In the complex world of business, understanding the difference between lease accounting and lease administration is crucial. Although they might seem similar, they each have unique and important roles when it comes to managing lease portfolio compliance, maintenance, and optimization effectively. Having a better grasp of these processes and using them strategically can significantly enhance an organization’s operational efficiency and compliance posture.
What is Lease Accounting?
Lease accounting is the practice of recognizing, recording, and reporting lease agreements within a company’s financial statements to maintain accuracy and transparency. Under today’s standards, including IFRS 16 and ASC 842, nearly all leases must appear on the balance sheet, recorded as a “right-of-use asset” alongside a corresponding “lease liability,” which reflects the organization’s obligation to make future payments.
What is Lease Administration?
Lease administration, or lease management, is the practice of overseeing a company’s leased assets, such as real estate and equipment, throughout their lifecycle. It includes collecting, maintaining, and reporting lease data, ensuring compliance with contractual terms, and coordinating with lessors and stakeholders. When done effectively, lease administration helps organizations minimize costs, reduce risk, and maximize the value of their leased assets.
Lease Accounting vs. Lease Administration
| Lease Accounting | Lease Administration |
| Ensures compliance with ASC 842, IFRS 16, and other standards | Manages day-to-day lease data and operations |
| Focuses on journal entries, disclosures, and audit readiness | Handles amendments, renewals, terminations, and new leases |
| Produces financial schedules and reports | Manages CAM reconciliations, variable expenses, and vendor communications |
| Risks include misstatements and audit findings | Risks include missed payments, errors, fraud, and cost overruns |
Why Lease Administration Matters to the CFO?
Lease administration provides essential support to the Office of the CFO by carefully managing crucial lease data needed for ASC 842 and IFRS calculations. This involves ensuring accurate and timely communication of data with accounting teams, and managing:
- Lease amendments
- Lease changes
- Lease terminations
This smooth coordination helps generate vital schedules and reports necessary for adjusting and meeting financial statements requirements.
The Dynamic Nature of Leases
Contrary to the one-and-done perception often associated with lease recording, leases are inherently dynamic. A lease portfolio is subject to frequent changes, influenced by variable expenses, one-time charges, escalation amounts, and indexation. This flux underscores the necessity for a robust lease administration process, emphasizing the importance of well-documented procedures and playbooks, particularly in managing the complexities of international leases.
Importance of Lease Data
Lease data holds immense strategic value, informing forecasting, impact analysis, and space planning. In a post-COVID world, with the shift towards flexible and remote work arrangements, up-to-the-minute lease administration and data are pivotal in supporting organizational strategy and operational flexibility.
Building Strong Lease Administration Processes
The discourse on lease administration circles back to a singular, powerful theme: process. Documenting and adhering to well-defined processes mitigates most problems and positions lease administration as a proactive collaborator across internal teams, including strategy, transactions, and accounting. Looking ahead, the evolving landscape of Environmental, Social, and Governance (ESG) requirements and the critical role of space planning underscores the growing significance of lease administration in strategic decision-making and portfolio optimization.
Critical Components of Daily Lease Administration
Lease administration encompasses managing portfolio changes, variable expenses, and risk mitigation. This includes:
- New leases
- Amendments
- Renewals
- Terminations
- Acquisitions
A key aspect is managing common area maintenance and operating expense reconciliations, a significant area for potential savings and error minimization.
Risks Mitigation Strategies
A solid foundation of processes and procedures is essential for mitigating ongoing risks such as:
- Missed or delayed payments
- Manual errors
- Fraud
Implementing dual controls, such as verification calls for changes in vendor information, can significantly reduce the incidence of fraud and cybersecurity threats.
The discourse on lease administration circles back to a singular, powerful theme: process. Documenting and adhering to well-defined processes mitigates most problems and positions lease administration as a proactive collaborator across internal teams, including strategy, transactions, and accounting. Looking ahead, the evolving landscape of Environmental, Social, and Governance (ESG) requirements and the critical role of space planning underscores the growing significance of lease administration in strategic decision-making and portfolio optimization.
“Process, process, process. If you document your processes and follow through, you’ll mitigate most of your problems and be a proactive asset to your internal teams.” – Jamie Covert, President Scribcor Global Lease Administration
In the realm of lease management, understanding and leveraging the distinct roles of lease accounting and administration can yield substantial benefits, from enhanced compliance and operational efficiency to strategic insights and optimization of lease portfolios. As the business world continues to evolve, the value of these functions will only increase, making their mastery essential for organizational success.
Discover how Visual Lease’s lease management software can help your organization unify these functions and transform your lease portfolio into a strategic asset.
