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. This article discusses different ways to get guidance with lease accounting from your softwares tools.
1. Get a preview of your financial reporting
You can get that information well before you’re ready to go live using the hypothetical testing features in Visual Lease’s platform. 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).
By using hypothetical calculations, you can explore different lease options, such as lease extensions, modifications, or buyouts, and see how these changes would affect your businesses financials. This type of analysis is invaluable for strategic planning, budgeting, and forecasting, as it provides insights into potential future obligations and financial outcomes. It also allows you to identify any adjustments needed to optimize your lease portfolio and ensure compliance with accounting standards well in advance.
2. Set up pending calculations for peer review
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, peer reviewing calculations is 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.
This feature not only helps collaboration among your accounting team but also adds an extra layer of quality control. With pending calculations, team members can suggest edits, add comments, and make adjustments before finalizing the entries. Once the entries have been thoroughly reviewed and approved, all it takes is the click of a button to activate them. It minimizes the risk of reporting mistakes, saves time on corrections, and ensures that your data is accurate before it’s officially recorded.
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 (ASC 842) 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 (IFRS 16).
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 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.
6. Preparing for Mergers & Acquisitions
When your business is involved in a merger or acquisition, understanding the financial implications of acquiring lease portfolios is important. Using hypothetical calculations in lease accounting software, you can simulate different scenarios related to mergers and acquisitions that provide insights into how these changes might impact your financials. This helps you evaluate potential shifts in liabilities, right-of-use assets, and other key metrics.
For instance, if your company is acquiring another business, you can use hypothetical testing to assess the impact of the new lease portfolio on your balance sheet. This includes evaluating the financial effects of adding leases with different terms, conditions, or discount rates.
On the other hand, if you’re divesting assets or businesses, scenario testing can help you understand how the removal of certain leases might affect your financial obligations and reporting requirements. This analysis makes sure that you are prepared to manage the financial changes from mergers and acquisitions, allowing for better planning and negotiation during the process.
7. Evaluating the Effects of New Accounting Policies
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Implementing new internal accounting policies or adopting new industry standards can significantly affect financial reporting. Using hypothetical calculations, businesses can simulate these changes and evaluate their impact on key financial metrics before making any official updates. This allows companies to assess potential effects on their balance sheet, income statement, and cash flow in a controlled environment.
For example, if a company is considering a new policy for classifying lease payments or deciding to switch from straight-line accounting to a different expense recognition method, scenario testing can help identify how these changes will affect financial results. The ability to test these policies beforehand helps with smoother transitions and avoids surprises during audits or compliance reviews.
By evaluating new accounting policies through hypothetical calculations, businesses can better plan for adjustments, anticipate the financial impact, and align policy changes with organizational goals.
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. With Visual Lease’s lease accounting software, you’ll have access to hypothetical calculations at all times and can avoid making harmful decisions for your business.
Want to see what that looks like? Schedule a live demo of Visual Lease.
