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
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.
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.
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.