Real estate lease accounting: 5 mistakes to avoid

Over the past few years, Visual Lease has helped hundreds of public companies achieve compliance with the new lease accounting standards. For many organizations, real estate lease accounting turned out to be much more complex and time-consuming than they anticipated.

Part of the problem was that adopting IFRS 16 and FASB ASC 842 for real estate leases and other leased assets was a new challenge; every company was working through the process for the first time and had little idea what to expect.

At this point, public companies have successfully worked through the process, albeit somewhat painfully in some cases. The good news for private companies facing the compliance process this year is that you have the opportunity to learn important lessons from their experience.

To help ensure your compliance process runs smoothly and delivers the best possible outcome, we’re sharing some advice about the common mistakes and oversights we saw and how you can avoid them.

1. Overlooking the cost-saving potential of real estate lease accounting

For most companies, real estate leases represent the bulk of leased assets (not necessarily in number, but in terms of financial value). That’s why it’s smart to think bigger when setting your goals for real estate lease accounting. This exercise can bring more benefits than merely achieving compliance with the new accounting standards. The data you collect for real estate lease accounting calculations, together with your lease software, is a powerful business planning tool that can help you take control of property costs.

Thinking about these larger goals as you begin to plan for your compliance project will impact what data you collect, the team you put together, and the tools you select.

Learn more:

Lease Accounting Changes: The Silver Lining You’re Overlooking

2. Putting the entire compliance burden on the Accounting team

At first glance, it may seem like moving to the new standards is something the Accounting team can handle on their own. We can tell you from experience that you’ll need more than Accountants on your team. And the sooner you get them involved, the better.

If you fail to include the people who negotiate and manage leases, you’ll miss key insights about how leases function and where to find critical data. We’ve seen Accounting teams operating in a silo overlook important pieces of data and end up scrambling to collect it as their compliance deadline approached.

When it comes to real estate lease accounting, you’ll need the expertise of the Real Estate team. Real estate leases are extremely complex, and some of the data you need for lease accounting calculations will need to come from the people who are making property leasing decisions. Here’s just one example: for each real estate lease on your balance sheet, you’ll need to know the likelihood of that lease being renewed at the end of the current term.

Beyond Real Estate, you may also need to include representatives from Procurement, IT, and Legal on your compliance team.

Learn more: FASB Lease Accounting: How to Assemble Your Readiness Team

3. Underestimating the task of gathering real estate lease data

Here’s a promise: it will take more time and resources than you expect to collect all the lease data you need for lease accounting calculations. That especially true for real estate lease accounting, due to the complex nature of those leases and the fact that you can’t get all the data you need from the lease contracts. Our advice: don’t delay!

Organizations make the mistake of hearing an estimated implementation timeline from a software vendor (ours is 90 days) and assume they have plenty of time to get started. However, that 90 day timeline starts when your team is ready with lease data abstracted, assembled, verified, and ready for importing into the system.

Not having your data ready for software implementation (i.e. incomplete data and incorrect data) can result in significant delays.

Learn more: Lease Accounting Compliance Deadline: Will You Be Ready?

4. Lacking expertise about the standards

There are many policy and accounting decisions (such as electing practical expedients) that need to be made early in the compliance planning process. If you’re not thoroughly grounded in the nuances of the new standards, you might make the wrong choices, or fail to make them at all until so late in the process that you delay your compliance project. It’s important to consider how those decisions will impact your financial reporting and your business in the long term.

Our advice? If you don’t trust your own knowledge of the standards, turn to your accounting advisory partner for help and include them on your compliance team from the beginning.

And, you may also benefit from getting advice from Real Estate partners for your real estate lease accounting.

Learn more:

Lease Accounting Decisions: Why It’s Smart to Partner With an Accounting Advisor

5. Failing to plan for post-compliance lease management

To gain the true value of real estate lease accounting and complying with the new standards, you may need to re-think leasing policies and procedures and plan for post-compliance changes.

For example, you will likely need to put new procedures in place to keep Accounting informed about new leases as well as any lease changes that impact financial reporting. Real estate leases do change frequently: space is added or given up, maintenance charges change over time, and leases may be canceled mid-term or renewed with modified terms.

With the increased impact of leases (especially real estate leases) on the balance sheet, many companies are taking a closer look at their real estate leasing policies and making adjustments that help them make better business decisions.

Learn more: Lease Accounting for Real Estate: How Will the New Standards Impact Leasing Practices?

Lastly, you’ll want to take advantage of your lease software and the lease data you’ve worked so hard to collect. With the right tools, you can find and prevent overpayments, which can easily save you millions on property expenses.

Learn more:

How Lease Accounting Software Can Help You Save Money on Leases

Visual Lease has decades of experience with real estate leases, so our platform is designed not only to help you achieve lease accounting compliance, but also to help you manage leases and optimize your real estate expenses.

Want to see how Visual Lease can make lease accounting and lease management work for you? Schedule a demo now.