As organizations are preparing to adopt the new FASB and IFRS lease accounting standards, virtually all must choose new technology to facilitate the process. And many are under the assumption that they need two new systems: one to manage property lease accounting and another to handle equipment lease accounting.
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.
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.