Today, many organizations lack control over their leases, which increases the risk of making costly errors, such as overpaying or missing a date for termination or renewal. (90% of senior Real Estate Executives do not believe they have access to the data they need to make an informed decision about their company’s lease portfolio.)
With leases usually serving as a business’ second-largest expense, they are far too valuable to overlook and undermanage.
Here are four common risks areas found in your lease portfolio and how to avoid them.
1. Inaccurate, unreliable lease data
Leases contain hundreds of unique terms and options that evolve over time. To remain aware of each liability and option, you’ll need to have visibility into the details within your leases.
As leases change, it’s important to keep track of every update or modification that has been made to your leases. By doing so, you will ensure that your data – and as a result, your financial reporting – is always accurate.
To get a firm grasp on your lease data, first identify all lease contracts within your organization and then, centralize your lease data within a reliable lease accounting solution that enables you to view and maintain your leases as they change, and also, know what updates were made and when.
2. Lease misclassification
To comply with the lease accounting standards, companies are required to classify leases as operating or finance leases at their inception. The distinction is important since misclassification can impact:
- The balance sheet
- Expenses related to operating and finance leases
- Understanding of credit agreements and covenants that may limit the number of finance leases
- Company metrics, bonuses or incentive plans due to misclassified “geography” of the respective accounts in the balance sheet
To ensure accurate classification of leases, it’s important to implement processes that support the criteria for reporting on operating and finance leases. Utilize your lease accounting solution to help your team properly classify leases and record them on the balance sheet.
3. A lengthy, expensive audit process
Your audit will likely take more time without a view into the lease accounting calculations and adjustments made to your lease data. To reduce time (and money), provide auditors with a complete view into your lease data, along with a full audit trail of every change – both of which can be accomplished by utilizing a strong lease accounting and administration platform.
Further, automated calculations backed by a SOC 1 Type 2 certification ensure everything is by the book for a seamless audit process. This added layer of necessary verification ultimately reduces the time auditors spend verifying accuracy and decreases the risk of any miscalculations.
4. Lease overpayments
Leases are complex, expensive contracts with many different terms, options and important dates. However, nearly three-quarters (71%) of private companies say they are not confident about the complete cost of their leases.
This lack of visibility into your leases can put you at risk of making significant overpayments and costly mistakes. Luckily, this can be addressed by implementing technology and processes that make it easy to keep track of your lease terms.
By keeping close tabs on your leases through technology, you can identify opportunities to save money within your lease portfolio, be aware of options and exercise windows and avoid confusion regarding repair and maintenance costs.
Protect your business from risks with end-to-end lease administration and lease accounting.
To avoid the risks associated with not having complete visibility into your lease portfolio, it’s important to maintain automation, lease controls and strong collaboration across all departments that touch the leasing process.
Choosing software like Visual Lease can help you reduce risk, drive confident and sustained lease accounting compliance and provide the visibility required to make agile business decisions. We can help you implement robust lease controls that support continued compliance with FASB, IFRS and GASB lease accounting standards, while empowering you to maximize the financial and operational performance of your leases.