Founder and CEO, Visual Lease.
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This past year, organizations across the globe have faced unprecedented challenges as they navigate new business models and virtual work environments. For many, it’s been a race against the clock to find and implement technology that will allow them to survive and thrive in this new era. In fact, according to a recent study from Gartner, 87% of senior business leaders say implementing digital technologies and processes is a company priority. However, only 40% of organizations in the Gartner study reported that they had brought digital initiatives to scale.
Why is there such a disconnect between prioritization and execution? In addition to adjusting to a new normal and juggling competing business needs, these same organizations also have to comply with a never-ending slew of regulatory demands. And while compliance usually does nothing more than put a drag on resources, there is one area where companies can actually use their compliance mandate to improve operations and reduce costs: lease accounting.
After spending years practicing law and negotiating commercial leases for some of the largest companies in the country, I’ve learned — and helped others to learn — that there is a range of opportunities within one’s lease portfolio. Today, lease compliance regulations can be leveraged to move a business forward.
Get Acquainted With New Lease Accounting Standards
In 2016, the three major accounting regulatory bodies, the Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB) and the Government Accounting Standards Board (GASB) issued new rules around leases. They required organizations to account for and capitalize their real estate and equipment leases on their balance sheets as assets and liabilities, and to report the results through specialized financial disclosure reports. Most public companies were required to comply starting in 2019, government entities by mid-2021 and private companies starting in 2022.
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These new lease accounting standards have created a frenzy among organizations that must now identify and collect all their real estate and equipment leases and extract detailed, accurate and reliable data so they can convert the lease payments into “right of use” assets and liabilities. Because of the complexity of the calculations (the rules are hundreds of pages long), this is no easy task.
In organizations with multiple leases, this is even more challenging. Leases can span multiple geographies, and lease documents are often dispersed throughout an organization. Even when the files are located, they are frequently missing amendments and other key documents.
Master Lease Data Collection
As they collect the information needed to comply with the new lease accounting rules, corporate controllers and others are surprised at how weak existing controls are when it comes to these obligations. Despite their financial size (real estate leases often are the second-highest expense), most companies do not closely manage the legal and financial aspects of their leases.
To successfully capture lease data — and, in turn, make better-informed business decisions — it’s important to set expectations and get the right players involved. This initiative shouldn’t be accomplished solely by an organization’s accounting team. Rather, it’s critical to enlist a company’s IT department to assist with any required implementation and system integrations. There’s usually a need for dedicated lease accounting professionals, as well. Whether these individuals are in-house or outsourced, their expertise is often instrumental in getting the job done.
Once the proper team is assembled, it’s time to create a formal and repeatable process that will produce accurate financial data. Key considerations include:
• Ensuring that all financial records are up to date and that all involved parties understand the relationship between different documents.
• Reviewing all service contracts to identify any hidden leases. Just because the word “lease” isn’t used does not mean that an organization is not technically leasing something within the terms of a larger agreement. This must be accounted for.
• Recording all lease options and exploring all hypotheticals to make better-informed decisions.
• Monitoring critical dates to help avoid unnecessary penalties.
• Tracking lease clauses to expose tax and operating expense overbillings by lessors and missed reimbursements.
For some, accurately housing and managing all this data can be overwhelming. To reduce the drain on resources, many have turned to dedicated technology, ranging from simple tools to generate lease accounting calculations to more robust lease systems that incorporate lease accounting into a more comprehensive lease optimization process.
Rethink The Business Case For Compliance
With the proper controls and tools, meeting the new lease accounting requirements can bring an organization much more than compliance. It can be leveraged to materially improve business processes and generate savings in a previously undermanaged area of an organization.
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