognized as expenses when incurred. In finance leases, they become part of the lease liability and noted as interest expense over the lease term.

What are variable lease payments under IFRS 16?

In IFRS 16, variable lease payments are payments influenced by events beyond time, like asset usage or market changes. These include percentage-of-sales payments, usage thresholds, or market price adjustments.

Are variable lease payments included in lease liability?

Yes, variable lease payments must be included in the lease liability and asset. They’re added initially if known, or later when event-dependent.

What’s the difference between variable and fixed loans?

Fixed loans maintain a constant interest rate, ensuring steady payments. Variable loans have rates that change due to market shifts, impacting monthly payments.

What is an example of a variable rate?

Examples of variable rates include adjustable rate mortgages (ARMs) and credit cards, where rates change based on indices or market conditions.

Can your lease accounting software find lease payment mistakes?

Were you under the impression that lease accounting software could only perform accounting calculations and add information to your balance sheet?

It’s true that this is the primary focus of many lease accounting products. However, smart organizations are choosing more comprehensive lease software that’s designed to provide lease administration along with the lease accounting calculations you need for FASB and IFRS compliance.

Why? Because by properly managing leases and auditing lease payments (which are now much more visible to your financial officers and external auditors), you can uncover millions of dollars in hidden waste and overpayments.

Having this capability is an important opportunity for organizations that want to save money on operational expenses. And who doesn’t stand to benefit from saving money?

3 common ways organizations pay too much for leases

Organizations spend a great deal of time and money negotiating leases for real estate and other assets, making sure the terms align with their best interests. Then, after an agreement is completed and signed, it goes into a filing cabinet, never to be seen again.

Bills come in from lessors and get paid by your AP staff. Expenses are incurred and paid for. Meanwhile, how do you know those charges are in line with what you agreed to pay? Very few organizations are checking to make sure they are, because it’s just too time consuming to find the lease and check every bill. (Not to mention trying to understand the contents of the lease once you find it.)

The problem is, the charges are inaccurate more often than you might expect. That’s because the lessors are not checking either. Landlords typically bill every tenant using to same method and leave it to lessees to challenge the charges.

There are countless details and nuances in lease contracts, especially for real estate leases. When no one is checking the bills against the lease details, incorrect charges and overpayments happen frequently. Here are just a few common examples.

1. Paying charges specifically excluded from the lease

With the use of many leased assets, things periodically need to be maintained and repaired. In a leased office space, the AC needs to be serviced, broken plumbing must be repaired, and faulty light fixtures replaced. The same is true for vehicle leases: cars, trucks and construction vehicles need oil changes and repairs.

When you order these repairs and maintenance services, chances are you automatically pay for them. But what if the lease specifies that the landlord or lessor pays for these items?

If you’re not checking, you’ve likely paid for many expenses that were not your responsibility.

2. Paying an inflated share of building expenses

In leased buildings, shared operational expenses (such as utility changes, cleaning costs, or landscaping expenses) commonly get divided among all the tenants in the building. Each tenant pays a percentage determined by the amount of usable space they occupy.

So what happens when there’s a change to the amount of usable space? Maybe the landlord added a new wing to the building. Or, maybe you gave up a portion of the space you were renting when a floor was subdivided. In both cases, your percentage of CAM charges should be reduced.

If your landlord doesn’t adjust your bills and your AP staff automatically pays those incorrect bills, you lose money for the remainder of the lease.

3. Paying for things you didn’t get

When a lease is negotiated, sometimes landlords agree to certain terms you request, such as the first month’s rent free, initial cleaning, or changing the carpet.

Many times, those agreed-upon changes to the landlord’s standard lease never make it into the billing, so you never get your free month’s rent. Or worse, you get charged for things you never received, like cleaning or carpeting.

Find and prevent overpayments with lease audit capabilities

The fact is, it doesn’t matter what’s in your leases if you’re not tracking the details and regularly validating your payments to be sure your lease payments align with the contracts.

When your lease accounting software tracks not only lease payment information (needed for accounting calculations) but also documents all the details of your leases, you have a powerful tool for preventing overpayments.

Here’s how you can do that when you choose lease accounting software (like Visual Lease) that offers lease auditing capabilities.

Validate every payment against the lease

Visual Lease users can automatically validate lease payments BEFORE you pay the wrong amount!

Every time you pay a bill, you’ll enter the charge into the system. When the system is tracking all your lease terms, it can automatically analyze the payment against the lease contract. If the amount doesn’t match what’s expected, you’ll be alerted. You can choose to pay only the expected amount and hold back the differential until you can investigate with the lessor.

Audit payments to flag anomalies

Certain lease payment amounts, such as CAM building expenses, change over time and you may not be able to validate simply by checking against the lease contract. For example, utility charges for one location may suddenly go up. While you may expect utility rates to increase, how can you tell if you’re being overcharged? It’s possible that a new tenant is the building is using more than their share and you’re being charged a percentage of that. Or, there may be an charge for electricity on the weekend because you failed to notify the landlord in advance.

If you’re not looking for these mistakes (on your part or the landlord’s), you’ll never find these opportunities to save big money.

To find them, you’ll need to use your lease accounting software to look for payments that increase beyond an expected range. Visual Lease lets you run a report that flags payment amounts that fall outside your specified tolerances. Then you can follow up with landlords and other lessors to verify the charges, and only pay what you really owe.

Streamlining the process of validating payments makes it much easier to catch the mistakes that slip through your payment processes every day.

Not what you expected from lease accounting software, right?

Request a Visual Lease demo to learn more about how you can save money on leases.

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.

Journal entries for the new lease accounting standards: are you getting the intelligence you need?

As the deadline for complying with FASB lease accounting changes draws closer, financial leaders are realizing they need much more than a tool that produces a list of journal entries for each lease in their portfolio.

Journal entries for the new lease accounting standards are an essential requirement, but they are really only the starting point for accurate and favorable lease accounting and financial reporting.

To optimize your lease accounting outcome, you need business intelligence that helps you:

• Understand how lease accounting impacts your financial reporting
• Examine lease accounting details for different parts of your lease portfolio and different segments of your business
• Make lease accounting choices that result in the best possible financial picture for your organization
• Make better decisions about leasing moving forward

To that end, Visual Lease’s recent software update provides enhanced reporting capabilities and business intelligence for ASC 842 journal entries.

We have also fine-tuned all the nuances of transitioning current leases over the new lease accounting standards, so you have everything you need in place to get prepared for Day 1 compliance.

Keep reading to learn about Visual Lease’s new journal entry summary report, which provides powerful and flexible tools that turn your journal entries into truly valuable data.

Business intelligence helps you do more with ASC 842 journal entries

Large organizations have mountains of financial data. But for that data to be useful for making decisions and improving outcomes, you need the ability to dig in and see that data in a variety of ways.

That’s exactly what we’ve provided with the new Visual Lease journal entry summary report. Using this powerful new tool based on data warehouse and analytics technology, you can view journal entry information across your entire lease portfolio. And, best of all, you can slice and dice it to see exactly what you need, when you need it.

For example, you can look at:

• Journal entries for different reporting entities within the larger organization
• An analysis of leasing information by department
• Lease accounting impacts for a month, quarter or year
• Lease dates, debits and credits to determine account balances for your balance sheet

What our customers seem to love is the flexibility the tool offers to quickly produce a custom view of your journal entries:

• Drag and drop columns to re-arrange information
• Change grouping and subgrouping
• Create subtotals at each group level
• Show the results in visual formats such as charts and graphs

The best part? As you select options to view different journal entry data, the report rebuilds in real time. So there’s no waiting and you have instant access to the information you need.

Visual Lease’s new report is an amazingly powerful tool for analytics reporting and data visualization. In fact, there’s so much you can do with it that we offered our customers a training webinar to show them the possibilities and help them get value from the tool immediately.

See for yourself: request a demo now!

Journal entries: think beyond the basics

Chances are, right now you are focused on ASC 842 implementation and transitioning to accounting for leases under the new standard. So you might be tempted to think only about producing accurate journal entries for all your leases and getting them onto the balance sheet.

That’s understandable. And of course, every lease accounting tool can do that.

However, don’t rush into the wrong decision because, in the urgent push to get prepared for Day 1, you’re overlooking the chance to think bigger and get more. Look for an ASC 842 lease accounting and reporting tool with features that can help your organization meet goals and improve outcomes.

The upcoming lease accounting changes mandated by FASB and IASB have dramatically increased the scope and complexity of lease reporting requirements for every organization that has leased assets (which is just about everyone).

That’s why many are looking for lease accounting and lease reporting software to help them prepare their financial reporting for leases.

Most available software tools provide a collection of pre-programmed standard reports. In some cases, the list is extensive: 100 reports or even more. At first glance, it probably looks like those canned reports are more than enough to handle all your lease reporting needs.

Unfortunately, soon after they begin to use the reports, most organizations will realize that they are not enough.

Relying on canned reports costs you time and money

The truth is, every organization is unique. You have you own way of doing things, your own industry and internal lexicon, your own organizational structure, your own leasing policies and practices… and many other factors that make you different from the company next door and your competitors around the world.

Because of these differences, at some point (probably sooner rather than later) you will want to make changes to those canned reports.

Then what? You will have two options:

• Go back to the software vendor (or hire a consultant) and shell out more money for custom reports. Then wait for weeks or months for the result, and hope you get what you wanted.
• Invest a lot of time in trying to learn a complicated report writer (and hope the employee who learns these skills doesn’t take the expertise elsewhere).

What’s the alternative? Get a more flexible lease reporting tool (Visual Lease) that makes it quick and easy to create your own data visualizations and custom reports using something you already know: Excel.

What can you do with unlimited ad hoc lease reporting?

Having the ability to create your own custom reports for any purpose is an incredibly powerful tool. Using Visual Lease, you can do much more than modify a few standard lease reports.

Get immediate answers

Your boss (or a financial auditor) asks you a question that requires you to dig into your lease data. How do you get the answer? It’s very unlikely that a canned report will be able to provide it.

With access to Visual Lease’s flexible lease accounting system and ad hoc lease reporting tool, you can easily query ANY lease information that you’re tracking in the system and group, subgroup, and filter data any way you choose.

With that capability, you can find answers or produce requested information in minutes.

How it works in Visual Lease:

1. Using the ad hoc reporting tool, filter and group your lease portfolio any way you like.

For example, you can filter leases for one division, or one particular type of lease (such as property leases), or leases with certain clauses, such as an option to buy. You can also filter over a time period, such as leases coming up for renewal within 2 years.

These are common examples, but you can filter and group leases according using any field tracked in the system.

2. Choose the data fields that you want to see for each lease on the report.

At this point, you have a custom data visualization that can answer questions or provide guidance for business decisions. You can view within Visual Lease or output to Excel.

Format reports any way you like

Every organization produces a variety of reports for different purposes and audiences. You want the ability to present lease reporting in the right way to meet the needs of those looking at the reports.

For example, your CFO might prefer charts and graphs that provide insights and business intelligence at a glance. Your audit partner, on the other hand, might want to see spreadsheets showing specific details structured in a certain way.

Visual Lease’s flexible ad hoc lease reporting tool lets you easily produce reports the way people want to see them.

How it works in Visual Lease:

1. Once you’ve chosen the leases and lease data to include in the report, click a button to export to Excel.
2. Now you have the data in a format you’re accustomed to working in: an Excel spreadsheet. Using Excel, you can format the data however you choose: rearrange columns, show data in graphical format, include your logo and branding.

Not an Excel wiz? Visual Lease trains our customers to take better advantage of the power of Excel, a tool that does much more than most people realize. Having that valuable skill can take you far in your career as well as improve your lease reporting!

Create templates

What about the next time you want to run your formatted report and update the data? Or you want to change the filter (to report on equipment leases instead of property leases, or look at leases in a different geographic region)?

That’s the real power of Visual Lease’s ad hoc reporting tool: you can take your formatted Excel report and bring it back into Visual Lease to use as a time-saving report template.

How it works in Visual Lease:

1. Import your formatted Excel report back into Visual Lease.
2. Now you can update as often as you like directly in Visual Lease, without having to export and format each time. Simply click a button to update the data.
3. You can also change the filter criteria, the lease groups and subgroups, and/or the included data fields to create a new report with the same formatting.

Report on custom fields

Many organizations want to track specialized lease data or details that are not important to others. For example, companies that rely on leased warehouses to store product or equipment want to track information like ceiling heights and number of loading dock bay doors.

You won’t find those fields in lease accounting and lease reporting software, because most organizations have no need to track that information.

Does that mean you need custom software specifically built for your industry? That’s not the best solution, because even if you could find that you will have different requirements than your competitors.

That’s why we have designed Visual Lease to be completely flexible. You can create fields to track and report on any lease details that are important to you. It’s just as easy to add custom fields as it is to create custom reports.

Want to see how it works in Visual Lease? Schedule a demo to see for yourself.

For most corporate attorneys, FASB ASC 842 compliance is an accounting exercise that is only vaguely on their radar (if at all). Here is why that is as a major mistake: there are significant ASC 842 legal implications that put companies, as well as their officers and boards, at risk.

Visual Lease is a lease accounting solution that was developed by attorneys & accountants, so we are hyper-focused on avoiding the potentially disastrous consequences of lease accounting mistakes. At virtually all the companies we talk to every day, the FASB ASC 842 compliance effort is driven by accounting and SEC compliance teams with very little input from the legal department. In our view, this is worrying, to say the least.

In this article, we will explain some of the important ASC 842 legal implications, what corporate attorneys need to know about lease accounting, and how they should be protecting the company by getting involved in FASB ASC 842 compliance efforts.

Why corporate attorneys must understand lease accounting and ASC 842 legal implications.

Let’s begin with a quick explanation of the significance of FASB lease accounting compliance for the company.

ASC 842 is FASB’s new accounting standard for leases, which is slated to take effect in January 2019 for public companies and a year later for private companies.

While leases are significant commercial agreements and important operationally (especially real estate leases), until now leases were not important for accounting. That is because lease payments do not appear on the balance sheet under the current accounting standard.

That is all changing under the new ASC 842 standard. Leases must now be brought onto the balance sheet, so they are visible to auditors. Lease agreements now impact the company’s financial reporting and are subject to Sarbanes-Oxley.

Anything less than an unqualified approval from a financial auditor has major consequences for your organization. When it is time for a financial audit, you must be sure all your numbers are correct. In addition, you must be able to show that you followed all the right processes to validate the data used in your financial calculations.

Our advice to corporate attorneys? Do not let your accounting team do this without your input.

As legal counsel, your job is to protect the company, its officers and board members from exposure and even personal liability due to improper financial reporting. That is why it is essential for corporate attorneys to understand the ASC 842 legal implications and to provide guidance for the lease accounting process.

Here is what you need to know.

3 things corporate attorneys need to know about lease accounting

#1 How to identify a lease

There are ASC 842 legal implications for contracts that do not look like leases. For accounting purposes, certain types of agreements may count as a lease, even if the word “lease” never appears.

For example, embedded leases may be found in service contracts or other agreements that target specific physical assets that are exclusive to your company. Examples include a corporate box at a sports stadium, racks at a data center facility, or vehicles used by a transportation service. Your company needs to identify every such agreement and determine whether or not it contains a lease. If it does, the lease component must be extracted for lease accounting reporting.

As it stands now, accounting is making judgments about contracts without the expertise attorneys have in understanding contract language. That is why legal must know the ASC 842 legal implications and get involved in evaluating contracts and advising accounting about what should be considered a lease.

Learn more: Embedded Leases Accounting: Do Your Contracts Contain Leases?

#2 How to validate lease data and data collection plans

To protect your organization, legal must work together with accounting to make sure that lease information is accurately captured, summarized, and reported on. If you do not, you run the risk that auditors will not give and unqualified opinion and certify that your books are kept in accordance with GAAP.

To mitigate that risk, corporate attorneys should oversee (or at least approve) the data collection and validation process for lease accounting. You will need to understand:

• The types of lease data needed for ASC 842 compliance
• Tactical procedures for obtaining lease data
• How to validate lease data so that lease accounting calculations and financial reports are accurate and complete

Learn more:

Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance
Lease Data Validation Steps for FASB/IFRS Accounting & Reporting

#3 Sources of lease data

Who is providing the lease data that you are feeding into lease accounting systems and using to perform calculations for financial reports? You need to be very careful if it is coming from external service providers.

It is becoming more and more common for large organizations to outsource real estate services. In that case, much of your lease accounting data may be coming from thirty parties. How can you be sure that those service providers are following due diligence and providing accurate information? Legal may want to recommend the following:

• Verification of lease data that comes from third parties (by comparing with original contracts, for example).
• Make sure that contracts with outsourced service providers assign them some liability in case of errors.
• Have outsourced service providers keep data in your own lease accounting system, rather than one that is under their control.

Learn more:

Why Real Estate Brokers Need Lease Accounting Software Solutions

ASC 842 legal implications: the silver lining for the legal team

Guiding your company through the lease accounting compliance process is going to prove time-consuming and complex. However, there is a benefit that your legal team can gain from this effort: a useful tool for managing corporate contracts.

Just about every organization with more than a handful of leases will need to purchase a tool to manage lease data and perform calculations. If you choose the right system, it can prove a significant asset to the legal team along with accounting, real estate and procurement.

Did we mention that Visual Lease was designed by lawyers? Moreover, that we use our own software to track and manage all our contracts (not only leases)?

We would be happy to show you how that works. Schedule a demo today to get started.

As a lease accounting solution provider, we talk to finance leaders every day who are facing the deadline for FASB ASC 842 and/or IFRS 16 compliance. Not surprisingly, we hear similar questions from almost everyone.

In this blog post, we’ll be able to help guide you with the task you’re probably dreading most: collecting all the data needed to generate lease accounting calculations and reports.

These are two questions that come up in every conversation regarding lease accounting standard compliance:

1. What are the important data points we must collect to produce FASB calculations?
2. How do I get that data into my lease accounting software? (For more information, please visit our blog post: How to Get Data into Your Lease Accounting Tool).

When people ask questions about gathering their data points, usually, they’re looking for a complete list of all the fields they need to fill in or a lease accounting example they can follow.

While we’d love to provide that, unfortunately, it’s not quite that simple. This is due to a few reasons:

• Reason #1: Each business’ lease portfolio does not look the same and contains many different variables. The data you need to track in your lease accounting software depends on many unique factors, including:
  • the type of leased assets you have,
  • how your leases are structured,
  • your financial reporting needs,
  • and your goals for managing your leased assets.
• Reason #2: Never depend on any canned list from a service provider. Always consult with your accounting advisor for new lease accounting guidance. You may need help with interpreting lease data, making decisions, and ensuring you’re capturing lease data accurately.
• Reason #3: To get prepared for FASB, you need much more than a list of data points to capture. You need to understand what to look for in your leases, what to collect from your financials and market information, and what to think about as you collect data.

Therefore, instead of offering a list of fields to collect, this article will help you understand the process and the types of data you’ll need for basic FASB calculations. We’ll also point out the questions you need to ask along the way to make sure, at the end of the day, you have complete and accurate lease accounting reports that are optimized for your business.

How do I identify and categorize my leases?

Identifying leases

When we first begin working with a client, we recommend starting by identifying everything categorized as a lease. This includes any potential embedded leases, real estate leases, equipment leases, and so much more.

Identifying and finding every lease is a complex and time-consuming task. Additionally, not everything you think of as a lease may qualify as one for the FASB standards. And if that wasn’t complicated enough, some contracts that don’t contain the word “lease” actually do qualify as a lease (i.e. embedded lease). We’ve seen some very unique ones that you might not think about, such as box seats at a stadium.

To identify embedded leases, you will need to review service contracts and other types of agreements that may contain them. (Here’s a helpful article that addresses how to do that: Embedded Leases Accounting: Do Your Contracts Contain Leases?)

Identifying real estate leases are not as complex. This is because most organizations commonly have more visibility into them to pay bills and handle the day-to-day operation of facilities. Chances are you have that data in some central location, even if it’s a collection of spreadsheets.

However, equipment leases and other assets tend to be more problematic to identify. Your organization may have many different people and departments leasing smaller assets such as vehicles, computers, and office equipment. Very rarely do we find a company that has all that information in a one place. It may take some detective work to find all the lease documents. As a starting point, we recommend that you get scanned copies of every lease in a central location.

Categorizing your lease portfolio

Once you have managed to collect all your lease documents, the next step is to organize them into any categories you will need for reporting purposes. For example, most organizations will track real estate leases separately from equipment leases. However, you may want to get more granular and separate other assets into specific classes.

Once your leases are categorized in a way that works for your business, you’re ready to start extracting the required FASB data points. The essential lease data for FASB is all about dates and dollars.

Which dates are essential to capture for FASB 87?

FASB lease accounting calculations require all the key dates associated with your leases, which includes:

• When your lease term starts and ends.
  • This is straightforward and can be found on the lease contract or a lease commencement letter.
• Lease options that, if exercised, may change when the lease ends.
  • For example, does the lease include an option to terminate prior to the expiration date?
  • Is there an option to extend the lease past the original end date?
  • Do you have an option to purchase the property or asset?
  • Can you exercise the option unilaterally? That means you can just execute the option as stated in the lease and you don’t need consent from the owner/lessor.

How will you determine if you’re reasonably certain to exercise lease options?

To do FASB calculations, you must be able to specify if you are reasonably certain to exercise lease options. The answer to that question determines the lease end date used to calculate your lease liability. Ask yourself the following questions:

• Do you have a process in place to regularly review leases and make those decisions?
• How will you make sure you don’t miss critical option dates?

To exercise lease options (to renew a lease or terminate early), you must take action by a specified date, which usually means notifying the owner/lessor of your intention to exercise the option. You might not need to track those notification dates to do your lease accounting calculations, but failing to track these dates in your lease accounting system will come back to bite you.

You’ll want to record lease options so you can do hypothetical calculations that help you make the best decisions about exercising options. A robust lease accounting system like Visual Lease, provides the ability to view side-by-side comparisons with different options and schedules to see how they impact your business.

If you’re not tracking the option dates, you might forget to notify the owner about a renewal option you intended to exercise, which could mean you’d lose out on favorable lease terms and pay much more for the renewal. As a result, all the due diligence you’ve done to choose the right financial plan would potentially be wasted.

Always make sure you’re not overlooking critical operational dates for the current lease term and that your software provides alerts for these critical dates.

Which financials are essential to capture for FASB?

Collecting expense information is an important step to preparing and gathering your essential lease data. At the very least, you’ll need to account for:

• Fixed rent. Your FASB calculations need to show the fixed rent obligation for each right-of-use asset. Be careful about extracting “fixed rent” terms from leases. There may be additional expenses you need to include, such as recurring charges for parking or storage.
• Rent escalation. How are your leases structured? Examine leases for details about how rent escalates. If the lease language is difficult to understand or has a variable contingencies such as CPI adjusted rents or rent due based on consumption or volume (such as number of parking spaces or a percentage of gross sales), you may need help from your accounting advisors to determine how to do the calculations.
• Other charges. Depending on which practical expedient you decide to take, you may need to record real estate CAM (common area maintenance) charges, taxes, and insurance.

How to account for extra charges beyond fixed rent?

Ask yourself, what’s the intent of these charges? Are they really adjusted rents? Variable rents? Do they change based on specific circumstances? Talking to your accounting advisor will help you accurately interpret and extract the relevant expenses.

Will you take practical expedients?

As a lessor, you’re entitled to take a practical expedient when reporting on certain expenses, such as CAM charges. You’ll need to define how you intend to account for each asset class. Make sure you’re capturing asset data in a way that can be meaningfully grouped and reported on.

Do you need to validate straight-line rent calculations?

You need to be able to extract an accurate deferred rent starting balance as of the day you move to ASC 842. Are you comfortable with your current straight-line rent schedule (how you’re normalizing rent over the life of the lease)?

If that process has been manual, you might not be sure you can accurately count on the data. Although, this problem can be solved via a strong lease accounting software provider. Visual Lease’s lease accounting software has a tool that calculates the figures you need to validate your straight-line rent calculations based on your financials.

Post-compliance lease data

We’ll conclude this lease accounting guide with one final bit of advice: don’t view achieving FASB ASC 842 compliance as the end game. From an operational standpoint, you have much to gain from taking full advantage of all the capabilities of your leasing software.

After you get the FASB essentials well underway, the next step is to collect and migrate operational and performance data for your leased assets. Read these related articles to learn more:

• Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance
• How Lease Accounting Software Can Pay For FASB/IFRS Compliance
• Lease Accounting Changes: The Silver Lining You’re Overlooking

As the deadline approaches for compliance with the new lease accounting standards, many companies are scrambling to choose a lease accounting tool. Just about everyone we speak to has the same question: how do I get my data into the system?

In this article, we’ll explain 3 ways of migrating your data into a new lease accounting tool like Visual Lease. But first, we’ll provide some tips for how to prepare your data so you get the most from your new system.

What to do BEFORE you migrate data into a lease accounting tool

Before you even begin to think about migrating data, take a step back and consider your goals for your new lease accounting tool. What lease data do you need to track to achieve those goals, and how do you want to manage it?

This is a critical first step that many overlook. If you jump right into moving your current data (as is) into the new system, you’ll miss opportunities to improve processes and get better results.

Right now, your urgent goal is achieving FASB compliance. However, if you’re moving to a comprehensive lease management tool like Visual Lease, with a small investment of time upfront you can achieve much more. You can solve problems, streamline processes, save time, and save money.

To learn more about how Visual Lease helps you do that, read this related article: Lease Accounting Changes: The Silver Lining You’re Overlooking

To make sure you capture all the data you need, now is the time to reach out to all the groups and stakeholders in your organization that work with leases. These might include Real Estate, Facilities Management, Legal and Procurement. Ask them what lease data they frequently need, and have to refer back to the lease documents to obtain. Make sure you plan to record that information in your new lease accounting tool, even if you’re not currently tracking it now, or if you’re tracking it somewhere other than where your financial data resides.

The fact is, most organizations will need to gather additional data, even if they have lease accounting data in a legacy system. Here’s some helpful information about the data collection process:

FASB Lease Data You Can’t Get From the Lease Abstraction Process

3 ways to move data into your lease accounting tool

When people ask us about how they should migrate their data into a lease accounting tool like Visual Lease, the first thing we need to know is where the data currently resides. Generally, there are 3 options, or some combination of these 3 options:

1. Lease data is stored in a existing database.
2. Lease data is recorded in spreadsheets.
3. Lease data is still in paper or electronic lease documents.

Let’s address each of these scenarios individually. If your lease data resides in more than one format (which is common) you’ll have more than one process for getting all the data into your lease accounting tool.

Migrating data from existing software

If you’re going to be moving data into a lease accounting tool from an existing system, the first issue to address is data integrity. Has the data been regularly updated? Here’s a question we ask when evaluating the state of the data: If you had to use this data for an audit, would you be comfortable doing that?

Remember the old adage about “garbage in.” Before moving any data, make sure it’s valid and accurate.

Once you’re comfortable that your data is in good shape, most of the time the rest is straightforward. Visual Lease provides data migration tools that integrate seamlessly with most existing databases. We can work with you to map your data and move it directly into the Visual Lease database.

In the unusual case that our migration tools don’t integrate directly with a existing system, the other option is to export Excel reports or flat files from your existing database, then import into Visual Lease. You might also choose to do this so you can validate and clean up your data before moving it into the new lease accounting tool.

If needed, Visual Lease can take care of the mapping and the import for you. Or, if your team is comfortable with this task, they can use a Visual Lease import template (based on your new configured database) and do the import themselves. Of course, we’ll always follow up with a sanity check to make sure everything is in place.

Migrating lease data from spreadsheets

If you’re keeping lease data in one or more Excel spreadsheets, you’re not alone! Plenty of very large organizations with hundreds or thousands of leases have been managing leases this way up until now. That’s because leases were not very visible and centralized lease management was not a big priority. Of course, now that’s all changing in a hurry because of the new lease accounting standards.

The good news is, getting your lease data into a lease accounting tool like Visual Lease shouldn’t be very complex. It’s a matter of mapping your data according to your newly configured database in the lease accounting tool, then importing.

However, just like migrating from a database, you must do your due diligence and validate the data if there’s any question about its accuracy.

Learn more about data validation: Lease Data Validation Steps for FASB/IFRS Accounting

Migrating data from lease documents

Even if you have lease data in other systems or spreadsheets, chances are there is some data you’ll need to obtain from your source lease documents. In that case, you’ll need to extract the relevant data points from those documents (this is called “abstraction”) and either import or enter data manually into your lease accounting tool.

If you don’t have the resources to handle a large volume of lease abstraction, Visual Lease can take care of that task for you. Here’s how it works:

• You’ll need to send digital copies of lease documents.
• We build an abstracting scope, taking into account all the data that must be captured from the lease documents.
• We abstract all the relevant lease clauses and data points, and enter into your Visual Lease database.

Updating lease data in your new lease accounting tool

Once your lease accounting tool is live, remember that you will also need a process for adding new records and making changes to existing records.

For a large organization, it’s not unusual to have multiple departments entering and updating lease data. For example, Real Estate might create a new lease record. Finance might need to approve it. Accounting will enter payment records.

Here’s our advice: make sure everyone who will be entering data receives training on the new lease accounting tool and understands your data entry workflow.

Preparing for the FASB lease accounting changes is time-consuming, and there are many tasks you’ll need to complete before the deadline so you’re ready to comply. Getting software for the new lease accounting standard is an important one. Almost every organization will need a tool to perform calculations and feed journal entries to the general ledger, at a minimum.

You may have heard conflicting opinions about the right time to purchase software for the new lease accounting standard. In this article, we’ll dig into both sides and help you determine what’s best for your organization.

Option 1: Collect data first, then get software for the new lease accounting standard

Some accounting firms have recommended focusing on data collection first before beginning your search for software for lease accounting standard changes.

For one thing, collecting all your lease data will require a major effort. Especially for public companies who need to comply with the new standard by January 2019, there’s no time to lose. It’s imperative that you start immediately if your data collection project is not already underway. For large companies, this effort alone could take 6 months.

Here’s what the to-do list looks like for data collection:

• Find all the records associated with property and asset leases that must be brought onto the balance sheet for compliance with ASC 842 and IFRS 16. That includes all the original lease documents plus any letters of intent, addendums, and modifications.
• Identify lease data that you need to extract from lease records.
• Abstract those documents to pull out relevant lease data.
• Find embedded leases in other existing contracts, and extract the related data.
• Classify leases to understand their lease accounting treatment under the new standards.
• Aggregate data in a central repository, which could be a database or spreadsheets.
• Figure out what data you’ll need to do lease accounting calculations that you don’t have in your current records.
• Add missing data and validate your records for completeness and accuracy.

To learn more, read our previous articles explaining this process:

Data Collection Tips for ASC 842 Transition & IFRS Compliance
FASB Lease Data You Can’t Get From the Lease Abstraction Process
Embedded Leases Accounting: Do Your Contracts Contain Leases?

Those recommending that you complete data collection before you purchase tools also point out that having your data ready can help define your requirements for software for the new lease accounting standards.

While these are valid points, we believe the disadvantages of this approach far outweigh the benefits.

Option 2: Choose your software for the new lease accounting standard ASAP

Full disclosure: it’s true that Visual Lease sells software for the new lease accounting standard. So you might think we are biased on this question. However, our opinion is not based on self-interest, but rather on the interests of our clients. Let me explain.

There’s one huge disadvantage to option #1, and that’s the rapidly approaching deadline for compliance with the new lease accounting rules. At this point, public companies that have not yet finished data collection won’t have enough time to complete that process before buying software for the new lease accounting standard.

You may not be worrying about it because so many software providers are telling you that it’s quick and easy to implement their tools. And that may be true. However, the impending FASB lease accounting deadline can and will complicate matters. As demand increases the closer we get to January 2019, experts say resources needed for implementation will be harder to come by.

As the deadline nears, software vendors will be inundated with new customers attempting to get lease accounting software up and running quickly. Even though vendors (including Visual Lease) are ramping up their staff to meet the demand, it’s very possible that the implementation time estimates you’re hearing now will be longer come November or December of 2018. If you wait to choose software for the new lease accounting standard until after you’ve finished collecting data, you may find yourself at risk of missing the deadline for compliance.

The fact is, there are only so many lease accounting experts out there who are qualified to abstract your data and get it into software for the new lease accounting standard.

Our best advice to mitigate the risk of not meeting the compliance deadline? You can compare and choose software while you are in the process of collecting data. When you do that, you get on track to finish data collection on time, and you can lock in the availability of implementation experts.

There’s another upside to choosing this approach besides optimizing your timeline. You can also take advantage of your software vendor’s expertise to help with your data collection and other preparation efforts. After all, we have helped many other companies just like you to achieve FASB lease accounting compliance. We can share best practices that can help you improve your leasing policies and procedures as well. You can even get tips that can save your company a great deal of money.

Learn more: How Lease Accounting Software Can Pay For FASB/IFRS Compliance

The bottom line: now is the time to begin looking at software for the new lease accounting standard if you haven’t already done so. Get started by signing up for a demo of Visual Lease.

Back in 2016 when FASB released their new lease accounting standard changes, the implementation deadline seemed far away and there were more immediate accounting issues to deal with (such as the new revenue recognition standard). As a result, many organizations put off preparing for the changes in lease accounting.

Fast forward 2 years, and now the deadline is rapidly approaching. And according to research by the big 4 accounting firms, most companies are not prepared. In February 2018, KPMG reported that only 15 percent of companies they surveyed said they were ready for the changes in lease accounting.

Deloitte published research in March that indicated only 21 percent of companies report being prepared to comply with lease accounting changes from FASB.

While the reasons behind the delay are understandable, organizations are taking a huge risk if they continue to put off preparations for the changes in lease accounting. The task of gathering all lease data will take a considerable amount of time (several months at least). And, as the deadline approaches, the demand for expert resources to implement lease accounting technology will increase while availability tightens up. You might face a situation where you can’t make the deadline.

What are the deadlines for the changes in lease accounting?

It’s coming fast: public companies need to be ready to adopt the changes in lease accounting by January 1, 2019. Other companies have an additional year.

It will take longer than you think to get ready for the changes in lease accounting

There are many lease accounting software vendors out there reassuring companies about how fast they can get their tools up and running. And it’s true: in most cases, getting the software ready will be the fastest part of the process. Yet that reassurance may be giving people a misleading sense of how long the entire lease accounting readiness project will take.

Here’s what you have to do to get ready for the changes in lease accounting (beyond software implementation) that will take much longer:

• Assemble a team to lead the project.
• Find all your lease documents.
• Figure out exactly which data points you need to collect for lease accounting calculations.
• Abstract the contents of all your lease documents.
• Assess what’s missing and find that information.
• Validate your lease data.
• Develop new procedures for collecting and updating lease data in the future.
• Determine the impact of the changes in lease accounting on your financial reporting.
• Develop new standardized leasing policies for your organization.

While the timeline will vary for every organization, experts say it will be difficult for a large company to accomplish all this in less than 6 months. As of right now, you have 7 months.

And, as the deadline approaches, the law of supply and demand will work against you.

A critical resource will be in short supply as the deadline approaches

There are certainly a lot of lease accounting tools out there. But given the number of companies who have yet to implement software to handle the changes in lease accounting, experts predict that there isn’t enough vendor capacity to handle the demand.

What does that mean? The closer we get to the implementation deadline for public companies (who have more data and more complex implementation needs) the more difficult it will be to get help from vendors. That might even include your accounting advisory partners.

Every software vendor understands this and many (including Visual Lease) are ramping up their capacity as fast as they can. But chances are, as 2018 draws to a close, vendors will simply be challenged to handle the volume of work that pours in as companies are finally ready to implement software just before the deadline.

The best advice for implementing the changes in lease accounting

Start now.
Don’t put off starting preparations for the changes in lease accounting another day. And, if you are already working on it, try to step up the process if you possibly can. The consequences of missing the deadline are severe and you need to do everything you can to make sure that doesn’t happen.

Don’t wait to select software.
We have seen come companies waiting until data collection is complete to begin looking at lease accounting technology to handle the calculations. While that strategy may have worked fine last year, time will not allow you to take that path at this point.

A smarter strategy is to implement lease accounting technology while you’re collecting data. You’ll be able to migrate data as it becomes available, test as you go, and be ready for compliance as soon as your data collection and validation is complete. You can save yourself valuable time and lock in vendor resources so you don’t have to scramble for them as the deadline approaches for the changes in lease accounting.

Visual Lease can help you navigate this complex process and get ready in time to meet your compliance deadline. Get started with a demo today, or reach out with your questions. We’re here to help!

For every organization that’s purchasing lease accounting tools to comply with the new FASB and IFRS standards (which is just about everyone), data security is a major concern.

We’re talking about your company’s financial records, so rock-solid security is essential. Don’t forget that accounting auditors will want to know how your lease accounting software protects your information and ensures data integrity.

As part of your lease accounting software comparison, be sure to check for the following security credentials and capabilities that ensure the safety of your data.

5 data security checks to include in your lease accounting software comparison

1. Physical security of servers.

Most lease accounting software is cloud-hosted, which is the best option for a number of reasons. Given the timeframe for complying with the new lease accounting regulations, probably the most important reason for you is that a cloud-hosted solution is faster and easier to implement. It’s also much less expensive.

However, choosing a cloud-based lease system means you must do your due diligence to ensure that your chosen vendor will keep your data safe. Be sure to ask these questions during your lease accounting software comparison:

• Do they have redundant servers in multiple locations?
• What type of physical security protects the buildings where servers are housed?
• Who has access to those servers and for what purposes?

2. Data encryption.

Data is regularly moving into and out of your lease accounting software. For example, you’re importing new lease records, entering updates to lease records, and sending journal entries to your general ledger. Your data must be secured both when it’s at rest on the servers, and when it’s in transit as records are added, modified, or exported.

Your lease data should be encrypted anywhere it is stored, and it must be encrypted via SSL when traveling to and from the servers.

3. User authentication.

You won’t find lease accounting software that’s not locked down; users must enter a user name and password to access the system. However, when doing your lease accounting software comparison, look for these authentication features that enhance security.

Control of login credentials. Make sure all parts of the system are password protected. It’s also important that your system administrator create and manage login credentials for your users. If your lease software vendor can create a login for anyone who asks, that’s a security risk. Your vendor should only provide login credentials with your administrator’s approval.

Password policy. In many organizations, lease software passwords must match your corporate password policy. Look for your lease software to provide flexibility so your administrator can set the desired password length, strength and expiration rules.

Multi Factor Authentication. Some organizations want the extra security of multi factor authentication. How does that work? Users enter their user name and password, and the system emails them a second one-time password that they must enter to access the lease software.

Authentication via Single Sign On (SSO). Your lease accounting software should provide the option to use your organization’s existing security store to authenticate users. If you have implemented centralized security system, enabled for single sign on, your employees can log in once and have access to all their applications. However, the big benefit is the ability to quickly and easily revoke access to everything if an employee leaves the company. Your users and their access permissions must be set up in your lease software, but they are linked to your centralized security store accounts so users can only log in using this system.

4. IP whitelisting.

Some organizations want to limit access to the lease software so that users can only log in from secured devices connected to the corporate network. IP whitelisting limits access to specific IP addresses or a range of IP addresses.

5. User roles and permissions.

Especially for comprehensive lease software (like Visual Lease) that manages the entire lifecycle of your leases, including administration and accounting, the design of user access and permissions is critically important for data security. Here are some items to check as part of your lease accounting software comparison.

Levels of administrative access. While most organizations have a single system administrator, look for the flexibility to allow some managers different levels of administrative permissions.

Separation of duties. What you want to see is a separation of roles and associated access rights within the various parts of the lease system. For example, a lease administrator may be able to create and modify lease records, but won’t be allowed to work with the accounting feed or create lease accounting calculations. On the other hand, you may want an accountant to send interface files to the ERP, move data to the general ledger, and approve invoices for payment. But you may want to prevent that user from creating payments. The goal is to give people access to only the capabilities and data they need to do their work and lower the possibility for fraud or malfeasance.

Group permissions. The best lease accounting software has a set of defined roles with pre-assigned permissions. That makes it easy to set permissions for users simply by assigning them to a group.

Here’s a great tip: creating a role for lease abstractors can be extremely useful. You can allow abstractors (who may be outside contractors or service providers) with the ability to create pending records but not to change live data. Then someone with a higher security level can review and validate the data before making it active. Doing that enhances your data integrity with another layer of authentication.

Individual level controls. While group permissions save you time, you also need the flexibility to control certain rights at an individual level. Look for the ability to can add or remove specific rights as needed from users assigned to groups.

Data security validation for Visual Lease

When filling in your lease accounting software comparison checklist, you can check all the data security boxes for Visual Lease. We have earned SSA18 SOC 1 Type 1 certification following a comprehensive independent audit that verified our controls and operations.

We’re happy to show you exactly how we keep your data safe. Give us a call or request a personalized demo.

Get more tips for your lease accounting software comparison: Get the Best Lease Accounting Software By Comparing Price & Value

As you prepare to implement the new lease accounting standards, you’re going to have questions and you’re going to need lease accounting guidance. Certainly you’ll turn to your accounting advisory partners for answers. However, there’s another source of lease accounting guidance you might not consider: your lease accounting software.

Let’s be clear: lease accounting software can’t recommend which decisions you should make. But it can provide the tools to help you test different scenarios without affecting your live data. Doing that shows you exactly how your choices will impact your balance sheet and financial reports. That’s powerful intelligence that can help you avoid mistakes and make better decisions.

5 ways to get lease accounting guidance with testing tools

If you’re still deciding about lease accounting software, look for these helpful testing features that prepare you for the new lease accounting under GAAP and IFRS.

These features give you the ability to “test drive” your data and your calculations. That’s important now as you develop new lease accounting practices. Also, you’ll find it helpful after you implement the new standards, since you can test a change without affecting your live data.

1. Get a preview of your new financial reporting.

This is probably the most important lease accounting guidance you need right now. Chances are, your financial leaders are anxious to see what your reporting is going to look like under the new standards. You want to understand the impact of the changes so you can take action as needed (such as preparing stockholders and lenders for what to expect).

You can get that information well before you’re ready to go live using the hypothetical testing features in Visual Lease. You can generate a preview even if you haven’t imported all your data yet. Just do a bulk upload of test data. Then you can generate a hypothetical disclosure analysis to see what your numbers will look like. You can even see side-by-side comparisons of reporting under the current standards (FASB ASC 840 and IAS 17) and the new standards (FASB ASC 842 and IFRS 16).

2. Set up pending calculations for peer review.

As you prepare to implement lease accounting changes, you’re likely planning a peer review process and verification of your calculations before you go live. Whether it’s to have a more experienced person check someone’s work, or just to put a second set of eyes on your journal entries, it’s a smart strategy.

Visual Lease’s pending calculations feature makes it simple to streamline that process. Simply set up new lease records and calculations as “pending.” Once they have been reviewed and validated, all it takes is the click of a button to activate them.

Related article: Lease Data Validation Steps for FASB/IFRS Accounting & Reporting

3. Test different interest rates.

Financial leaders also want the ability to test different scenarios that may occur to see how they affect the balance sheet. Here’s a great example: interest rates. While a small change in your borrowing rate may not affect smaller leases, an interest rate change may have a huge impact on a high value industrial lease.

Visual Lease’s hypothetical calculations feature, you can try out different values (without impacting your active data) and see the resulting change in the lease accounting calculations, such as the right-of-use asset and liability amounts.

4. Test different standards and classification options.

When things are changing in your business, you need to plan ahead for those changes. The lease accounting guidance you get with Visual Lease’s testing features can help you prepare for what’s coming.

Here’s just one example. Let’s say your company reports under US GAAP now, but plans to open a new facility outside the US next year and begin doing business in new regions. You’re going to want to see what your lease accounting looks like under the international lease accounting standards (IAS 17 is the current international standard, and the new IFRS 16 standard takes effect at the same time as the new FASB ASC 842).

Also, your lease classifications will change when you report under IFRS 16, so you’ll want to see how that changes your balance sheet.

You can also use this feature to help you make decisions when negotiating lease terms.

Here’s some more lease accounting guidance for you: read this article to learn more about the differences between FASB ASC 842 and IFRS 16.

5. Plan for exercising lease options.

Speaking of lease decisions, whether or not you decide to exercise lease options can have a big impact on your lease accounting. That’s especially true for long-term real estate leases. The information you get from testing your options can be a big help with planning and budgeting.

For example, should you exercise an option to extend a lease for an additional 3, 5, or 10 years? For high value leases, understanding how that would affect your lease accounting obligations could impact your decisions about options.

And don’t forget, when you classify your leases, you need to specify whether or not you are “reasonably certain” to exercise options. If you’re unsure about making that call, being able to easily test different scenarios can provide helpful lease accounting guidance.

Testing helps you plan ahead and prevent mistakes

The bottom line is, nobody likes surprises when it comes to lease accounting. Being able to easily test different scenarios without impacting your live system is the best kind of lease accounting guidance.

Want to see what that looks like? Schedule a live demo of Visual Lease.

Why measure and optimize equipment lease performance?

Most large, global organizations have some form of management and oversight in place for their real estate leases. After all, those leases represent millions of dollars and you want to make sure you’re getting the best value for your investment. But up until now, equipment leases have been under the radar.

That’s partly because of the de-centralized nature of equipment lease procurement and management: there could be hundreds of people, working in many different functions and regions, leasing different types of equipment. There’s no one group overseeing equipment leasing throughout the organization.

Also, equipment assets, unlike real estate, tend to move around and are harder to track. It’s much more likely that leased equipment will get lost, stolen or damaged before the end of the lease.

As a result, few companies have bothered measuring equipment lease performance, even though they may have many thousands of equipment leases globally. That’s changing now because of the new FASB and IFRS standards for equipment lease accounting.

Starting at the end of this year for public companies, all equipment leases get brought onto financial balance sheets and reports. That means they are now visible. Equipment lease performance will be increasingly scrutinized by financial leadership, external auditors, and investors.

Will you be able to explain why you’re spending so much to lease equipment? Let’s take a closer look at all the ways you waste money without centralized lease management for equipment. Then we’ll show you how you can take control of the situation with something you’re already doing: collecting equipment lease data for FASB.

How does poor equipment lease management cost you?

There are great reasons why companies choose to lease equipment instead of buying it. Leasing improves cash flow and makes budgets more flexible. It also allows you to get the benefits of new equipment and technology sooner than you might if you purchased equipment assets.

However, the financial benefits of leasing often disappear without careful oversight to prevent mistakes and wasted expense. For example:

• Failing to renew equipment leases by the option date and having to pay more for the renewal.
• Making poor decisions about purchase options.
• Agreeing to leases with terms that cost you more than you’re saving.
• Continuing to make lease payments after the lease expires.
• Failing to terminate leases for equipment that’s no longer in use.
• Paying the wrong amounts, especially for variable payment leases.

These are just a few of the ways your organization loses money without centralized equipment lease management and oversight in place.

The good news is, you can use the lease accounting data you’re collecting for FASB to help you analyze the effectiveness of your lease decisions. Then you can use that information to put standardized policies and procedures into practice that improve performance.

Tap into FASB data & technology to measure equipment lease performance

Like most organizations, you’re probably scrambling to collect and centralize all the lease data needed for compliance with the new FASB and/or IFRS standards. And your organization is probably investing in equipment lease accounting software to perform calculations, send journal entries to your GL system and produce disclosure reports. This situation can be a great opportunity to use that lease data and technology to your advantage.

First of all, you’ll need a central repository that captures ALL your equipment lease data, not just what’s required for FASB.

Also, choose equipment lease software that does more than accounting. For the same price or even less, you can get a comprehensive platform that helps you manage equipment leases (and real estate leases too) as well as handle the accounting.

Learn more: Equipment and Property Lease Accounting: Can One System Do Both?

Here’s what to look for:

Asset-level equipment lease tracking. Some products only track leases at the contract level. But equipment lease contracts often include hundreds of individual assets on the same contract. To properly manage your leased assets, you need to be able to track serial numbers, locations, and other data points associated with each item on the contract.

Easy customization. For a large global organization, you need to organize your system and your data according to the way you work. Make sure you’ll be able to make changes as your company makes structural changes such as mergers or acquisitions.

Flexible reporting. To get the intelligence you need to improve your lease performance, you’ll need the ability to slice and dice equipment data by a variety of criteria.

Intelligent alerts. To prevent missing critical lease option dates, set up alerts to notify lease managers in time to act.

Equipment lease audits. Validate all lease payments against lease contract terms and avoid overpaying.

With your centralized lease data repository and management technology in place, you’ll be able to create reports that reveal the true cost of your equipment leases.

Want to see how that works in Visual Lease? Schedule a personalized demo.

Use lease intelligence to develop standards

With the right lease data at your fingertips and a comprehensive leasing system, you can:

• Find out which types of lease structures and lease terms provide the best financial return.
• Break down equipment lease performance by regions, business units, type of asset, asset manager, or any other criteria that helps you compare performance.
• Find out where you’re losing money.

Here are just a few ways you can use that intelligence to standardize equipment lease operations across your organization and improve performance:

1. Develop policies for negotiating lease terms for different types of assets.
2. Set up lease approval requirements to make sure policies are enforced.
3. Establish timelines and procedures (and assign responsibility) for regularly updating equipment lease data. That should include the location of leased assets and usage status.
4. Set up procedures for handling end-of-term and early lease terminations.
5. Track and compare the performance of people and groups responsible for lease procurement and management.

Don’t miss this opportunity to take control of your equipment leasing and stop wasting money. The experts at Visual Lease can help you get the right data and analytics in place to drive cost-effective process improvements.

Achieve fast compliance and long-term value with Grant Thornton and Visual Lease’s joint lease accounting solution

With the enactment of the new IFRS 16 & ASC 842 (FASB) lease accounting rules, there’s important work to be done, especially for organizations facing a 2019 deadline for compliance with both lease accounting rules (IFRS 16 & ASC 842).

Here’s the to-do list for accounting for leases under the new standards:

• Finding all the records associated with property and asset leases that must be brought onto the balance sheet for compliance with ASC 842 and IFRS 16;
• Classifying leases to understand their treatment;
• Aggregating data in a central repository;
• Selecting a software tool to automate the process of performing calculations, creating journal entries, and producing disclosure reports for IFRS 16 and ASC 842;
• Revising or creating internal processes and controls needed for ongoing accounting and lease management.

Many accounting teams are still shell-shocked from the revenue recognition changes. However, it’s still important to understand that accounting for leases under IFRS 16 and ASC 842 will have a big impact on your balance sheet as well. You need to be sure you’re getting the IFRS 16 and ASC 842 implementation right.

In response, the specialists at Grant Thornton have developed a process and set of integrated tools for end-to-end implementation of the new lease accounting standards. Grant Thornton’s cloud-based data repository, readiness and validation tool – known as LeaseX, helps prepare your data for FASB and IFRS-compliant lease accounting calculations. then, by using the Visual Lease platform, you can
create journal entries and disclosures on your balance sheet and run insightful analytics reports.

What’s more, this joint solution for IFRS 16 and ASC 842 also offers longer term lease management improvements that can have big payoffs for the entire organization.

IFRS 16 and ASC 842 prep: Focus on data collection first

A good lease accounting process starts with data collection, as it takes a great amount of time and effort to gather all of your data for IFRS 16 and ASC 842 compliance.

Learn more: Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance

Once that’s underway, you can work to accomplish the following:

• Talk to stakeholders within your organization to learn more about their lease management needs. Look at the big picture instead of focusing only on accounting requirements for IFRS 16 and ASC 842. Doing that up-front will help you get the most benefit from your lease software solution, potentially making your compliance project a revenue gain instead of a cost.
• Put lease management processes and controls in place to streamline lease accounting compliance going forward, and also to improve decision making and reduce costs. Grant Thornton’s Advisory teams can help you design these processes and controls, while Visual Lease’s flexible management tools can help you implement them.

Learn more: Lease Portfolio Management: Policies & Procedures to Reduce Risk

Streamlining FASB and IFRS data collection and validation with Grant Thornton’s LeaseX

As a leading independent audit, tax and advisory firm, Grant Thornton guides its clients through every step of achieving IFRS 16 and ASC 842 lease accounting compliance. To minimize the data collection burden on organizations, Grant Thornton has created LeaseX.

LeaseX organizes, simplifies and streamlines the process of taking masses of scattered lease data and transforming it into a centralized and complete resource for compliance. The accounting advisory teams at Grant Thornton determine the data fields required to perform the lease accounting calculations under IFRS 16 and ASC 842.

Once that step is complete, the data collected in the LeaseX repository is quick and easy to import into Visual Lease, which performs the lease accounting calculations and creates journal entries and disclosures in your GL/ERP. LeaseX is also compatible with other leasing software.

Here’s what the process of getting your lease data into LeaseX looks like:

1. Grant Thornton works with your organization to set up a LeaseX repository that’s customized according to your organization’s structure and requirements.
2. Next, the specific data needed about each lease to comply with IFRS 16 and ASC 842 is extracted. You can import this data from an existing repository, have your own team review leases and enter data manually, or have Grant Thornton help you with lease abstraction.
3. LeaseX continuously validates the contents of your repository, showing you where data is missing on a lease-by-lease basis.
4. Throughout the process, you can monitor your IFRS 16 and ASC 842 readiness progress by seeing how many leases are complete and how many still outstanding.
5. You can also monitor your total Right of Use (ROU) asset and liability numbers as you populate your data. Financial leaders will appreciate having that information earlier in the process, rather than having to wait until data collection is complete to understand the impact on the balance sheet.

When your LeaseX repository is complete and validated, it’s a simple matter to export the data to Visual Lease. At that point, you’re ready for IFRS 16 and ASC 842 compliance with the ability to generate journal entries and disclosures.

LeaseX and Visual Lease: Long-term lease accounting and management

Grant Thorton, in alignment with Visual Lease, now offers a joint solution that not only streamlines IFRS 16 and ASC 842 lease accounting compliance, but also helps create smarter and more effective lease management. Integrating these operations creates efficiency, reduces leasing expenses, and drives smarter lease decisions across the organization.

Learn more: Lease Accounting Changes: The Silver Lining You’re Overlooking

Visual Lease’s cloud-based platform handles every aspect of lease management and accounting for IFRS 16 and ASC 842 and beyond. With all of your lease data in one unified platform, you have a single source of truth and an end-to-end solution that you can always count on to be accurate and up to date.

Get up and running FAST. LeaseX and Visual Lease integrate seamlessly, meaning there’s next to no implementation time. In one click you can import your prepared LeaseX data into Visual Lease.

Seamless systems integration. Visual Lease provides a deep level of integration not only with LeaseX, but also with a wide variety of systems including SAP, PeopleSoft, Power Plan, Workday, NetSuite, JD Edwards, and more than 50 other platforms — empowering you to automate GL journal entries or create cash transactions in your AP/AR system. You can even integrate with multiple GLs.

Visual Lease works the way you work. No two organizations are alike, so a leasing solution tailored to your company and your specific requirements can be invaluable. Visual Lease’s customization possibilities go beyond simply changing field names, and instead allow you to design the system to work according to your processes and controls – and with Visual Lease, you can quickly make those changes yourself.

“We are excited to partner with Growth Street to take Visual Lease to the next level of success. It was important for us to find an investment partner who is innovative and focused and who is driven to provide hands-on strategic guidance. We found that with Growth Street,” said Marc Betesh, CEO and Founder of Visual Lease.

The company’s SaaS solution is relied on by over 300 of the largest publicly-traded and privately-owned corporations, retailers, hospitals, and institutions throughout the world to manage and report on their real estate and equipment lease portfolios. In 2017, Grant Thornton selected Visual Lease as its preferred vendor for FASB ASC 842 lease accounting software.

“Growth Street is thrilled to partner with Visual Lease to accelerate the company’s growth. Born from Marc’s deep domain knowledge, the company developed industry-leading software that customers and auditors love,” said Stephen Wolfe, Co-Founder of Growth Street.

“Growth Street will work alongside the existing team to help scale sales, marketing, and customer success, reinforcing the company’s leadership position in the lease management and accounting markets,” added Nathan Grossman, Co-Founder of Growth Street.

In conjunction with the investment, Stephen Wolfe and Nathan Grossman will join Visual Lease’s Board of Directors.

Visual Lease
Visual Lease was founded in 1995. Since its inception, Visual Lease has served companies with lease portfolios ranging from 15 to over 10,000 leases. Visual Lease’s tagline, “Lease Software by Lease Professionals” is reflective of its industry-leading expertise in commercial lease administration. Visual Lease’s mission is to facilitate efficient management and exacting compliance regarding lease obligations through world-class software and customer service. To learn more about Visual Lease, visit www.visuallease.com.

Growth Street Partners
Growth Street Partners provides early growth capital to vertically-focused, rapidly growing SaaS and technology-enabled services companies located in underserved U.S. markets. The firm partners with founders who have personally lived through the problems their businesses solve. To learn more about Growth Street, visit www.growthstreetpartners.com.

CONTACT: Stephen Wolfe, steve@growthstreetpartners.com

With FASB compliance less than a year away, Visual Lease is doing all we can to smooth the transition — including delivering a new lease accounting update designed to make it even easier to meet the requirements of ASC 842 and IFRS 16.

What’s new in our lease accounting update?

Visual Lease FASB 2.0, our enhanced Lease Accounting module, provides a range of new tools for displaying multiple lease views and running a variety of calculations, for the ultimate in accounting flexibility. For example, our lease accounting update enables you to:

• Pick a particular calculation or run parallel entries for ASC 840, ASC 842, IAS 17, and IFRS 16
• Run hypothetical calculations and preview them side by side for comparison, such as different interest rates or lease dates
• Create different calculations and reporting for different dates or different locations
• Automatically compute and reverse journal entries when lease terms change — or even end calculations and remove old assets from your balance sheet entirely

With the new FASB lease accounting rules now requiring all lease assets and expenses to be accounted for, Visual Lease’s enhanced module empowers you to create compliance-related reporting from your accounting data, for a more complete picture of your lease profile and related financial obligations.

For instance, you can look back on 2 years’ worth of journal entries and automatically pull data from your balance sheet for footnotes in Qualitative Disclosure Reports. Forecast what the next 5 years of lease obligations will look like and generate reports on all types of lease expenses — operating, short- and long-term, variable, and sub-lease, as well as finance.

For companies that include different entities, you can create drill-down Disclosure Reports according to different entities, regions, countries, lease terms, or whatever criteria you need. Our lease accounting update also includes enhancements for visualization of short-term versus long-term lease liabilities and for handling IFSR-only portfolios.

What are some enhancements in FASB 2.0?

Our lease accounting update not only sets you up for compliance with new FASB lease accounting rules on Day 1 — it also provides enhancements that help you handle complex lease scenarios on Day 2 and beyond.

Flexible Classifying & Calculating

Added audit trail and override capabilities give an administrator the ability to change the bright lines in Capital Lease Testing, to adjust how a lease is classified and how journal entries are done.

For instance, you can override the default values for the Lease Test Threshold amounts (normally 75% of Useful Life and 90% of Fair Market Value) to tweak those values (e.g., set the threshold to 88%) to be sure leases are properly classified. Our lease accounting update also expands the FASB schedule and calculations with additional criteria, such as Deferred Rent and Prepaid/Accrued Rent balances. The addition of a new Journal Entries section allows FASB schedule data to be viewed in Journal Entry form.

Easier Currency Conversion

A number of enhancements to Visual Lease help you handle complex currency conversions over multiple periods with greater ease and agility. Integration with foreign exchange tables allows third-party data to be used in the system, for tasks such as tracking changing currency rates over time and allowing customer databases to import rates from Visual Lease’s reference tables on demand.

Secure Single Sign-on

Our lease accounting update strengthens our already robust security features with the addition of secure single sign-on. Utilizing user authentication from Federated Security Sources, this capability enables users to log on once for secure access and the ability to work with Visual Lease and accounting, general ledger, and ERP systems simultaneously.

Managing User Workflow, Alerts, & Notifications

The lease accounting update adds tools for managing user approval to tasks, such as allowing specific users to import lease financial entries or hiding project modules from specific users. We’ve also improved lease alerts and notifications by including full contact information for alert recipients — making it easier to identify the alert targets — and adding a quick search capability when selecting targeted organizations.

Enhancements to Financials

Adding a new field for Cost per Rentable Area, our lease accounting update allows this to be included as a recurring, computed cost and adjusted when there are changes in lease terms; Cost per Rentable Area has also been added to ad hoc and abstract reporting capabilities. Enhancements to financials include:

• Forecast calculations on Multiple Lease Update for budgeting/projections
• Ability to filter entries for the financial types used on each lease and for options such as forecasts and GL entries
• Improved searching of the full hierarchy of financial categories
• Mapping to other financial categories for forecasting and straight line rent automation functions

What will the near future bring?

The new FASB lease accounting rules are designed to align U.S. standards with global accounting standards while increasing transparency in financial reporting by 2019. FASB 2.0 from Visual Lease is designed to help you meet those requirements with speed and ease; additionally, it is compliant with IFRS 16, the new international standard.

Are you ready for compliance? Learn more:
FASB Lease Accounting Changes: How to Assemble Your Readiness Team
Get the Best Lease Accounting Software by Comparing Price & Value

Moving forward, we will continue to support these efforts with regular releases — so we encourage you to return to this space frequently to read about the latest lease accounting update from Visual Lease and learn more about how we can help you make the transition.

Want to see for yourself? Request a demo

FASB lease accounting is changing the game not only for companies with leases, but also for the real estate brokers who help them to manage their property leases. Now, in addition to providing lease administration software to clients, brokers will be smart to consider providing lease accounting software solutions as well.

In fact, if they don’t, real estate service firms may find themselves losing clients.

Keep reading to learn why, and what to do about it.

Why lease administration software is important for real estate brokers

Commercial real estate services firms typically provide day-to-day management of property leases for their clients. This service is a relatively small source of revenue. However, it serves as a foot in the door to get the more profitable business: the big transactions when companies acquire new space.

That’s why many commercial real estate brokers offer lease administration services. As part of that service, they include a software solution that can used by both the client and the service provider. It helps the service firm more efficiently manage leases, and it gives the client easy access to their lease information when they need it.

Now, the upcoming lease accounting changes are shifting that model. Real estate firms are in danger of losing their foot in the door if they don’t offer lease accounting software solutions as well.

FASB changes & the need for lease accounting software solutions

The lease accounting changes coming from FASB and IFRS (in January 2019 for public firms, and a year later for private organizations) mean that companies need to track much more lease data than they did previously. Just about every lease must be brought onto accounting balance sheets.

So, companies need an automated way to centralize lease data and perform the necessary calculations. While the entry-level lease administration tools offered by real estate firms may handle the basic lease management functions, there’s no support for lease accounting. That means every company with more than a handful of leases is out there shopping for lease accounting software solutions.

The dilemma for companies: one system or two?

The need for lease accounting software solutions creates a dilemma for large organizations that currently maintain lease data in a broker-owned lease administration tool.

Should they purchase one of the standalone lease accounting software solutions, and keep lease administration information in the existing system?

Or, should they move to one complete, integrated lease solution that does both?

The two-system approach: a logistical nightmare

As companies begin to investigate the technology infrastructure they will need to meet lease accounting objectives, it quickly becomes clear that the two-system approach is problematic at best.

For one thing, the lower-end lease administration tools that real estate service firms typically offer don’t integrate well with other systems. Until now that wasn’t a problem, because they didn’t need to.

Because of the new lease accounting rules, lease payments and other data will need to be regularly fed to general ledger systems. Since low-end lease admin tools can’t send data feeds, companies would be forced to use manual export/import processes.

Not only is that incredibly time consuming, but it’s expensive to set up. For the real estate firm, integration with lease accounting software solutions could cost more than they’re currently paying for their administration tool.

For the client, relying on manual data moves is risky: it’s prone to error. When it comes to accounting data for multi-million dollar real estate leases, it’s a risk many CFOs (and their audit firms) won’t even consider.

And there’s even more manual work involved in keeping lease data up to date in lease accounting software solutions. Property leases can and often do change during the course of the lease: payments change, options are executed, and space is added or removed. That means more manual movement of data, and more risk of mistakes, when you’re stuck with two systems.

Few large organizations are going to accept a difficult ongoing data management process like this. That’s why end-to-end lease administration and lease accounting software solutions are catching on.

The issues with moving to a single system

When a large company decides to move to a combined solution, they face another problem with their real estate firm.

Finance executives may not want an outsourced real estate firm to have administrative access to their accounting data. That decision may be made based on lease accounting guidance from audit partners. And they certainly don’t want their real estate firm to OWN their lease accounting software solution.

For real estate services firms, the handwriting is on the wall: clients need to centralize all their lease data, and many will choose to take it back into their own hands. That could easily mean the real estate broker loses their foot in the door that ensures they get the bigger business associated with property leases.

Can real estate service firms keep their clients’ business with lease accounting software solutions?

Smart real estate service providers won’t just take this situation lying down and wait to lose customers.

The good news is, if you’re proactive you can get out in front of the problem and actually improve your relationship with your clients.

Our advice? Take these steps now:

1. Get educated about the upcoming FASB and IFRS lease accounting changes.

Learn about the challenges companies are facing and the data they need to collect. Understand lease accounting problems and solutions. Also, be able to speak to clients about the risks and opportunities related to FASB compliance, and how you’ll be stepping up your management practices accordingly.

Here are a few articles to get you started:

Lease Accounting Changes: The Silver Lining You’re Overlooking
Lease Portfolio Management: Policies & Procedures to Reduce Risk
Corporate Real Estate Strategies and the New Lease Accounting Standards

2. Learn about end-to-end lease administration and lease accounting software solutions.

You may be able to improve your position by offering technology that better meets your clients leasing needs instead of one that’s only half a solution.

We’re happy to show you Visual Lease and explain how we stack up to our competitors: REQUEST A DEMO.

3. Get a seat at the table and help clients make smart decisions.

The fact is, if your clients choose the right lease accounting software solutions, you can still keep their lease administration business.

Visual Lease, for example, has the security infrastructure in place to allow an outsourced firm to work with a client’s lease administration data, while controlling access to sensitive accounting data.

Don’t wait for your clients to come to you with this problem.

Find out who is involved in your clients’ FASB/IFRS implementation process and technology selection. Get involved and earn their trust by recommending smart lease accounting software solutions. If you do, you can stay in the game and keep your valued clients.

Why lease accounting may impact corporate real estate strategies

The new lease accounting standards from FASB (U.S.) and IASB (international) essentially require all leases to be brought onto the balance sheet. That’s a big change. According to JLL, currently more than 85% of lease commitments don’t appear on the balance sheet.

After the new rules take effect, balance sheets will show very different debt-to-equity ratios and return on assets. These changes may have far-reaching impacts on the organization, such as loan covenants and greater scrutiny on lease policies and decisions. And it’s happening soon: January 2019 for public companies.

The questions for corporate real estate is, should these lease accounting standards change your corporate real estate strategy? And if so, how?

Corporate real estate strategies you may have to re-think

If you’ve researched the impact of lease accounting on corporate real estate management strategy, you’ve probably seen a wide range of opinions. However, there’s one thing everyone agrees on. The increased financial impact of leasing will mean increasing scrutiny of your corporate real estate strategies and decisions. You may also face new approval requirements from finance leaders for real estate leasing decisions.

Now is the time to think through your current corporate real estate strategies, understand how the new lease accounting rules may impact your organization, and adjust accordingly.

The buy vs. lease decision

Under the new lease accounting rules, you will lose some of the financial benefits of leasing space. Does that mean you should decide to purchase buildings instead of leasing?

Some experts predict that when looking to occupy all or most of a building (like a corporate headquarters), more organizations will now consider the option to buy. According to CBRE, if you’ve got excellent credit you may find that the cost of capital to purchase is lower than the long-term cost to lease.

However, others experts argue that many other factors (besides balance sheet impact) will continue to be the main drivers in the decision to buy or lease space. Some of these include:

• business requirements and forecasts
• availability of capital
• debt and equity covenant restrictions

Remember that the lease accounting changes, in most industries, will impact everyone equally. Your competitors are facing the same challenges you are. However, if you are the lone company in your vertical with a lot of leased space (versus owned) then you may want to rethink your corporate real estate strategies related to leasing.

Lease term length

Under the new rules, longer leases can have a more detrimental effect on the balance sheet due to larger lease liabilities. Does that mean you should consider shorter lease terms as one of your corporate real estate strategies?

There’s already a trend toward shorter lease terms globally. The average lease length for commercial space in the U.S. is 7 years, but in some international markets the average is 2 to 3 years. With the lease accounting changes factored in, some predict that trend will grow.

However, there are practical considerations that may preclude shorter lease terms. For one thing, there’s a lot of risk for landlords with shorter leases. Tenants may also not want to risk having to move every 2 to 3 years. And for certain industries where leasehold improvements are common, having to depreciate that cost over a short lease may not be realistic.

That being said, it’s possible we may see leases for smaller turnkey spaces becoming shorter with more options. But remember, options that you are “reasonably certain” to exercise will be included (for accounting purposes) as part of the lease term anyway.

Lease structure

In many industries, fixed, all-inclusive lease payments are common for the sake of simplicity. However, under the new lease accounting standards, a higher proportion of variable payments (i.e. with payments for taxes and maintenance separated out) may result in smaller lease liabilities. Should you consider modifying lease structures as one of your corporate real estate strategies?

To be sure, structuring leases with separate payments for lease and non-lease components will simplify the workload for your financial reporting team under the new standards. But that can be more work for accounts payable (unless you have lease management software that makes variable payments simple and automatic).

Even with fixed lease payments, you can ask landlords to provide details about breakdowns of your payments for reporting purposes. However, landlords may consider that proprietary information and may not be willing to comply. If you face that situation, outsourced real estate partners can also provide helpful information.

Sale-leaseback is another lease structure that changes significantly with the new standards. Until now, these transactions served as a form of off-balance sheet financing. With this advantage taken away, you may find this lease structure a less attractive option in your playbook of corporate real estate strategies.

More resources for strategic corporate real estate leadership:
Lease Portfolio Management: Policies & Procedures to Reduce Risk
The Uncertain Future of the Corporate Real Estate Profession

The bottom line: how to decide what’s right

Who is right in all these debates? The fact is, there is no one correct answer for everyone. You need to make decisions that are best for your organization. That means considering lease accounting impacts along with other factors that currently affect your corporate real estate strategies and decision making.

Here’s the difficulty: you can’t possibly do that without all your lease data in a central repository. And without software that makes it easy for you to analyze your lease data, find out where your risks and opportunities lie, and make informed decisions about corporate real estate strategies.

Just about every organization is rushing out to get lease accounting software to push out balance sheet calculations. But lease accounting software alone can’t help you with the critical decisions ahead. The lease accounting changes can serve as your opportunity to implement a comprehensive end-to-end lease solution that helps you improve corporate real estate strategies along with lease accounting.

Learn more:
Lease Accounting Changes: The Silver Lining You’re Overlooking

That’s why we have prepared this quick reference that explains the IFRS and FASB changes in the new standards. You can also see the differences between the IFRS changes and FASB changes to lease accounting.

Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

Scope of IFRS and FASB changes

FASB changes in ASC 842

Scope includes leases of all property, plant, and equipment.

IFRS 16 changes

Scope includes leases of all assets.

Definition of a lease

Under both standards, A lease contract must convey the right to control the use of a specifically identified asset for a specified period of time. A customer controls an identified asset when the customer has both the right to obtain substantially all of the economic benefits from its use and the right to direct that use.

FASB changes in ASC 842

A lease is defined as a “contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”

IFRS 16 changes

A lease is defined as a “contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.”

Definition of a short-term lease

FASB changes in ASC 842

A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise.

A lessee may recognize the payments on such a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.

IFRS 16 changes

A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option.

A lessee may recognize the payments on a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.

Lease accounting overview

Under both standards: As of the lease commencement date, a lessee will recognize both:

1. A liability for its lease obligation (initially measured at the present value of the future lease payments not yet paid over the lease term).
2. An asset for its right to use the underlying asset (i.e., the right-of-use (ROU) asset) equal to the lease liability, adjusted for lease payments made at or before lease commencement, lease incentives, and any initial direct costs.

FASB changes in ASC 842

Lease classification
A lessee will classify a lease as a finance lease when the lease meets any of the following criteria at lease commencement:

1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
3. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion will not be used for lease classification purposes.
4. The present value of the sum of lease payments and any residual value guaranteed by the lessee that is not already reflected in lease payments equals or exceeds substantially all of the fair value of the underlying asset. Note that for measurement purposes, lease payments will only include amounts probable of being owed by the lessee under a residual value guarantee.
5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

FASB operating lease and finance lease treatment
For a finance lease, the ROU asset is generally amortized on a straight-line basis. This amortization, when combined with the interest on the lease liability, results in a front-loaded expense profile in which interest and amortization are presented separately in the income statement.

For an operating lease a straight-line expense profile that is presented as a single line item in the income statement.

IFRS 16 changes

All leases will be recorded as per the FASB’s finance lease approach when amortizing the ROU asset.

Lease term

FASB changes in ASC 842

Lease term is the non-cancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option or in which the exercise of those options is controlled by the lessor.

Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee, (2) a contract term obliges the lessee to exercise (or not exercise) an option to extend or terminate the lease, or (3) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.

A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.

IFRS 16 changes

Lease term is the noncancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option.

Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee or (2) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.

A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.

Lease payments

Under both standards, lease payments include:

• Fixed payments
• Variable payments that are based on an index or rate (e.g., CPI) calculated by using the index or rate that exists on the lease commencement date.
• Amounts that it is probable will be owed under residual value guarantees.
• Payments related to renewal or termination options that the lessee is reasonably certain to exercise.

Lease payments do not include variable lease payments that are based on the usage or performance of the underlying asset (e.g., a percentage of revenues).

FASB changes in ASC 842

Variable payments based on an index or rate would only be reassessed when the lease obligation is reassessed for other reasons (e.g., change in the lease term, modification).

IFRS 16 changes

Variable payments based on an index or rate would be reassessed whenever there is a change in contractual cash flows (e.g., the lease payments are adjusted for a change in the CPI).

Discount rate

Under both standards, lessees use the rate charged by the lessor if the rate is readily determinable. If the rate is not readily determinable, lessees will use their incremental borrowing rate as of the date of lease commencement.

FASB changes in ASC 842

Private-company lessees can elect to use a risk-free rate.

IFRS 16 changes

No exemptions provided for private-company lessees.

Lease modification accounting

Under both standards, a lease modification is any change to the contractual terms and conditions of a lease.

A lessee will account for a lease modification as a separate contract (i.e., separate from the original lease) when the modification (1) grants the lessee an additional ROU asset and (2) the price of the additional ROU asset is commensurate with its stand-alone price.

Lessees would account for a lease modification that is not a separate contract by using the discount rate as of the modification effective date to adjust the lease liability and ROU asset for the change in the lease payments.

The modification may result in a gain or loss if the modification results in a full or partial termination of an existing lease.

Sublease treatment

FASB changes in ASC 842

The intermediate lessor would classify a sublease by using the underlying asset of the master lease.

IFRS 16 changes

The intermediate lessor would classify a sublease by using the ROU asset of the master lease.

Sale-leaseback treatment

FASB changes in ASC 842

The transaction would not be considered a sale if (1) it does not qualify as a sale under ASC 606 or (2) the leaseback is a finance lease.A repurchase option would result in a failed sale unless (1) the exercise price of the option is at fair value and (2) there are alternative assets readily available in the marketplace. If the transaction qualifies as a sale, the entire gain on the transaction would be recognized.

IFRS 16 changes

The transaction would not be considered a sale if it does not qualify as a sale under IFRS 15.A repurchase option would always result in a failed sale. For transactions that qualify as a sale, the gain would be limited to the amount related to the residual portion of the asset sold. The amount of the gain related to the underlying asset leased back to the lessee would be offset against the lessee’s ROU asset.

There’s good news on the FASB compliance front, which is not quite official yet but should be finalized any day now. It looks like the FASB board is about to approve an option for organizations to eliminate the 2-year lookback as they move to FASB compliance with ASC 842.

Apparently, the FASB board is attempting to reduce the monumental amount of lease data collection companies are facing, especially large, distributed organizations with large leased portfolios. To get ready for lease compliance, you’ll need to fundamentally change your lease accounting practices. As of now, that means finding, classifying, extracting, collecting and aggregating mountains of data over a 3 year period (representing the current reporting year plus 2 years prior).

What does this FASB compliance change mean for you?

Let’s be clear about one thing: this change does not impact the new lease accounting standard effective date. For public companies and others meeting certain criteria, you’ll need to be ready for FASB compliance by January 1, 2019. Most private companies have another year.

What’s changing is the requirement to provide financial statements for a 2-year comparative reporting period (as known as the 2-year lookback) according to the new rules. Instead, you can choose to apply the new lease accounting standard at its effective date to achieve FASB compliance with ASC 842.

According to the new FASB standard (ASC 842), you must recognize and measure leases at the beginning of the earliest period presented in your financial statements (which is 2 years prior to the current year). That means, for public companies using the January 1, 1019 FASB compliance date), you would need to measure and recognize leases as of January 1, 2017.

That’s why public companies are scrambling to collect lease data right now. You’re already a year behind.

Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

Under the proposed change, the requirement to measure and recognize leases during the comparative reporting period goes away. Needless to say, this change simplifies the transition to FASB compliance under the new standard. You won’t need to include leases that expired prior to January 1, 1019, and you won’t need to remeasure leases modified multiple times during your comparative reporting period.

Don’t let this news slow down your FASB compliance plans

Once this change is officially announced, many public companies will be breathing a collective sigh of relief.

However, we have to caution you not to let this news change slow down your efforts to get ready for FASB compliance. You have fewer leases to worry about and some data collection tasks that you can cross off the list. But there’s still a great deal of work to do. And, the sooner you get through the job of preparing data and changing your lease accounting practices, the sooner your organization can reap the benefits of FASB compliance.

You may be wondering what benefits we’re talking about. Getting to go home to your family at a reasonable hour instead of working 18 hour days? Maybe, but there are other considerable financial and efficiency gains you can achieve because of your FASB compliance efforts.

If you’ve been following our blog, you know we have been pointing out some of the upsides related to the effort required to achieve FASB compliance.

In case you missed it, read these articles to learn more:

Lease Accounting Changes: The Silver Lining You’re Overlooking
How Lease Accounting Software Can Pay for FASB/IFRS Compliance

Lease accounting software has become a necessary expense for most organizations due to the new IFRS and FASB lease accounting standards. However, choosing wisely can save more money in operating expenses than your lease accounting compliance efforts will cost.

What will FASB/IFRS compliance cost you?

For the vast majority of organizations, the effort to get ready for compliance with the new FASB and IFRS lease accounting standards will have a significant cost impact. According to research by EY, estimates range from $500,000 to $5 million. And furthermore, most organizations have not even budgeted for this expense.

Because compliance is mandatory, many will simply assume this cost must be absorbed as a necessary expense. But here’s what you may be overlooking: lease accounting software can help reduce operating expenses so much that it more than pays for the cost of your lease accounting implementation efforts.

Seem too good to be true? It’s not. Keep reading and we’ll explain.

Lease accounting software is a cost of compliance… or is it?

Probably the biggest expense associated with lease accounting compliance is the cost of gathering and aggregating all your lease data. That’s especially true for global and distributed organizations with large leased portfolios.

Another expense that’s mandatory for the vast majority of companies is the cost of lease accounting software. The new standards have increased the complexity of lease accounting to the point where it’s no longer possible to continue storing data and producing calculations in Excel spreadsheets (as most have done until now).

However, the cost of lease accounting software may not turn out to be an expense after all, depending on the technology you choose. In fact, choosing the right product can be a net gain for your organization due to the operational cost reductions you can achieve.

Learn more: Lease Accounting Changes: The Silver Lining You’re Overlooking

Let’s explore exactly how that’s possible with the best lease accounting software.

5 ways lease accounting software pays you back

Before we get into the details, there’s one caveat you must be aware of: not all lease accounting software solutions can provide these benefits. In fact, those that only perform lease accounting calculations can’t.

These cost-saving benefits come from having an integrated solution that combines lease accounting with end-to-end lease management.

1. End overpayments on variable rents and CAM charges

For retail companies, variable rent payments are a way of life. Lease payments vary month to month because they’re based on a percentage of sales. That’s only one example of many different scenarios where property lease payments change regularly. Then there’s common area maintenance or CAM charges: the ongoing maintenance changes that the landlord passes on the lessee. These are often subject to change over the term of the lease.

These variable payments can be a logistical nightmare for accounts payable teams, who have to figure out what exactly they need to pay each month. When that’s done manually (or not calculated at all, but simply paid based on the landlord’s calculations), you’d be amazed at the costly mistakes that result.

When your lease management & lease accounting software documents all lease terms, automatically calculates the correct payments every time and integrates with your AP system, you save money by preventing overpayments.

2. Avoid paying expenses that are the lessor’s responsibility

When your lease terms are not easily accessible to those making decisions at ground level, it’s surprisingly easy to end up paying for things you shouldn’t. One simple example: you pay to get a leaky roof replaced, when in fact the lease clearly states that this is the landlord’s responsibility. That happens because the facilities staff handling the issue has no access to the terms of the lease.

When you have a single lease management & lease accounting software solution that’s used by everyone from facilities staff to procurement to accountants, all your information is kept up to date and easily accessible. That prevents costly mistakes.

3. Stop making automatic payments on expired leases

When your AP system is not integrated with your lease management & lease accounting software, payments can continue going out long after leases expire. If you’ve got a large leased portfolio, especially lots of shorter term equipment leases, this kind of mistake can quickly add up.

With an integrated solution, your payments automatically stop when the lease’s end date is reached. No one has to remember to cancel the payment.

4. Avoid missing lease option deadlines

Property leases often include options to renew at a favorable rate, provided you exercise that option by a specified date. As real estate professionals know, missing just one of those deadlines can cost you millions on a single long term lease. That’s because you lose the chance of that favorable rate and then are forced to pay market rate for what can be several years at a minimum.

Your lease management & lease accounting software can alert you when those critical lease dates are approaching, so you have enough time to carefully consider your options and make the most cost-effective decisions.

5. Negotiate better lease deals

When all your lease data is available in a single source of truth (your combined lease management & lease accounting software) you have a gold mine of business intelligence that you can use to drive better lease deals. You can easily access terms of similar leases and use that data during your negotiations to get more favorable terms that can result in huge cost savings.

The fact is, there are significant benefits to be gained by the effort to comply with the new lease accounting standards. Choosing the right lease accounting software puts you in the best possible position to actually reduce expenses across your organization instead of adding to them.

It’s no secret: the lease accounting changes required by FASB ASC 842 and IFRS 16 have put a significant burden on companies, especially the accounting teams. The effort to achieve compliance requires an investment of time and money, which can seem particularly onerous since you have no choice in the matter. It’s like a huge black cloud hanging over your head. But just as every cloud has a silver lining, there’s an upside to this effort.

The lease accounting changes are mandatory, but that doesn’t mean you can’t benefit from implementing the new lease accounting standard. In fact, if you do things right, the process can lead to big changes in the way you manage leases, ultimately reducing expenses and improving your bottom line.

To reap those benefits, here’s what you need to do as you prepare for the lease accounting changes:

• Implement lease accounting software with integrated lease management capabilities. When you do that, you’ll have all your lease data in one single source of truth, the intelligence to show you opportunities for improvement, and the tools to reform inefficient and wasteful lease management practices.
• Take advantage of working with both accounting and technology experts to get your house in order and improve operational and decision-making processes.

Let’s take a closer look at what you stand to gain from the lease accounting changes and how to make it happen.

Efficient and cost-effective lease management

As leases become more visible and their impact on organizational finances is realized, the processes surrounding lease management will be increasingly scrutinized. Here at Visual Lease, we work with organizations in every industry and we see the same trend: a lack of consistent practices related to leases. In fact, when it comes to leases for equipment and other assets, many have no documented policies and processes at all. Because of the lease accounting changes, that’s changing.

Not having lease management tools and controls in place costs you money. Here are just a couple of examples:

• Accounts payable continues to make monthly payments on outdated leases.
• You pay for building repairs that are the landlord’s responsibility according to the terms of the lease.

With lease expenses appearing on financial reports because of lease accounting changes, those at the top of the food chain will be examining lease costs and looking to improve operational efficiency and decision-making.

Are you prepared to do that? You will be if you’ve chosen the right technology to implement the lease accounting changes.

Your choice of lease accounting technology is critical

Until now, most organizations used spreadsheets to handle lease accounting for FASB and/or lease accounting for IFRS. With the new lease accounting changes, both the volume of work and the complexity have increased exponentially as virtually all leases must be brought onto the balance sheet. That means the old methods are no longer sufficient and everyone is shopping for new technology.

Especially for public companies racing to meet the January 2019 compliance deadline, it’s easy to make the mistake of going with lease accounting software that merely takes data from other sources and spits out the calculations. Doing that may seem simpler in the short term. However, here’s what you’ll find out after the lease accounting changes are complete: having multiple systems for lease accounting and lease management leads to more complexity, more mistakes, and higher costs. Even worse, you’re missing out on the opportunity to improve your lease administration. That’s the real silver lining in this situation.

A complete lease platform enables process improvement

What if you could eliminate the mistakes that drive up your lease-related expenses? When you consider the costs associated with high-value property leases alone, it’s easy to see how much wasted money you can reclaim by eliminating overpayments, late fees, and payments that shouldn’t have been made at all.

An end-to-end lease accounting and management platform helps you put an end to that, by documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms.

That’s just the beginning. A complete system alerts you about upcoming critical dates related to lease options, so you have the time to make the right decision about executing options. As lease administrators know all too well, making the wrong call, or missing an option date entirely, can be a mistake that can cost millions on just one long-term real estate lease.

When everyone involved in managing leased assets, handling payments, and accounting for lease payments on the balance sheet is using the same system, you also eliminate data integrity problems that occur when data is moved between systems. You can count on the accuracy of your lease data because it’s updated in real time by those working with leases.

Preparing for the upcoming lease accounting changes requires you to centralize lease data so calculations can be done and journal entries & disclosures added to your GL. But don’t limit your consolidation of lease data to only what’s required for FASB & IFRS compliance. When you centralize all lease data, including administration information that’s outside the scope of accounting calculations, you create a gold mine of business intelligence that can guide more cost-effective leasing decisions that are aligned with the goals of your business.

Have you considered integrating with your AP system, streamlining and tracking all expense payments? What about auditing your large expenses, providing warnings or stop payments on landlord overcharges, such as CAM expenses?

Learn more: Equipment and Property Lease Accounting: Can One System Do Both?

Expert advice for improving your lease management operations

With the right tools in place and data at your fingertips, you’re in a great position to transform your operation and save money in the process. But to make those decisions, you need the confidence that comes from experience. Let’s face it: few organizations have implemented major lease accounting changes and transformed lease management operations throughout the company. That’s why, as you work toward implementing the lease accounting changes, getting the advice of knowledgeable experts who have been down this road before is invaluable.

As you prepare for the lease accounting changes you’ll have the opportunity to work with knowledgeable technology professionals and your accounting partners. However, these experts may not know very much about leases.

That’s an overlooked benefit to implementing an end-to-end lease accounting and management platform like Visual Lease. We are lease experts, and we can help with every aspect of your transformation. Our decades of experience working with global organizations to implement our technology, and to continuously improve it, enables us to guide our clients toward smart decisions and achieve the results they want.

Learn more:
FASB Lease Accounting Changes: How to Assemble Your Readiness Team

When we talk about lease portfolio management, in the past that meant real estate. Now property leases are only one component of your company’s lease portfolio management equation. Leases for every conceivable type of asset must be accounted for, which requires standard procedures and controls for managing the leases. While some organizations may have these in place for high-value real estate leases, very few have standard policies and processes for equipment lease portfolio management. And those that do exist are probably not implemented uniformly throughout the organization.

Related article: Equipment and Property Lease Accounting: Can One System Do Both

While your accounting teams are preparing for the lease accounting changes, now is the time to put lease portfolio management policies and procedures into practice across all teams that handle lease portfolio administration.

Policies and procedures organizations will need to implement for lease portfolio management

Centralize lease data

Getting compliant with the FASB & IFRS standards will, for most companies, require you to move all your lease data into a central repository that will feed lease accounting calculations, journal entries and disclosures to your GL.

While you’re figuring out how to get all the lease data you currently have into a new system, make sure you create policies and procedures for adding new leases once you’ve implemented your new software. Especially for equipment leases that were never tracked before, procurement and IT groups that obtain and maintain these items will need to be trained on how to enter new lease data into the lease management & accounting system.

TIP: Training many new people on new technology can be a burden. Your best bet? Choose intuitive software that’s simple to understand and use without extensive training.

Create an audit trail

Property leases in particular can have many changes throughout the course of the lease term. Not only must every change be recorded in your lease management and accounting system, but with just about every global lease being tracked, there are many people involved in making changes. That means you must put policies and procedures into place to track change approvals and submissions. You’ll need these in case of questions or problems with day-to-day lease administration and also in the event of financial audits.

TIP: Make sure your lease accounting software can support your audit trail, with drill-down capabilities that link data to supporting documents and fields to track changes and approvals.

Standardize lease requisition and monitoring

Before the new lease accounting standards were announced, most leases (especially your equipment lease portfolio) were hidden away in file drawers. As a result, companies had little reason to establish consistent processes for lease requisition and approval. Monitoring lease changes probably didn’t happen at all.

Now that you must roll up lease data for inclusion on the balance sheet and in financial reports, having accurate and consistent data is essential and your lease portfolio management practices must be expanded and organized. Every group that’s involved in acquiring and maintaining leases should follow standard practices for lease negotiations, processing new leases, documenting lease changes, and handling lease terminations.

TIP: Because lease changes now significantly impact your financial reporting, make sure your lease accounting software has automated re-measurement tracking.

Create lease vs. buy guidelines

The balance sheet impact of the new lease accounting changes is a concern for many organizations. Your decisions about how best to acquire and finance assets are more important than ever. Especially for large organizations with many departments and people involved in acquiring assets, providing guidance into the decision making process can have a positive impact on the company’s financial picture.

TIP: When you have one system that serves as a central source of truth for ALL lease data, you’ve got an invaluable source of intelligence for lease portfolio analysis that can help you craft those guidelines.

Establish internal controls

Documenting standard operating procedures around lease portfolio management is only half the battle. You must put internal controls in place to monitor compliance with these processes across your organization. With lease accounting on the balance sheet and now subject to Sarbanes-Oxley compliance, there’s no margin for error.

TIP: Your lease management software can actually help you monitor compliance with lease policies. For example, Visual Lease has an audit tool that identifies lease payments that fall outside parameters that you set. This type of tool helps you identify mistakes, and significantly reduce lease expenses in the process.

5 steps to transforming lease portfolio management

Overhauling your processes and procedures related to lease portfolio management may seem like a daunting task, but doing it now will save you big headaches down the road. You’ll also be in the best position to take advantage of your centralized lease accounting data to make better decisions and optimize expense for leased assets.

1. Start by assembling a high-level team, including your CFO, Controller, senior accounting managers, as well as heads of corporate real estate and procurement.
2. Assemble the resources to understand and analyze how different groups are handling lease portfolio management currently.
3. As your organization begins pulling together lease data for FASB and IFRS compliance, the cross-functional leadership team should develop the related policies and procedures that need to be implemented across the organization to support ongoing lease portfolio management.
4. Make a transition plan to roll out the changes throughout all affected teams, and get everyone up to speed on the new lease portfolio management policies and processes.
5. Choose the right technology to make lease portfolio management easier. In addition to the tips mentioned above, the critical factor for reducing risk, cutting costs and maximizing productivity is having one system to handle ALL your lease portfolio management and accounting tasks.

Are you still looking for the right lease management and accounting technology for your organization? Request a Visual Lease demo today.

The truth is, there is no reason to complicate the situation further than it already is. In fact, there are significant benefits to choosing one platform that can do both accounting for equipment leases and accounting for property leases.

In this article, we’ll explore why this myth has developed in the first place, as well as the different capabilities that are needed for equipment lease accounting and property lease accounting. Armed with that knowledge, you’ll be in the best position make your life easier (and make the smart choice for your business) by choosing one solution that can do both.

Why are so many solutions fractured?

The release of the new lease accounting standards has (not surprisingly) lead to a huge influx of new lease accounting tools. Many of the vendors have chosen to focus on equipment lease accounting because that really didn’t exist prior to February 2016; equipment leases did not need to be represented on the balance sheet or included in financial reports. Then there are the vendors who have been specializing in property accounting software for some time. Both of these groups have been emphasizing the differences between equipment lease accounting and property lease accounting to get companies to believe they need separate solutions.

It’s quite true that there are significant differences, which we will explain here. But if you know what to look for, you can choose one system that does both accounting for leased equipment and accounting for property equally well. And you get the benefits of a simpler solution that provides a single source of truth.

The differing complexities of equipment lease accounting and property lease accounting

We like to explain the difference between equipment lease accounting and property lease accounting in terms of vertical vs. horizontal complexity.

A property lease is complex horizontally because it can have a many different structures and data points, along with numerous data streams, critical dates, options and expansions. Not to mention many more source documents. Property leases change all that time, so that adds even more horizontal complexity: you need mechanisms in place for updating your property lease accounting as things change.

Learn more: FASB Lease Data You Can’t Get From the Lease Abstraction Process

Equipment leases tend to have more vertical complexity. A lease for an automobile or a laptop has fewer data points and requires less interpretation for performing calculations. However, equipment leases tend to be organized in a vertical structure, with a master lease that must be tied to hundreds or even thousands of sub-leases, or embedded leases, for individual items.

Property lease accounting: features to look for

When you think in terms of numbers (as accountants tend to do), understanding the relative importance of property and equipment leases in your accounting can be misleading. That’s because, with a few exceptions (such as retail companies), most organizations have far more equipment leases than property leases. But here’s what you can’t overlook: the value of those property leases, and their impact on your financial statements under the new standards, is far greater.

That’s why it’s critically important that your lease accounting technology vendor demonstrate expertise with real estate leases. How can you see that? By looking for the following:

• The ability to accurately account for a variety of lease payment structures, such as percentage/variable rent.
• Mechanisms that automate lease accounting adjustments when property leases change during the lease term or are renewed.
• Lease management capabilities, including critical date alerts and integration with your A/P system to automate payments.
• Lease abstractors with years of experience and knowledge about the complex terms of property leases, so you can be sure you extract the correct data from your source documents.

In short, you want a single source of truth that’s kept accurate and up to date by the people who work with your leases every day. With that in place, you eliminate the delays and mistakes that can happen with data moving around between different systems.

Equipment lease accounting: features to look for

As we said earlier, an equipment lease is not all that difficult to account for. What’s complicated is the sheer number of them, how they are related to one another, and deciding which ones you are required to report on. Here’s what to look for in equipment lease accounting software:

• The ability to manage parent/child relationships for asset leases.
• Tools that make data migration quick and easy.
• Lease classification functionality that automatically classifies your leases and applies the correct accounting treatment.
• Easy customization, so you can adjust fields and reports for all the types of assets you lease: everything from airplanes to manufacturing equipment to oil pipelines.
• A built-in audit trail that ties entries back to the original sources (especially for embedded leases).

How you benefit from one complete solution

Today’s APIs make it possible to connect data from all kinds of systems. Your lease accounting solution must integrate with your ERP and potentially multiple GL and AP systems. However, there’s no need to make things more complex than they need to be by keeping lease data in two or even three separate systems.

With all your lease data in one unified platform, you have a single source of truth and an end-to-end solution that you can always count on to be accurate and up to date. Plus you eliminate the costs required to maintain multiple systems for equipment lease accounting and property lease accounting.

Here’s the really surprising part: you can pay less for Visual Lease’s complete solution than you might for a partial one. Want to see how it works? Sign up for a demo.

Think you have all the data you need for ASC 842/IFRS 16 compliance? Think again.

Extracting data for ASC 842 transition or IFRS 16 compliance is more than a numbers game. In addition to the dates and payment amounts associated with your leases, there are more complex quantitative data points that will need to be captured from lease documents. Some will need to be calculated based on specific lease terms, such as breakdowns of lump-sum rent payments and CPI increases.

While the main source of data will be the leases themselves, there are also qualitative data points that won’t be found in the lease documents, but instead might come from your real estate team or lease administration partners. You may also need help from outside resources to understand the legal and accounting implications of all lease conditions.

The complexity of capturing and aggregating data for ASC 842 or IFRS 16 compliance is exacerbated when you’re not starting from a single source of truth. Before the new lease standards were announced, many organizations had no central repository for lease information. Now that lease data is moving onto the balance sheet, it’s essential that you collect the right data and ultimately gain more visibility about your leases.

Keep reading to learn what you may be overlooking, as well as the steps to improve the speed and quality of your data collection efforts for ASC 842 or IFRS 16 compliance.

Data you may be missing for ASC 842 transition or IFRS compliance

In most organizations, the accounting teams are driving data collection for ASC 842 or IFRS 16 compliance. The problem is, your accounting managers are focused on the numbers and are not lease experts. So, there are going to be lease terms they won’t understand what to do with, and data they won’t realize they need to capture.

These are just a couple of examples:

Lump sum rent payments: it’s not enough to capture an all-inclusive monthly payment amount. That needs to be broken down to show what portion is intended as base rent, as well as portions for taxes, insurance and CAM expenses. That detail is not likely to be found in the lease.

Intentions: If a lease includes an option to purchase at the end, you need to find out if your business intends to exercise that option. Similarly, you need to know if the business may be planning to end a lease early (if you have an office that’s moving to a new building, for example). These intentions must be identified because they now impact the lease assets and liabilities you’ll need to show on the balance sheet for ASC 842 or IFRS 16 compliance.

3 data collection steps that ensure complete and reliable data

To avoid overlooking important data, which can undermine your compliance timeline and the accuracy of your reporting, follow these data collection steps.

STEP 1: Gather and organize all relevant documents

Simply locating all your lease documents are can be a major challenge for a global organization with hundreds or thousands of leases. You’ll need a strategy for uncovering all records and possibly a mandate from upper management to help you get cooperation from everyone.

Learn more: FASB Lease Accounting Changes: How to Assemble Your Readiness Team

For your most complex leases (typically property leases), you’ll need to gather multiple documents, including addendums and commencement letters, in addition to the master lease. Before beginning to extract data, make sure you’ve considered the entire scope of documents associated with every lease and have the most up-to-date and accurate records. You may need help understanding the links between the various documents, so you can tell which include the relevant data.

TIP: If you’re missing amendments or other records, lessors may be able to help (they are gathering the same data for ASC 842/IFRS 16 compliance).

Another source of data may prove challenging for accounting teams when it comes to the ASC 842 transition and IFRS 16 compliance: embedded leases within service contracts. If an agreement includes an implicit or explicit asset that you control the use of, such as equipment or vehicles, that may be considered a lease. You’ll need to collect any contracts that might have embedded leases, and also devise policies to help those extracting data to decide what constitutes a lease for ASC 842 or IFRS 16 compliance.

STEP 2: Collect the right data

The last thing you want to do is spend lots of time and resources pouring through lease documents, then find out you missed critical information and be forced to go through them again. Get it right the first time with these tips.

Understand lease terms well enough to extract the relevant data. For example, there may be different ways to calculate payments that are subject to CPI increases, and a close examination of the lease terms is needed to make sure the amounts are correct.

Be smart about using automated abstraction tools. If humans have trouble understanding lease terms, then AI/machine learning software will also. Automated tools that use optical character recognition (OCR) to recognize words can’t either- they can only extract simple terms. These tools can speed up the process for the easy data, but you’ll need experts to extract and validate complex terms.

Learn more: Can You Trust Artificial Intelligence for Lease Abstraction?

Knowing what to extract is just the beginning. You’ll need to make decisions about how to categorize certain terms. With complex leases (again, your real estate leases) there may be terms that are difficult to put into buckets. Turn to resources that can help you understand the legal and accounting implications of all lease conditions. Your technology vendor and accounting advisory partner should be able to help.

Get data from your business. Certain qualitative data, especially about your intentions around lease options and obligations, won’t be in the lease documents. That’s also true of leased asset details such as physical location and assigned department. You’ll need to turn to your lease administrators and those using the assets to collect this information.

Don’t forget about data for ongoing lease management. In the rush for ASC 842/IFRS 16 compliance, you may be tempted to collect only what you need for performing calculations. If you do this, you’re overlooking the benefit you stand to gain from this process beyond merely being compliant. Having all your lease data centrally located and easily accessible provides visibility into your leases that you can use to reduce costs and get better value from your property and other assets.

Gather the data for lease management as a second layer (or have two teams working concurrently) if you’re worried about meeting the ASC 842/IFRS 16 compliance deadline.

STEP 3: Data quality audit

Your data collection effort needs to be both complete and accurate to meet your goals for the ASC 842 transition or IFRS 16 compliance. Errors can happen for many reasons:

• Manual data entry mistakes (“fat finger” errors)
• Misunderstandings about lease terms
• Data that doesn’t import correctly (TIP: be sure your lease accounting system will alert you about data that fails to sync or assign)
• Aggregation issues when the same data from multiple systems doesn’t match

Those errors add up to reporting results that don’t make sense. You don’t want those mistakes showing up as you get close to your adoption date for the new lease standard. That’s why you need quality checks throughout the data collection process.

Spot checks. As you bring data into your repository or lease accounting database, conduct spot audits regularly. For example, have someone look at some of your most complex leases and verify that the data in the system is correct, especially items like renewals and increases.

Validate data against your assumptions. As you reach milestones, roll up your data, run reports and have your leadership review your findings to see if the numbers feel right. If something jumps out as being way out of line, that’s the time to go back and look for incorrect data that could be impacting your calculations.

TIP: Your lease accounting software should provide the ad-hoc and drill-down reporting flexibility to slice and dice data as needed to perform validation checks.

Don’t put off asking for help

Here’s our last bit of advice and it’s important: if you know you’ll need help with any aspect of the ASC 842 transition or IFRS compliance, now is the time to engage the experts. Get your questions answered, get resources for data collection, and choose your lease accounting system as soon as possible. As the deadline nears, it’s likely you’ll wait longer and even pay more for the limited pool of expertise available.

Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

Don’t hesitate to reach out to us at Visual Lease. We’re lease experts and we’re here to help you through your IFRS 16 or ASC 842 transition.

Attending the CoreNet Global Summit 2017 Nov 5 – 7 in Seattle? See Visual Lease in action at Booth #722.

With deadlines looming, organizations are racing to get the lease data necessary to comply with updated FASB ASC 842 and IASB 16 rules — especially the public companies that have a deadline of early 2019.

Artificial Intelligence (AI) technology for lease abstraction can reduce the time is takes to extract relevant data from piles of hard-copy lease documents. Many organizations are evaluating AI over time-consuming manual lease abstraction, which can take as much as five hours per lease to distill all the qualitative and quantitative data points. When you have hundreds or even thousands of leases in need of abstraction, that can add up to a significant amount of time and resources.

AI tools can help speed up the lease abstraction process to procure the information you need to meet your end goal: gathering essential data for FASB/IASB lease accounting as well as information for ongoing lease management. But can a technology takeover provide the quality you’re looking for? Can your organization rely on AI tools?

Keep these six points in mind when considering the use of AI.

1. AI is only as intelligent as you make it.

AI software must first train itself to understand and decipher the information you need for lease management and compliance purposes. AI tools can be reliable for extracting important data points that are necessary to carry out your calculations — but they are also very literal and will only abstract exactly what they are told. To go beyond this, AI tools require precise training, sometimes involving tens of thousands of documents to get up to speed.

When relying on AI, your organization may need to enlist experienced human lease professionals to review what the tool has assembled, as the intelligence is far from error-proof. Some tools, for example, may copy any language that matches a key term or overlook synonyms for a key term, which can entirely derail your data collection.

2. AI isn’t always AI.

Because Artificial Intelligence is an emerging technology, there are no real standards for using the term when describing a commercial software product. For example, AI and Optical Character Recognition (OCR) are often used interchangeably, though the terms are not synonymous.

An OCR system can scan hard-copy text — such as typewritten or handwritten PDF — and interpret it into machine readable text. The process results in the rudimentary extraction of key words and phrases. True AI, in contrast, applies machine learning to the lease abstraction process, “training” itself as noted above in order to improve its success rate over time.

3. Costs and volume may be a barrier to entry.

There is a volume requirement to conduct proper AI (machine learning). Because it takes time and a significant amount of work to train an AI tool, that can translate into significant upfront costs to develop a lease abstraction process. It may cost thousands of dollars just to begin putting your records on an AI platform, then hundreds per record to perform the lease abstraction. For this reason, AI is only practical for large, complex asset portfolios rather than small- to mid-sized portfolios.

4. Critical data points: Think beyond immediate needs.

To perform the calculations you need to be compliant with the new lease accounting standards from FASB and IASB (IFRS), you need to capture a specific set of data points.

For certain areas — equipment leases or simple leases for example — AI may be a sensible option for extracting very basic data points like dates or payment amounts. But you will likely need manual intervention to capture the more complex FASB data, or important data that you’ll want to extract for legal and administrative purposes.

To position your organization for better lease visibility for the long term, you should consider a thorough abstract between 150-200 data points, depending on who is going to be reading the abstract and how the information may be used.

5. Time savings can be deceiving.

When comparing manual versus AI-driven lease abstraction, be sure to take into consideration the “human intervention” time that will still be necessary for the latter.

Manual lease abstraction — It could take up to 4 hours for a full abstract of data from a standard commercial lease, while FASB compliance-relevant data may take 1 hour to extract. An equipment lease could take 30 minutes for a full abstraction, while FASB-only data will likely take less than 15 minutes.

AI-supported lease abstraction — You’ll gain a head start by automating 5-50% of the lease abstraction process. However, keep in mind that a thorough quality assurance (QA) review conducted by trained professionals will still be necessary. And it is quite difficult to put a time stamp on the QA process.

6. The human element: Still a requirement.

Despite its automated properties, AI still requires administration by lease abstraction professionals as mentioned above. These are the professionals who review each and dissect each document to identify the multiple documents within, then organize and drill down each individual component.

AI can take over the organizational task, but the rest is up to a set of eyes that are keenly focused on the details. If there is an error or oversight, AI does not make corrections. That also requires a professional to go into the documents to manually implement changes.

Learn more: FASB Lease Accounting Changes: How to Assemble Your Readiness Team

The most effective approach to lease abstraction: Technology & people working together

Consider a hybrid strategy, using automated tools to meet the easier data requirements and depending on human experts for more complex lease abstracting and data validation. If you are going to take advantage of automated lease abstraction technology, you still want to have professionals administrating it, as well as overseeing the QA and any complications that may arise.

As you develop your implementation timeline and choose lease accounting technology, you must have a realistic plan for extracting the data from hundreds or even thousands of lease documents. For many, lease abstraction is the most time-consuming part of the FASB/IASB readiness process, but when used in conjunction with a professional eye, AI tools can help speed along the process for many large organizations.

The problem? Some organizations are delaying the inevitable. While many have a plan in place for adoption, others are significantly underestimating what’s needed to ensure compliance, including the guidance and support of outside resources. The new IFRS leasing standard will go into effect for most public companies by early 2019. As 2017 winds down, the demand for resources will increase while expert vendor availability tightens up. And you can guess how that will impact the cost of acquiring these resources.

Getting started on your FASB and/or IASB transition as soon as possible by appointing your internal and external teams, rallying your people and choosing lease accounting software that’s quick and easy to implement can make all the difference in being ready for the IFRS new lease standard by the effective date — and controlling how much it costs to get you there.

Preparation for FASB & IASB lease accounting changes: No better time than the present

According to a recent article in the Journal of Accountancy, 31 percent of executives say their companies are unprepared to comply with the new Financial Accounting Standards Board (FASB) lease rules changes. Similarly, a survey by PwC and commercial real estate services firm CBRE found almost one-fourth (23%) of respondents admitting that they hadn’t begun their lease accounting IFRS 16 adoption efforts yet.

The delay is somewhat understandable. Many organizations are still regrouping from the implementation of FASB’s new revenue recognition standard, which applies to annual reporting periods beginning after December 15, 2017, and may not be ready to tackle yet another major FASB-related project.

However, creating an inventory of your leases will involve many departments beyond simply your accounting team, so you need to be realistic about the time, money and resources it will require.

Securing internal buy-in for FASB & IASB lease accounting changes

To be ready for FASB and/or IASB adoption by the deadline, preparation starts with determining the internal bandwidth to be dedicated specifically to the IFRS 16 and ASC 842 transition and putting together a mosaic of what this effort will look like. Consider the following points:

• Who or what team is going to manage the project?
• How will you assemble and abstract the data?
• What resources will you need for implementation and training?

As outlined in a previous post, your accounting department needs a solid collaboration with real estate, procurement and IT to ensure accurate lease data can be collected, calculated, shared and integrated for complying with the new lease standard. These teams need to work together, drawing knowledge from each department’s expertise, to fill in the missing pieces and create a comprehensive strategy for adoption of FASB & IASB lease accounting changes— including identifying the external resources you’ll need.

Take your accounting department, for example. Early on, you should seek the guidance of an audit or advisory partner as your first touchpoints to help lay the preliminary groundwork for your adoption plan of attack. Schedule a meeting with your advisory partner or a trusted lease accounting technology vendor.

• Your advisory partner will give you both information and advice that will help in making policy decisions regarding ASC 842 & IFRS 16 adoption.
• Your lease accounting vendor can give you an overview of how a system works and provide a look at what data you should start thinking about collecting to get compliant with FASB & IASB lease accounting changes.

As many organizations are discovering, it takes much more than simply your accounting team to plan for the coming changes.

Lining up the right external resources

As time passes, the competition for external vendors — already a limited pool — is exponentially increasing. To make sure your company has the help it needs for adoption of ASC 842 & IFRS 16, it is important to secure your resources now and avoid settling for a less-than-ideal fit when it comes to crunch time.

The earlier you start the search process, the greater the benefits:

• More power over scheduling and vendor selection.
• A better picture of what to expect during the process.
• Guidance and best practices in terms of the overall project and any integration implications.
• A clearer understanding of what your policy decisions need to be.
• More control over your software implementation timeline.

The benefits of a lease accounting system

With your teams working together on the FASB & IASB lease accounting changes, is there still a need to purchase new technology? Absolutely. Unless you want the hassle of running calculations every time you need to produce a report — whether quarterly or annually — lease accounting software will improve the efficiency and accuracy of the process by updating and automating recurring reporting. And the sooner you have automation in place, the sooner your company will be ready for FASB & IASB adoption.

The new standards mean a more complex balance sheet with more data to collect and process, increasing the volume of accounting you need to do. Many companies are adding hundreds of asset leases (at a minimum) onto the balance sheet. A lease accounting system will keep those leases and related data in an accessible, centralized location, allowing you to run calculations and report on your enterprise lease information as needed.

Lease accounting software will also make the adoption process proceed more quickly, so your staff can return their focus to their primary responsibilities.

The bottom line? Protect yours

Make no mistake: the FASB and IASB lease accounting changes call for significant effort — and more complex and time-consuming analyses than many businesses are anticipating.

With time drawing short for FASB & IASB adoption and expert help becoming more difficult to engage, the process will continue to grow in complexity and cost the longer you delay. By preparing now, and leveraging available technology and resources, you will gain a clearer idea of what to expect in the coming months — and ultimately, save money and gain peace of mind without the last-minute scramble as the deadline nears.

If you haven’t already, start the discussion today to enact a plan for a smooth adoption of the new standards.

The Financial Accounting Standards Board (FASB) is gearing up to align U.S. standards with global accounting standards, increasing transparency in financial reporting and altering the way organizations account for their leases. For many organizations, adherence to these new FASB lease accounting changes (ASC 842) or IASB changes (IFRS 16) also creates a greater compliance burden.

While the liability of adopting new FASB lease accounting changes technically falls onto accounting, the accounting department is not in it alone. Organizations will need to rely on other stakeholders — real estate, procurement and IT departments — to help implement the changes and stay in compliance. By including other stakeholders early in the planning process, your organization will be better prepared for a seamless transition.

Start by lining up key players to collaborate with your accounting department to achieve and ensure compliance with FASB lease accounting changes.

Real estate: Your first touchpoint for FASB lease accounting changes

With the FASB lease accounting changes, there’s a shift happening and real estate figures are hitting the balance sheet. The real estate department, historically in charge of managing and administering those numbers, is a critical source when it comes to identifying your leases and related data.

The FASB new lease standard will require your organization to provide more data regarding its real estate, so it makes sense that the department should understand what’s needed, why it’s needed and how to make sure it’s done correctly. While real estate might hyper-focus on site selection and facilities management, your accounting department can do their part to make their colleagues more adept on the deeper financial and accounting aspects of real estate. Ultimately, they will have a hand in using, and possibly even managing, the lease accounting system.

Your real estate department should also know, at a high level, what’s happening from an operating versus capital lease shift perspective and how it is driving a digitization of leases into the financial realm. In an operating lease, the real estate team signs and manages all the leases before the expenses are pushed over to the accounts payable team each month to pay the bills. They never actually hit the balance sheet that accounting manages. So now as we shift into capital leases, the data will go straight onto the balance sheet, bringing accounting into the fold.

In addition, real estate can provide accounting with guidance and input on different renewal options, how they look or what would work best. Accounting sees the whole portfolio in terms of numbers. But how will that roll into the balance sheet with the new FASB lease accounting changes? From equipment to facilities to real estate, they’re focusing on these elements as data points. But real estate can provide a new perspective on how real estate leases function and offer missing information that hasn’t previously been tracked.

While there may be substantially fewer real estate leases compared to equipment, in terms of risk and obligation, real estate might represent half of the expenses in your leased portfolio. Financially, there is now a need for a working partnership between accounting and real estate because of the FASB lease accounting changes.

Procurement: An extra set of eyes

Whether you’re an accounting executive, a product manager or a salesperson, your priority is your day-to-day tasks. So, if you need a new vendor or a new service, the procurement team is there to assist. Procurement helps evaluate and qualify different vendors as well as the related costs. They guide everyone through the process right down to the signature. In many cases, they’re comparable to a project manager, bringing various teams together to help them make a decision. They help to drive the process or run a project. And they also play an important role in readiness for FASB lease accounting changes.

Many procurement teams are involved in the existing asset management, whether that’s real estate, office equipment, IT items or maybe even fleet. Chances are, at some point they’ve adopted a system to track and manage those fixed assets. It could be a very basic spreadsheet that’s tracking your fifty property leases and their terms. This is an area where you would want procurement’s involvement with accounting. They have visibility that your accounting team may lack into the other assets or other successes across the portfolio.

And with an eye on organization and detail, the procurement team may notice an overlap in a lease management and lease accounting projects. Their input can prove to be valuable in terms of ensuring compliance with FASB lease accounting changes.

IT: The glue that makes everything stick

It is easy to overlook the fact that real estate is just looking at real estate, accounting is just considering the balance sheets, and procurement is focused on asset management. But the IT department holds all those pieces together. IT is thinking through the components, databases and spreadsheets. How do we get this information to the accounting system? How do we map it to our current cost center’s expense codes so that every single vendor has a pay code attached to it?

IT understands systems integration. It is IT’s job to ensure that data flows from the source of record — the lease management — to a lease accounting system such as an ERP system. They are heavily invested in how the integration works, investigating all avenues and overseeing a seamless connection.

IT is an essential piece of tracking, storing and moving critical data. And with IT handling the back-end details, you’ve assembled a well-rounded team to adhere to the FASB new lease accounting rules.

Ready? Set. Go!

With the FASB lease accounting changes on the horizon, it takes more than your accounting team to ensure that your organization can effectively integrate information, share data and comply with the new standards. By fostering early collaboration with real estate, procurement and IT, your accounting department can pave a smoother path to adopting the new standards and avoiding compliance penalties.