Lease accounting changes: the onus and the opportunity
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- Accounts payable continues to make monthly payments on outdated leases.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?
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.