The Fusion of Technology and Data Standards

The collaboration between Visual Lease and OSCRE International exemplifies a synergistic approach to marrying technology with the rigorous development of data standards, significantly enhancing ESG reporting capabilities. Ian Cameron from OSCRE International emphasized the critical contribution of technology-focused companies like Visual Lease:

“It makes a real difference to us to have a clear idea of what kinds of data requirements fit, let’s say, energy data management… You are very much aware of that, and you’re sharing that, and again, that’s extraordinarily valuable because frankly, the proof is in the pudding at the detail level in these standards.”

This insight illuminates the importance of granular, technical knowledge in crafting standards that align with industry needs and bolster the integrity and functionality of ESG data.

The Pillars of Effective ESG Reporting: Integration and Implementation

A standout theme from our discussion is the imperative of data integration and strategic implementation beyond mere management. Bill Harter of Visual Lease discussed how working with OSCRE has enriched the evolution of Visual Lease’s solutions, particularly the VL ESG Steward platform. This tool represents a pivotal step forward, leveraging the collaboration with OSCRE to ensure comprehensive analytics and actionable ESG insights.

Leveraging OSCRE’s Work with VL ESG Steward

The VL ESG Steward platform is at the forefront of applying the insights and standards developed through Visual Lease’s collaboration with OSCRE, marking a leap from compliance to strategic advantage in ESG reporting. It underscores the importance of a seamless data flow and detailed analytics in providing organizations with the insights needed for impactful environmental stewardship.

Broadening ESG Reporting Horizons

The dialogue with OSCRE opens new avenues for expanding into scope three operations and beyond. This initiative is poised to offer more precise estimations for ESG reporting, aiding companies in the complex landscape of scope three emissions and broader ESG concerns.

A Comprehensive Approach to ESG Standards

The collaborative effort to develop ESG reporting standards is comprehensive. Ian Cameron’s work on process flows represents an all-encompassing strategy to ensure tools like VL ESG Steward meet users’ sophisticated needs, enabling organizations to exceed ESG reporting standards.

The partnership between Visual Lease and OSCRE is not just a collaborative effort; it’s a pioneering endeavor to redefine the future of ESG reporting. We’re establishing a foundation for a new era of sustainability and transparency in real estate and beyond through targeted technology, detailed data standards, and a focus on practical application.

Reflecting on the depth of the collaboration, Ian Cameron remarked, “You focus on the detail and the technical aspects of some of the stuff that probably passes by most people’s eyes… And that’s extraordinarily valuable because frankly, the proof is in the pudding at the detail level in these standards.” This encapsulates the essence of our mission – to empower organizations with the tools they need to demystify ESG reporting complexities and contribute to a sustainable future. This conversation highlights the transformative power of integrating robust data standards with cutting-edge technology.

Shaping the Future with Data Standards

OSCRE International, a non-profit dedicated to developing and implementing real estate data standards, plays a crucial role in facilitating digital transformation across the industry. With a focus on enhancing data strategy and management, OSCRE’s Industry Data Model spans leasing, space management, and, crucially, environmental data management. This broad and diverse model is designed around implementable use cases, such as lease data exchange, ensuring practical application in the real world.

“Our collaboration with industry leaders, including Visual Lease, is vital in developing standards that truly meet the industry’s needs,” shares Ian Cameron, Chief Innovation Officer at OSCRE. “By focusing on areas like energy data standardization, we’re addressing the immediate and future challenges organizations face in managing and reporting environmental data.”

Visual Lease and OSCRE: Collaborating on ESG

Visual Lease’s involvement in OSCRE’s initiatives, particularly around ESG, underlines our commitment to addressing the nuanced demands of lease management in the context of sustainability. As part of OSCRE’s Data Standards Committee, Bill Harter contributes insights and drives conversations on how best to integrate and implement these crucial standards within our solutions, including our newest product offering, VL ESG Steward.

“Working with OSCRE has been invaluable in enhancing our approach to data standardization and ESG,” notes Bill Harter. “This collaboration not only enriches our understanding but also ensures that our products, like VL ESG Steward, are equipped to provide actionable intelligence for companies looking to improve their operations and reduce their environmental impact.”

Beyond Compliance: The Vision for ESG Stewardship

The journey towards comprehensive ESG reporting is more than a compliance exercise; it’s about equipping organizations with the data they need to make informed decisions that benefit their bottom line and the planet. By integrating OSCRE’s standards and leveraging diverse industry perspectives, VL ESG Steward is designed to offer more than mere compliance. It aims to deliver actionable insights, enabling companies to track and analyze a wide range of ESG-related data and metrics effectively.

“The real goal of ESG stewardship is to provide companies with the tools they need to make a real difference,” explains Bill Harter. “As we look to the future, understanding the broader implications of ESG data, from energy management to water usage and beyond, will be key to driving meaningful change.”

A Unified Front for Data and ESG Standards

As Visual Lease continues collaborating with Ian Cameron, Bill Harter, and other industry leaders, our collective efforts are setting the stage for a new era of data-driven decision-making and sustainability in real estate lease management. Through initiatives like the Energy Standards Data project and beyond, we respond to current trends and anticipate our industry’s future needs, ensuring our clients are always one step ahead.

“In the realm of ESG and data standardization, collaboration is not just beneficial; it’s essential,” states Bill Harter. “Together, we are not only shaping the standards that will define our industry’s future but also ensuring that organizations have the tools they need to succeed in an increasingly complex world.”

At Visual Lease, we empower organizations to navigate these changes, leveraging our SaaS solutions to provide strategic, financial, and operational outcomes from their leased portfolios. As we move forward, integrating robust data standards and a deep commitment to ESG considerations will continue to be at the heart of Visual Lease’s work. By fostering collaboration and innovation, VL helps organizations navigate today’s challenges and build a more sustainable and efficient future.

Before the adoption of Visual Lease, the organization faced sustainability issues in lease management, compounded by new accounting compliance standards. The Director’s team, responsible for overseeing approximately 150 real estate leases and an additional 1400 equipment and vehicle leases, found an innovative solution in Visual Lease, marking a significant shift in how they managed their global lease portfolio.

The Challenges of Pre-Visual Lease Management

The lease management process was quite a hassle, relying on Excel spreadsheets and Lotus Notes as a makeshift electronic filing system. This method proved inefficient, especially with a lean team focusing on lease negotiations and strategic business needs. Searching for a more robust system led to exploring various platforms. Visual Lease stood out for its user-friendly and intuitive interface, simplifying lease abstraction and management tasks.

Visual Lease: A Catalyst for Efficiency and Collaboration

Adopting Visual Lease transformed the lease management process, empowering the team with tools to abstract leases efficiently, even with a lean staff. The platform’s ability to grant read-only access to stakeholders significantly reduced the overload of queries, enabling the team to focus on critical tasks. This accessibility and ease of use made Visual Lease an indispensable tool for the organization.

“One of our most important things that we can do is to provide good, reliable information in a timely manner to our decision-makers. Honestly, I believe that Visual Lease helps us do that, and it’s really been transformative, honestly, through my career here,” shares the Director, underscoring the pivotal role of Visual Lease in enhancing operational efficiency and decision-making.

Navigating Lease Accounting and ESG Reporting with Visual Lease

The transition to Visual Lease streamlined lease management and positioned the organization to adapt seamlessly to evolving lease accounting standards. The collaboration between the real estate and finance teams has been exemplary, ensuring data integrity and compliance with financial reporting requirements. Furthermore, as sustainability and ESG reporting become increasingly critical, Visual Lease’s potential role in supporting environmental and sustainability goals highlights its value beyond lease management.

A Future-Ready Approach to Lease Management

Visual Lease has become an integral part of Toshiba America Business Solutions daily operations, significantly impacting the organization’s ability to effectively manage a vast and complex lease portfolio. The Director’s participation in Visual Lease’s Customer Advisory Board reflects a commitment to continuous improvement and customer-centric development, ensuring that the platform remains at the forefront of addressing the dynamic needs of global lease management.
The journey with Visual Lease illustrates a transformative shift from fragmented and manual lease management practices to a streamlined, efficient, and collaborative approach. As organizations navigate the complexities of global lease portfolios, accounting standards, and sustainability reporting, Visual Lease emerges as a critical partner in fostering operational excellence and strategic decision-making.

Key Insights from Zena Thomas on GASB 96:

• Expertise and Experience: With over 20 years in the field, Zena’s extensive accounting background enriches Visual Lease’s product development, ensuring our solutions are deeply aligned with accounting standards.
• GASB 96 Overview: GASB 96 addresses the need for standardized accounting treatment for subscription-based IT arrangements, establishing a framework for capitalizing software costs.
• Comparison to GASB 87: While similar to GASB 87 in creating a right-of-use asset and liability, GASB 96 distinguishes itself with unique implementation stages, including preliminary, initial implementation, and operation/additional implementation stages.

  Our conversation dives into the complexities of the GASB 96 lease accounting standard, a subject of interest among government entities and other organizations. This standard marked a pivotal shift in the accounting of subscription-based information technology arrangements, aiming to normalize the capitalization of software costs. GASB 96 is was designed to mirror its forerunner, GASB 87, by establishing a right-of-use asset and a corresponding liability for these software arrangements. Yet, it sets itself apart by introducing distinct implementation stages not present in GASB 87. Zena Thomas shares:

  “GASB 96 is the accounting treatment for subscription-based information technology arrangements. It’s GASB’s response to questions around accounting treatment for software. Many entities were already capitalizing these costs, and they were looking for GASB to justify that treatment.”

  This in-depth discussion with Zena illuminates the importance of adapting to and implementing the GASB 96 standard, highlighting the evolution of lease accounting practices.

  Understanding GASB 96

  GASB 96 addresses the accounting treatment for subscription-based information technology arrangements, essentially acknowledging the evolving software capitalization landscape. The standard aims to provide a clear justification for this treatment, drawing parallels to GASB 87 but with notable distinctions, particularly in its initial stages.

  The Distinction from GASB 87

  While GASB 96 shares similarities with GASB 87, especially in amortization schedules, the differentiation lies in the initial implementation stages outlined by GASB 96:

  • Preliminary Stage: Costs incurred in the conceptual framework development are typically expensed as incurred.
  • Initial Implementation Stage: Costs associated with placing the asset into service are, for the most part, capitalized.
  • Operation and Additional Implementation Stage: Ongoing troubleshooting and maintenance activities may see a mix of capitalization and expense costs.

  Leveraging Technology for Compliance

  The transition to or concurrent handling of GASB 87 and 96 poses unique challenges and opportunities for organizations. While it’s feasible to calculate GASB 96 using GASB 87 methodologies, organizations are advised to employ specific platforms designed for GASB 96 to ensure accurate reporting and compliance. Visual Lease, for instance, provides a robust framework that can initially accommodate both standards, with plans to transition calculations to a dedicated GASB 96 module.

  Preparing for GASB 96

  For entities that were well-versed in GASB 87, the introduction of GASB 96 presented an opportune moment to begin preparations for compliance. Gathering data concurrently for both standards could streamline processes, offering a comprehensive approach to lease accounting standards compliance. With many entities still in the early stages of GASB 96 material development, there was a window for thorough preparation and strategy formulation.

  The evolution of lease accounting standards, evidenced by the introduction of GASB 96, underscores the dynamic nature of financial regulations and the imperative need for organizations to stay informed and prepared. As we navigate these changes, leveraging tailored technology solutions like those offered by Visual Lease can provide a strategic advantage, ensuring seamless compliance and optimized lease accounting practices. Whether deep into GASB 87 or just beginning your journey, now is the time to consider the implications of GASB 96 and how it will shape your organization’s future of lease accounting.

  The post The Great GASB 96: Insights with Zena Thomas first appeared on Visual Lease.]]> https://visuallease.com/uniting-lease-accounting-and-lease-administration/ Fri, 03 May 2024 13:00:23 +0000 https://visuallease.com/?p=9333 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...
  The post Uniting Lease Accounting and Lease Administration first appeared on Visual Lease.]]> 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.

  The Essential Role of Lease Administration

  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.

  The Undervalued Effort of Lease Administration

  Often underestimated, the effort and time required to build and maintain effective lease administration processes are significant, especially in the context of mergers or decentralized operations. Organizing a global lease portfolio demands a considerable investment of time and a detailed understanding of the nuances involved in lease management.

  Strategic Planning and 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.

  Critical Components of Daily Lease Administration

  Lease administration encompasses managing portfolio changes, variable expenses, and risk mitigation. This includes new leases, amendments, renewals, terminations, and acquisitions. A key aspect is managing common area maintenance and operating expense reconciliations, a significant area for potential savings and error minimization.

  Mitigating Risks through Process and Dual Controls

  A solid foundation of processes and procedures is essential for mitigating ongoing risks such as missed or delayed payments, manual errors, and fraud. Implementing dual controls, such as verification calls for changes in vendor information, can significantly reduce the incidence of fraud and cybersecurity threats.

  “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

  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.

  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.

  The post Uniting Lease Accounting and Lease Administration first appeared on Visual Lease.]]> https://visuallease.com/asc-842-summary/ Thu, 21 Mar 2024 16:30:32 +0000 https://visuallease.com/?p=6204
  

  Table of Contents

  • ASC 842 Lease Accounting
  • ASC 842 Summary of Changes
  • How to calculate a lease liability under ASC 842
  • How to Transition to ASC 842
  • ASC 842: Financial Statement & Calculation Impacts
  • ASC 842: additional reading
  • FASB Lease Accounting Updates
  • Lease Accounting Subtopics under ASC 842
    • Lessee accounting for finance and operating leases
    • Lessor accounting
  • ASC 842 FAQ
  • What is ASC 842?
  • Who Does ASC 842 affect?
    • Why was ASC 840 replaced with ASC 842?
    • How does ASC 842 change the balance sheet?
    • What is considered a lease under ASC 842?
    • How has lease classification changed under ASC 842?
    • What does a lease classification test tell you?
    • Is there a low-value lease threshold under ASC 842?
    • How is ROU calculated under ASC 842?
    • Why do embedded leases have a bigger impact under ASC 842?

  What is ASC 842?

  ASC 842 is an accounting standard issued by the Financial Accounting Standards Board (FASB) that governs the accounting treatment for leases. It requires companies to recognize lease assets and liabilities on their balance sheets for almost all leases, including operating leases, previously only disclosed in footnotes.

  ASC 842 Lease Accounting

  The purpose of ASC 842 is to increase disclosure and visibility into the leasing obligations of both public and private organizations. Where previously most leases were not included on the balance sheet, the new ASC 842 lease accounting standard requires companies to report right-of-use (ROU) assets and liabilities for almost all leases.

  These changes to financial statements make it easier for investors, vendors, government agencies, and business stakeholders to (1) see a company’s exposure to risk and true financial position, and (2) make comparisons between organizations.

  ASC 842 Summary of Changes

  The lease accounting standard ASC 842, replaces the lease accounting standard ASC 840.

  Why was ASC 840 replaced with ASC 842?

  Given the high cost of leases and their historical lack of representation on the balance sheet, the introduction of ASC 842 provides transparency into organizations’ lease liabilities.

  Before ASC 842, operating leases were not included on the balance sheet, which neglected to provide a full picture of cash flows from leases. This meant companies and investors were unable to identify how much debt was carried within a business’ lease obligations.

  The new lease accounting standard requires organizations to include operating leases and financial leases on the balance sheet, which increases visibility into leasing costs and arrangements. This ensures an accurate depiction of company financials.

  In addition, ASC 842 closely aligns with the new international lease accounting standard IFRS 16, especially in the way a lease is defined. This makes financial reporting more consistent for organizations with both U.S. and international lease assets.

  For more differences between the new standards, take a look at our IFRS & FASB Lease Accounting Changes page for a quick reference to all of the improvements.

  Who Does ASC 842 affect?

  ASC 842 affects private and public companies of all industries and sizes within the U.S., including construction, business services, healthcare, manufacturing, retail, hospitality, transportation and more.

  ASC 842 Lease Accounting

  The purpose of ASC 842 is to increase disclosure and visibility into the leasing obligations of both public and private organizations. Where previously most leases were not included on the balance sheet, the new ASC 842 lease accounting standard requires companies to report right-of-use (ROU) assets and liabilities for almost all leases.

  These changes to financial statements make it easier for investors, vendors, government agencies, and business stakeholders to (1) see a company’s exposure to risk and true financial position, and (2) make comparisons between organizations.

  Lease Accounting Updates

  Since FASB was issued ASC 842 in 2016, there have been numerous updates, such as:

  •       ASU 2017-13: Amendments to SEC Paragraphs
  •       ASU 2018-01: Land Easement Practical Expedient for Transition
  •       ASU 2018-10: Codification Improvements
  •       ASU 2018-11: Targeted Improvements
  •       ASU 2018-20: Narrow-Scope Improvements for Lessors
  •       ASU 2019-01: Codification Improvements
  •       ASU 2019-10: Effective Dates
  •       ASU 2020-02: Amendments to SEC Section on Effective Date
  •       ASU 2020-05: Effective Dates for Certain Entities
  •       ASU 2021-05: Lessors – Certain Leases with Variable Lease Agreements
  •       ASU 2021-09: Discount Rate for Lessees That Are Not Public Business Entities

   

  Lease Accounting Subtopics under ASC 842

  ASC 842 Lessee accounting for finance and operating leases

  Lessee accounting for finance and operating leases

  Under the previous guidance, ASC 840, leases were labeled capital or operating leases. However, their labels were changed to finance and operating leases under ASC 842.

  The criteria defining a finance lease is as noted under the guidance in 842-10-25-2:

  •         The lease transfers ownership of the underlying asset to the lessee by the end of the lease term
  •         The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise
  •         The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease
  •         The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset

  If none of the criteria applies, then the lease would be considered an operating lease.

  Accounting for both the finance lease and operating lease are similar under ASC 842, unlike ASC 840. The new standard now requires both leases to recognize both the lease liability and the right of use asset on the balance sheet unless the lease is considered a short-term lease (12 months or less).

  Lessor accounting under ASC 842

  Lessor accounting has not had any significant changes under ASC 842. Similar to ASC 840, lessors still need to determine the type of lease to record, which will be either an operating lease, sales type lease or a direct financing lease.

  Under a sales type lease, the lessor is assumed to be selling a product to the lessee, which calls for the recognition of a profit or loss on the sale. For the lessor to classify the lease as a sales back lease, the lease must meet any of the criteria, noted within 842-10-25-2 (provided above) at lease commencement.

  Further, when none of the criteria in 842-10-25-2 are met, a lessor shall classify the lease as either a direct financing lease or an operating lease as noted within 842-10-25-3. The following criteria within the standard are as such:

  If both of the following criteria are met, the lessor should classify the lease as an operating lease:

  •         The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset.
  •         It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

  Otherwise, the lessor is to classify the lease as a direct financing lease.

  ASC 842: Financial Statement & Calculation Impacts

  Under ASC 842, almost all leases must be represented on the balance sheet with a liability and an ROU asset. ASC 840 capital leases and ASC 842 finance leases are substantially the same. Both are capitalized on the balance sheet, and the method for doing so is similar under both standards. Discover how the new ASC 842 standard impacts the balance sheet.

  How are lease calculations impacted under ASC 842? How can ASC 842 Compliance Software assist with these changes?

  ASC 842 requires lease obligations to be captured on the balance sheet. The calculations that are involved to stay compliant are extremely susceptible to error – particularly if done without automation.

  Lease accounting software assists with ASC 842 compliance by automating calculations and financial reports. It enables you to ensure reliable data – and provides transparency into the math behind the calculations.

  Without automated calculations or processes around lease management, you may run into issues related to human error or lack the ability to back up your calculations.

  ASC 842 Practical Expedients

  Businesses can elect practical expedients to apply the accounting guidance more easily. Depending on the type of practical expedient, they can be elected by lease, class of asset or as an accounting policy. Examples of practical expedients include:

  •         Initial direct costs for leases that commenced before the effective date
  •         The ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset
  •         Locking in a lease classification
  •         Combining lease and non-lease components
  •         Failing to restate the prior year’s financials

  ASC 842 Disclosure Requirements

  The disclosure requirements for ASC 842 are quantitative and qualitative. Under ASC 842, a lessee must disclose information about the nature of its leases and lease terms and conditions. This includes general descriptions of leases and various details regarding terms and conditions, such as the basis that variable lease payments are determined.

   

  ASC 842: additional reading

  

  ASC 842: Software

  

  ASC 842: Journal Entries

  

  ASC 840 vs ASC 842

  How does ASC 842 change the balance sheet?

  Previously, only capital leases — leases that are essentially purchase agreements — needed to be recorded on the balance sheet. But under ASC 842, most leases except for short-term leases must also be included on the balance sheet.

  In addition, FASB has changed the treatment of all leases to be intangible assets. This changes the terminology for capital leases, or leases that represent a purchase agreement. These leases are now called finance leases.

  This means companies must report ROU assets and lease liabilities for operating leases as well as for finance (capital) leases under ASC 842. So now IT and office equipment, vehicles, construction equipment, and other leased assets must appear on the balance sheet along with real estate leases.

  All the leases recorded under ASC 842 will now be part of the total reported assets and liabilities on an organization’s balance sheet — significantly changing the company’s financial statements.

  What is considered a lease under ASC 842?

  A lease is defined as a contract or an element of a contract that conveys the right of use (ROU) of a physically distinct identified asset for a specified period of time in exchange for payment.

  The identified asset can be property, plant, equipment, or other tangible assets. The period of time can be described in terms of the amount of use for the identified asset, such as the number of production units a piece of equipment will be used to produce, rather than in terms of time per se.

  Note: ASC 842 does not include assets that are covered in other accounting standards:

  • Intangible assets (ASC 350)
  • Minerals and biological assets including timber (ASC 930, 932)
  • Inventory (ASC 330)
  • Assets under construction (Covered under ASC 360)

  How has lease classification changed under ASC 842?

  Besides renaming capital leases “finance leases”, ASC 842 added a fifth lease classification question (“Is the asset so specialized that it is only useful to the lessee?”) to the test that determines whether a lease is a finance lease or an operating lease.

  Essentially, this question says that after the asset is returned to the lessor, if the asset will have no value to anyone else without a major overhaul by the lessor, then the lease would be classified as a finance lease.

  In addition, ASC 842 removed the so-called bright lines for the lease classification test. Previously these percentages were used to indicate what constitutes a “major part” of economic life (75%) or “substantially all” of the fair market value (90%); now these percentages are considered guidelines and you can elect whatever percentage you choose to use.

  • Transfer of title test: By the end of the lease term, will ownership of the asset transfer from the lessor to the lessee?
  • Bargain purchase option test: Is there a purchase option in the lease that the lessee is reasonably certain to exercise?
  • Lease term test: Does the lease term encompass the major part of the remaining economic life of the underlying asset?
  • Present value test: Is the present value of lease payments plus RVG (residual value guaranteed by the lessee) greater than or equal to substantially all of the fair market value of the asset?
  • Alternative use test: Is the asset so specialized that it is only useful to the lessee?

  What does a lease classification test tell you?

  Although almost all leases must be capitalized on the balance sheet under ASC 842, it is still necessary to classify them as either a finance lease (previously capital) or an operating lease. That’s because finance leases and operating leases are measured differently.

  The lease classification test determines whether a leased asset is essentially an alternative method of financing the purchase of an asset, or if the majority of the life and/or value of the underlying asset is controlled by the lessee; if so, it must be classified as a finance lease. Otherwise, the lease must be classified as an operating lease.

  Is there a low-value lease threshold under ASC 842?

  IFRS 16 includes a threshold under which leases can be considered “low value” and do not have to be capitalized on the balance sheet. However, FASB has not specified a low-value threshold for excluding leases from the balance sheet under ASC 842. If this is an issue for your organization, you can discuss it with your auditors to determine if you can use a materiality threshold.

   

  

  How to calculate a lease liability under ASC 842

  Lease liability represents the current value of minimum future lease payments. To calculate it, you need to make assumptions about:

  • The likely amounts owed under residual value guarantee
  • Whether you are reasonably certain to exercise lease renewal options, termination options, or purchase options

  The discount rate to use for the calculation is either the rate implicit in the lease (if known) or your organization’s incremental borrowing rate (IBR). Privately-held firms also have the option to use a risk-free rate.

  Keep in mind that the assumptions you make about lease options at the beginning of the lease often change over time. If during the term of a lease you change your mind about whether you are likely to exercise any lease options, you will need to remeasure both your lease liability and your ROU asset.

  How is ROU calculated under ASC 842?

  The ROU asset is calculated as the lease liability, plus or minus these adjustments:

  • Plus initial direct costs and prepaid lease payments
  • Minus lessor incentives, accrued rent, and ASC 420 liability at transition date

  Over the life of the lease, the ROU is amortized linearly. All of the assets and liabilities that adjust the ROU asset are reclassed from the balance sheet and included as one number to show the total leased asset.

  Why do embedded leases have a bigger impact under ASC 842?

  Previously, because operating leases were not on the balance sheet, embedded leases had little impact on the income statement since the expense was usually being straight-lined. But now that all leases must be capitalized on the balance sheet, you need to:

  • Examine all contracts to find any embedded leases within them
  • Separate the lease components (for use of assets) from non-lease components (payments for the service) within the contract

  Identifying embedded leases and their components is a complex task that takes time, judgment, experience, and consistency. It is another area where you might want to enlist the help and guidance of an accounting advisor.

   How to Transition to ASC 842

  Preparing for ASC 842 is a time-consuming, comprehensive effort that expands further than the accounting and finance department. It requires cross-departmental collaboration between IT, legal, procurement, etc.

  In fact, since the introduction of the new standard, impacted private companies have been slow to make the transition. In July 2021, The Visual Lease Data Institute (VLDI) reported 75% of surveyed private companies were not yet fully compliant with ASC 842. In addition, 40% said they were underconfident in their ability to comply with the new lease accounting standard because they didn’t have all the necessary lease data gathered.

  As of August 2022, The VLDI reported that while nearly all private companies (98%) have started the transition to ASC 842, one-third (33%) are still not fully prepared to implement the new standard.

  Businesses are under massive pressure as they attempt to prepare for their initial reporting period under the new lease accounting standard.

  The steps and milestones to ensure a successful transition to the new accounting standard are:

  •         Planning and analysis

  o   Determine project stakeholders and project lead

  o   Determine and approve budget for solution

  o   Collect and prep leases across portfolio

  o   Conduct needs assessment for a solution

  •         Software evaluation

  o   Kickoff software vendor evaluation

  o   Attend solution demonstrations

  o   Sign preferred vendor contract

  •         Implementation

  o   Gather business requirements and build timeline

  o   Complete software configuration

  o   Lease review, data analysis and entry

  o   Validation and testing

  o   Journal entry and disclosure pilot

  •         Go-live and transition

  o   Go live with software

  o   User training

  o   Adopt platform internally

  o   Transition to new FASB accounting standard

  •         Operationalizing and sustaining

  o   Ongoing maintenance (remeasurements, data management, change management)

  o   Annual reporting

  Benefits of New Standards and Implementation

  According to data from The VLDI, 71% of private companies believe ASC 842 presents an opportunity for their business.

  The new lease accounting standards encourage organizations to adopt a centralized view of their lease portfolio, providing them with an opportunity to prioritize a proper lease management strategy. In turn, this provides them with much of the information they require to remain adaptable in a post-pandemic world.

  Using a centralized system of record for leases provides companies with the ability to quickly and easily access crucial terms and clauses, such as the ability to exit, extend or change a lease.

  With this newfound visibility, companies can respond to unforeseen circumstances strategically, such as a retailer needing to shutter brick-and-mortar locations or exercise an exclusivity or force majeure clause to protect the future of its business.

  While some organizations manage and report on their leases using Excel, research has repeatedly shown that 90% of spreadsheets contain errors with 50% of processes enabled through those spreadsheets having “material defects”.

  Read More Content About ASC 842
  

  

  ASC 842 Compliance Software

  

  ASC 842 Balance Sheet

  

  Leasehold Improvements for ASC 842

  The post ASC 842 Lease Accounting first appeared on Visual Lease.]]> https://visuallease.com/unlocking-strategic-value-from-lease-accounting/ Fri, 15 Mar 2024 13:00:53 +0000 https://visuallease.com/?p=9164 It’s clear that the journey towards and beyond compliance with lease accounting standards (ASC 842, IFRS 16, & GASB 87) is fraught with challenges and opportunities. The strategic importance of...
  The post Unlocking Strategic Value from Lease Accounting first appeared on Visual Lease.]]> It’s clear that the journey towards and beyond compliance with lease accounting standards (ASC 842, IFRS 16, & GASB 87) is fraught with challenges and opportunities. The strategic importance of effectively managing a lease portfolio becomes even more apparent in today’s economic climate.

  The Evolution of Lease Management:

  The initial wave of adopting new lease accounting standards such as ASC 842 was not merely a compliance exercise but a transformative process for organizations worldwide. This transition period illuminated the potential for lease portfolios to significantly reduce risks and unlock real business benefits when managed with intention and strategic foresight.

  Maintaining Momentum in Compliance and Control:

  With the foundational compliance phase behind us, the enduring challenge for organizations is maintaining this compliance dynamically. This necessitates an integrated effort across various functions—real estate, finance, operations, legal, and procurement—to ensure information is accurately managed and utilized, minimizing exposure to risk and enhancing strategic decision-making capabilities.

  Insights from the Audit Front Lines:

  Audit and accounting professionals underscore the importance of meeting compliance mandates and leveraging the audit process as a strategic tool for refining lease management practices. Audits offer a unique lens through which to view lease agreements, providing opportunities to strengthen internal controls and operational insights.

  Emerging Topics on the Horizon:

  The transition to ASC 842 opened up a series of emerging topics that continue to evolve. The complexity of lease agreements and the dynamic nature of today’s economic environment call for ongoing diligence in lease management. The optimization and strategic advantage opportunities that arose during the initial adoption phase are just as relevant today, if not more so.

  Leveraging Lease Data as a Strategic Asset:

  The detailed lease data organizations have worked hard to compile and maintain is a veritable gold mine of strategic value. This previously underutilized information now allows management to make more informed and agile business decisions, optimize operations, and achieve cost savings on a previously unattainable scale.

  As we look back on the insights shared in the past and their application in the present day, the journey through and beyond lease accounting compliance emerges as a pathway to significant operational and strategic benefits. The detailed work required to achieve compliance offers a foundation upon which companies can build to streamline operations, negotiate better terms, and foresee future costs more clearly, transforming their lease portfolios into strategic assets that drive efficiency and savings.

  If you’d like to learn more about reducing risk and leveraging your lease portfolio to drive better outcomes, watch a quick overview of VL’s platform.

  The post Unlocking Strategic Value from Lease Accounting first appeared on Visual Lease.]]> https://visuallease.com/the-strategic-asset-of-lease-portfolios/ Wed, 13 Mar 2024 13:00:40 +0000 https://visuallease.com/?p=9162 Businesses have encountered unique opportunities to transform their lease portfolios from mere contractual obligations into dynamic, strategic assets. This evolution, spurred by effective management and the integration of cutting-edge technology,...
  The post The Strategic Asset of Lease Portfolios first appeared on Visual Lease.]]> Businesses have encountered unique opportunities to transform their lease portfolios from mere contractual obligations into dynamic, strategic assets. This evolution, spurred by effective management and the integration of cutting-edge technology, has allowed organizations to diminish risk and unlock extensive operational and financial benefits significantly.

  The Evergreen Nature of Lease Management:

  Historically, leases have represented one of the largest line items on the expense ledger for many companies, overshadowed only by payroll. This reality was often overlooked until the advent of new lease accounting standards (ASC 842, IFRS 16, & GASB 87), which prompted a paradigm shift towards more stringent lease accounting and lease administration processes to ensure continuous compliance.

  As we look back from our current vantage point, it becomes clear that for Chief Financial Officers (CFOs) and their teams, the initial push for compliance was just the beginning. The ongoing challenge has been to sustain these efforts, leveraging appropriate technology and establishing controls that span multiple departments. The absence of a unified approach to lease management exposes organizations to various risks, including financial inaccuracies and missed opportunities for savings.

  From Compliance to Strategic Advantage:

  The journey beyond compliance has revealed the untapped potential of lease portfolios as catalysts for greater financial agility and operational efficiency. Visual Lease has been at the forefront of this transformation, providing a robust platform tailored to meet the nuanced needs of all stakeholders involved in lease management. This centralized strategy mitigates risk and enhances compliance, ensuring that critical decisions can be made swiftly and confidently.

  The Ongoing Revolution in Financial Technology:

  Financial technologies, particularly those designed to streamline lease management and optimization, have proven indispensable. These tools have facilitated adaptability to the fluctuating economic landscape and supported the efficacy of virtual teams, proving essential for modern business operations.

  Conclusion: A Look Ahead:

  Reflecting on our journey through 2023, the importance of leveraging leases as strategic assets has never been more pronounced. The foresight and strategies implemented have paved the way for businesses to not only navigate the complexities of the present but also to lay a solid foundation for future growth and optimization. As we build on these insights, the potential for innovation and efficiency in lease portfolio management remains boundless, promising opportunities for those prepared to explore them.

  If you’d like to learn more about reducing risk and leveraging your lease portfolio to drive better outcomes, watch a quick overview of VL’s platform.

  The post The Strategic Asset of Lease Portfolios first appeared on Visual Lease.]]> https://visuallease.com/get-equipped-to-master-your-equipment-leases/ Tue, 12 Mar 2024 13:00:07 +0000 https://visuallease.com/?p=9160 As businesses navigate the complexities of the post-pandemic landscape, the question of whether to lease or buy equipment is more pertinent than ever. The global health crisis, followed by economic...
  The post Get Equipped to Master Your Equipment Leases first appeared on Visual Lease.]]> As businesses navigate the complexities of the post-pandemic landscape, the question of whether to lease or buy equipment is more pertinent than ever. The global health crisis, followed by economic fluctuations, has significantly impacted the equipment leasing market, prompting organizations to reevaluate their leasing strategies and financial planning.

  The Significance of Lease vs. Purchase Analysis

  A thorough lease versus purchase analysis is at the core of any equipment financing decision. This fundamental strategy supports organizations in determining the most cost-effective method for acquiring equipment, considering the net present value of after-tax cash flows, correcting residual assumptions, and setting appropriate discount rates. This analysis is crucial for boardroom-level decision support and auditing, ensuring businesses make informed decisions aligning with their financial goals.

  The Impact of the Pandemic on Equipment Leasing

  Despite the challenges posed by the labor market, supply chain issues, and inflationary pressures, we’ve seen record years for equipment financing. The Equipment Lease Financing Association projects the market to grow from $1.1 trillion in 2020 to $2.5 trillion by 2030. This surge underscores the shifting preference towards leasing as a strategy for cash preservation and financial flexibility.

  Navigating Lease Accounting Standards

  The relatively recent accounting standard (ASC 842, IFRS 16, & GASB 87) updates have spotlighted lease execution, contract terms, and management. These standards necessitate heightened transparency and control over leasing contracts, pushing organizations to adopt best practices for managing the life cycle of leases. Consequently, there’s an increasing demand for sophisticated lease accounting and advisory services to navigate these complexities and optimize contract savings.

  The Role of Visual Lease in Supporting Equipment Leasing

  In partnership with leading financial advisors, VL delivers comprehensive data and insights for managing equipment leases effectively. This collaboration ensures that organizations have access to the latest strategies and tools for lease analysis, contract management, and compliance with accounting standards, enabling them to realize significant savings and enhance their lease portfolio management.

  Preparing for Future Lease Transactions

  As companies adapt to economic uncertainties and evolving market conditions, the emphasis on strategic lease administration has never been more critical. Successful lease management goes beyond contract negotiation, encompassing a detailed understanding of lessor capabilities, contract terms, and overall portfolio strategy. Organizations that invest in developing baseline metrics for their leasing activities can measure improvement and achieve substantial savings over time.

  By embracing advanced lease versus purchase analysis and leveraging strategic partnerships, companies can confidently navigate this evolving market, ensuring their leasing decisions support long-term financial health and operational efficiency.

  If you’d like to learn more about reducing risk and leveraging your lease portfolio to drive better outcomes, watch a quick overview of VL’s platform.

  The post Get Equipped to Master Your Equipment Leases first appeared on Visual Lease.]]> https://visuallease.com/fund-accounting-for-leases/ Thu, 07 Mar 2024 15:34:35 +0000 https://visuallease.com/?p=9158 In the complex accounting landscape, fund accounting is a specialized area that demands meticulous attention, especially for non-profits, universities, hospitals, and governmental entities. Fund accounting is essential for these organizations,...
  The post Fund Accounting for Leases first appeared on Visual Lease.]]> In the complex accounting landscape, fund accounting is a specialized area that demands meticulous attention, especially for non-profits, universities, hospitals, and governmental entities. Fund accounting is essential for these organizations, as it helps track the allocation and usage of cash designated for specific purposes, ensuring that funds are not misappropriated.

  Understanding the intricacies of fund accounting is crucial for maintaining financial integrity and compliance, particularly when managing leases. Leases represent significant financial commitments and are subject to strict reporting requirements, making the accurate tracking and reporting of lease-related transactions a critical concern for accountants.

  The Challenge of Fund Accounting for Leases

  Fund accounting’s primary challenge is its need to precisely monitor cash flows and obligations within distinct funds, treating each fund as a standalone entity akin to a department. This approach is fundamentally different from traditional business accounting, focusing on ensuring that money designated for specific uses is spent accordingly.

  For governmental entities, this is further complicated by the need to satisfy the Annual Comprehensive Financial Report (ACFR), a comprehensive government-wide report detailing all financial activities and fund statuses, including those related to leases.

  Visual Lease’s Role in Simplifying Fund Accounting

  Visual Lease, a leading provider of lease accounting software, addresses these challenges head-on by offering solutions tailored to the unique needs of fund accounting. By automating the creation of journal entries that align with government-wide reporting and providing detailed insights into fund-specific transactions, Visual Lease enables organizations to maintain accurate and compliant financial records.

  Visual Lease’s platform offers flexibility, allowing users to integrate lease-related fund journal entries directly into their existing ERP systems or maintain them within Visual Lease for specialized reporting. This adaptability is crucial for organizations that manage their funds through separate ledgers or need to report on fund activities comprehensively.

  Understanding Accruals in Fund Accounting

  A fundamental aspect of fund accounting for leases is navigating the differences between modified and full accrual accounting. Most organizations are familiar with cash-based accounting, where transactions are recorded when cash changes hands. However, the shift to full accrual accounting under standards like GASB 87 requires recognizing expenses and revenues when they are incurred, regardless of when the cash transaction occurs.

  Government entities often operate on a modified accrual basis, focusing on short-term assets and liabilities alongside cash balances to provide a clear picture of a fund’s financial health. This necessitates maintaining dual sets of journal entries to comply with full and modified accrual reporting requirements, a complex process that Visual Lease simplifies with its robust software solutions.

  Setting Up for Success in Fund Accounting

  Successfully implementing fund accounting practices, particularly for leases, requires a deep understanding of an organization’s financial structure and the ability to track and allocate cash accurately. Organizations must have a clear organizational map from the outset, allowing for the precise movement and allocation of funds as needed.

  Visual Lease has proven to be an invaluable partner for organizations navigating the transition to GASB 87 and beyond, providing the tools and support needed to manage lease accounting with confidence and compliance.
  As organizations strive to adapt to evolving accounting standards and complex fund accounting requirements, the importance of leveraging specialized tools and expertise cannot be overstated. Visual Lease stands at the forefront of this challenge, offering solutions that ensure accuracy, compliance, and financial integrity in fund accounting for leases.

  The post Fund Accounting for Leases first appeared on Visual Lease.]]> https://visuallease.com/how-is-gasb-87-different-from-previous-standards/ Thu, 22 Feb 2024 13:00:58 +0000 https://visuallease.com/?p=9085 In this blog post, we will provide a comprehensive breakdown of GASB 87 and explain what you need to know. Revisiting the Introduction of GASB 87 The lease accounting standard,...
  The post How is GASB 87 different from previous standards? first appeared on Visual Lease.]]> In this blog post, we will provide a comprehensive breakdown of GASB 87 and explain what you need to know.

  Revisiting the Introduction of GASB 87

  The lease accounting standard, GASB 87, brought about a significant shift in how leases are accounted for. Previously, operating leases were kept off the balance sheet, but now they must be included. This change meant that public sector organizations saw a substantial increase in assets and liabilities on their balance sheets.

  How has GASB 87 Changed Lease Accounting?

  1. Increased Transparency

     Similar to the standards set by FASB and IFRS, GASB 87 aimed to bring more transparency to financial statements. With the inclusion of operating leases, stakeholders can now have a clearer picture of an organization’s leasing obligations. This increased transparency is essential for making informed decisions and understanding the financial health of an organization.

  2. Impact on Government Entities

     Governmental funds, including proprietary and fiduciary funds, experienced changes due to GASB 87. While fund balance accounting didn’t see significant alterations, comprehensive annual financial reports needed to reconcile fund balances with full accrual balances on government-wide financial statements. This alignment ensured accurate and comprehensive reporting of lease obligations.

  3. The Role of Lease Accounting Technology

     To navigate the complexities of GASB 87, implementing lease accounting software is highly recommended. This technology simplifies the calculation, reporting, and compliance processes, especially for organizations with substantial lease portfolios. By leveraging lease accounting software, organizations can maintain accurate records and alleviate the burden of continuous remeasurement and reporting.

  4. Managing Data Integrity and Internal Controls

     Adopting GASB 87 is just the beginning. Organizations must also prioritize the day-to-day management of lease data integrity and internal controls. Lease accounting software serves as a critical tool in this process, facilitating budgeting, cash flow forecasting, and document management. Strong internal controls are crucial for ensuring compliance and accuracy in lease accounting processes.

  5. Integration with ERP Systems

     Organizations have different preferences for integrating lease software with their general ledger systems. Direct integration between lease software and ERP systems can help reduce manual errors and streamline processes. This integration ensures seamless communication and data synchronization between different financial systems, improving efficiency and accuracy in lease accounting.

  In conclusion, GASB 87 has brought significant changes to lease accounting standards. Organizations need to understand these changes and adapt accordingly. By embracing lease accounting technology, maintaining data integrity, and preparing for future standards, organizations can navigate the complexities of lease accounting and ensure compliance with regulatory requirements.

  The post How is GASB 87 different from previous standards? first appeared on Visual Lease.]]> https://visuallease.com/a-complete-guide-to-commercial-lease-negotiations/ Wed, 21 Feb 2024 13:00:04 +0000 https://visuallease.com/?p=9083 Best Practices for Negotiating Ideal Lease Terms We’re diving into the intricacies of GASB 96, a significant standard that government entities need to adopt, especially following the implementation of GASB...
  The post A Complete Guide to Commercial Lease Negotiations first appeared on Visual Lease.]]> Best Practices for Negotiating Ideal Lease Terms

  We’re diving into the intricacies of GASB 96, a significant standard that government entities need to adopt, especially following the implementation of GASB 87.

  For most companies, leases and operating costs are usually the second largest expense behind payroll. Yet, after the initial negotiation, companies often don’t keep track of their lease terms or obligations — and that can mean missed opportunities, overbilling and wasted time.

  Because leases are such a big investment, the ability to negotiate or renegotiate a lease is a critical part of managing business expenses. Lease negotiation requires understanding lease components and their implications, and then using that information to negotiate the best lease terms for your business.

  A great way to prepare for negotiating a new contract or renegotiating with current lessors is to review your existing lease portfolio. It can help you get a good grasp of your obligations under different leases, which lease terms benefit you (or not) and how much flexibility there may be for negotiation.

  How to Negotiate a Commercial Lease

  In this guide, we’ll look at three ways you can prepare for and effectively manage your next lease negotiation:

  1. Identify Opportunities to Negotiate Within Leases
  2. Evaluate Your Existing Leases
  3. Seek Expert Advice

  Identify Opportunities to Negotiate Within Leases

  In general, negotiation plays a bigger role in commercial leases than in residential or consumer leases.

  That’s because:

  • Companies often have needs specific to their business, such as the way a space is configured or special requirements for utilities and other features
  • Lessors may be motivated to accommodate those needs to help seal the deal

  In addition, businesses are more likely to lease larger quantities of equipment, vehicles and other assets than a consumer would. Although these leases often require customized contracts based on individual companies’ needs, most commercial leases include some common terms and standard boilerplate language.

  These terms and language might be negotiated at the beginning of a lease and then automatically inserted each time the contract renews, with little or no changes over time. However, there are a few factors that can help determine the flexibility and ability to negotiate lease terms.

  Factors that Affect Negotiation Power

  The amount of flexibility you have to negotiate a commercial lease often depends on the circumstances. For instance, if it is close to the end of a lease term and your landlord wants you to renew, you may have an opportunity to renegotiate a lower cost or other favorable terms.

  Other things that may affect your ability to negotiate include the size and value of the leased assets. For example, you may have some leverage to negotiate with prospective landlords if you are looking for:

  • Prime locations for multiple retail stores
  • Significant square footage for warehousing, a showroom or manufacturing facilities
  • Multiple office spaces to accommodate doing business in different locations

  The ability to negotiate a lease also depends on the flexibility of the property owner or provider. A landlord who is anxious to fill a vacancy may be willing to negotiate an incentive for you to lease, such as a generous Tenant Improvement Allowance (TIA) for customizing an office space to your needs.

  Renegotiation of a lease in the middle of a lease term could be triggered by a hardship of some kind, such as a distressed market, a significant business disruption or even bankruptcy. In these cases, lessors may be more inclined to negotiate so that they get something rather than nothing.

  For example, if you lease a large amount of square footage or a highly visible location in a mall or office building, the landlord may work with you on desirable lease terms to avoid having the space sit empty.

  Lease Clauses in a Post-Pandemic, Hybrid Work World

  As the world recovered from Covid-19, corporate real estate planning became more complicated than ever. Businesses across all industries continue to be in cash-conservation mode, looking to cut costs and remain agile in response to economic uncertainties.

  Now, many leases directly consider and may include:

  • A pandemic clause, clarifying the rights and obligations of both parties in the event of unforeseen circumstances, such as future pandemics or other force majeure events
  • Health and safety protocols, specifying the measures each party must take to ensure a safe and healthy working environment, including sanitation, cleaning, and compliance with health guidelines
  • Dispute resolution for pandemic-related issues, establishing a clear process for resolving disputes related to pandemic-related matters, such as rent abatement due to government-mandated closures.
  • Government assistance coordination, describing how parties will cooperate in obtaining and managing government assistance programs that may be available during times of crisis.

  Even more so, there is now an emphasis on “hoteling” — an office arrangement where employees don’t have assigned workstations and instead reserve or use available workspaces temporarily — as well as spaces created with collaboration in mind, such as huddle rooms, team neighborhoods, and social zones.

  These may be incorporated through flexibility in space utilization clause, allowing for flexibility in the use of space, potentially permitting tenants to adjust the layout or configuration based on changing needs or social distancing requirements, or through a negotiated tenant improvement allowance to help offset the expenses associated with incorporating this new office needs.

  The widespread effects of the COVID-19 pandemic has had a strong impact on both lessees and lessors. On one hand, landlords whose properties have been affected want to recover as much rent as they can. At the same time, many tenants have been looking for some form of relief from their rent obligations had experienced some level of unoccupancy to their corporate real estate leased properties due to office closures. Still, nearly half (47%) of the companies paid full rent on unoccupied properties — and a small fraction (8%) paid no rent. Regardless, more than half the companies planned to ask landlords for some rent relief, such as application of their security deposit or a rent abatement, reduction or deferral.

  Tenants have looked to their leases for clauses like force majeure, casualty or business interruption to save money on rent.

  However, these clauses have not been commonly found to apply to COVID-19, given it was unusual to include specific language about a pandemic in lease clauses before the current climate. However, that is something that may change in the future through lease negotiations.

  Alternatively, some tenants and landlords have worked together during the pandemic on lease negotiations to ensure that both can stay in business during and after the crisis, and the landlord can continue to collect revenue from assets.

  Evaluate Your Existing Leases

  Your existing leases are a valuable source of information that can help your business negotiate new leases or renegotiate existing agreements.

  Any lease that has been customized to your business needs provides an opportunity for you to identify lease language that has worked in your favor. Moving forward, you can choose to establish that language as a standard to use in new leases or renewal negotiations.

  Conversely, if existing leases contain language that has not worked well for your business, you can try to avoid those terms in new contracts or renegotiate them at the time of lease renewal.

  What to Look for in Current Leases

  Naturally, you want to know what your rent and other lease payments are — but you also want a clear picture of what you are getting for the money. For example:

  • How many offices or how much space do you lease from the same landlord?
  • What is your cost per square foot?
  • Is the cost based on occupied space? Or on total square footage?
  • Is your rent comparable to what other lessees in the building are paying?
  • Is your monthly payment comparable to or better than the current market rates?
  • Are you paying for common area maintenance (CAM) and if so, how?
  • Are there other shared costs (such as water or other utilities) and if so, are you paying more than your fair share?

  In addition, you should look at your leases to determine whether your termination rights and renewal terms are favorable to your business. How easy is it for you to get in or out of leased spaces?

  • Is there a “lease kickout,” or a threshold that allows you to terminate a lease if the location is not operating profitably?
  • Is there a clause that allows you to terminate the lease on a retail location if there is a significant reduction in foot traffic or if an anchor store closes?
  • If you have multiple leases and critical dates with the same landlord, can you trade off and move locations to make the best use of all the leased spaces?

  Lastly, you should know where you are in your current lease terms, to be aware of automatic renewals, deadlines you must act on and possible opportunities to renegotiate before you renew.

  For instance:

  • If you have several leases with the same landlord — such as space in multiple offices or malls — how much of your portfolio is about to expire? If a large number of leases are involved, the upcoming expirations may give you significant leverage in negotiations.
  • Are your lease obligations short-term or long-term? If they are short term, you may soon have a chance to revisit lease language and make changes that will benefit your business.

  How to Search for Pertinent Lease Language
  With this kind of visibility into the details of your current leases, you are in a position to evaluate whether there is language you would like to renegotiate when a lease renews — or language you want to incorporate or avoid when entering into a new contract.

  Manually searching through every lease for specific clauses and language is an incredibly time-consuming and cumbersome task. (Just ask anyone who has implemented lease accounting standards — ASC 842, IFRS 16, GASB 87.)

  But by utilizing lease accounting and management technology, you can more clearly identify all your lease obligations and crucial lease language, which enables you to keep track of current financial obligations and critical dates, plus important details to help with future lease negotiations.

  For example, lease management software can help you identify if you paid for space you did not use — or overpaid for services such as cleaning or utilities. Armed with that information, you can look out for those issues in new leases or address them in current leases prior to renewal.

  With all your leases and important terms entered into a centralized system of record system, you can easily group information, generate reports and view a complete picture of your lease portfolio. You can also view individual lease details and cut data by region, landlord/lessor, expiration dates and other criteria.

  Creating a digital portfolio of abstracted leases lets you search for both ideal and low-performing lease language to:

  • Identify lease terms that previously worked well for your business and use them in new leases
  • Avoid under-performing language in new or renewing leases
  • Renegotiate where possible based on what works well and what does not

  The lease management system you choose should allow you to bookmark specific language and establish it as a standard that you want to repeat in the future, such as:

  • A previously negotiated, favorable holdover rent rate of 125%, versus the typical 150% or even 200%
  • CAM pro rata share language that bases the fee on the square footage of the space you occupy rather than the total square footage

  Further, a robust lease accounting and management system such as Visual Lease enables you to search for and identify automatic renewals on leases that you negotiated long ago, which gives you the opportunity to easily determine whether the terms are still favorable or if they need to be renegotiated.

  Seek Expert Advice

  Engaging with professionals, such as brokers or lawyers, can help you make smarter, more informed decisions about your leases. Lease experts can provide sound advice and help you better interpret and understand lease language, the current market conditions and your overall negotiation options.

  Consult a Broker

  Brokers are not experts in lease documents and legality. However, they can provide insights about the marketplace to help you decide whether to invest in a particular lease. For instance:

  • Does it make sense to sign a long-term lease at current prices — or are prices likely to come down further?
  • Do current lending rates make buying a better option than leasing in some markets?

  A broker can perform a market analysis, which includes the typical pricing in a given area. In addition, brokers often know the lessors and are familiar with their business and reputation — added information that can be helpful to you as a potential lessee.

  When you work with a real estate broker, they can help you better understand the current market and what is happening in neighboring communities.

  For example, in the aftermath of COVID-19, a broker can tell you if there are have been rising vacancies and falling rents in certain locations. Those are trends that may open the door to negotiating with owners who are eager to have their properties occupied and generating revenue.

  The same is true for equipment, vehicles and other frequently leased assets. There, brokers can tell you if prices are down or new stock is not moving — possibly giving you an opportunity to negotiate a price or opt to buy while the market is soft.

  Additionally, there are brokers who specialize in meeting different needs based on the health of a business and its goals. For instance, there are real estate brokers who help companies lease high-end spaces. There are also brokers who help companies during situations such as severe market downturns or bankruptcies.

  Still, remember that brokers are not experts in the legalities of lease language. Therefore, you should consult with an attorney regarding any lease.

  Work with an Attorney

  Before you commit to a lease — whether it is new, renewed or renegotiated — you should always work with an attorney. He or she can identify the high and low liability aspects of the lease and help make sure that you:

  • Get the best terms in legal protections
  • Limit your risks from a casualty and insurance standpoint
  • Understand the boilerplate language often included as standard in leases (such as waiving the right to a jury trial)
  • Know what all your obligations are according to the lease and agree with those terms

  In lease negotiations, an attorney can ensure that a lease includes ideal language to protect your interests. This adds a level of refinement and enforceability that only a legal expert can provide.

  Unlike a broker or other layperson, an attorney has the expertise to guide you through negotiations and manage complex lease language such as casualty and force majeure clauses. Just as you should always consult an attorney before signing a new contract, it is also important to have an attorney review the documents for lease renewals and renegotiations. Additionally, there may be times when it is appropriate to use an attorney to revisit previously negotiated boilerplate language.

  For instance, when you work with the same landlord for a long period of time or a multiple-lease portfolio, you tend to negotiate some standard language and then update the lease as needed in areas such as:

  • Business terms
  • Location-specific charges
  • Insurance language

  Ideally, you can work with the same attorney who was involved in negotiating the original lease, who can compare the documents and redline any changes or additions. At the very least, a new attorney can review the lease to make sure your interests are protected and there are no red flags.

  —

  Get a head start on your negotiation power with a powerful lease accounting and management tool. More than 1500 companies have used Visual Lease as their system of record for all leased real estate and equipment assets. Through proper lease management within one easy-to-use tool, you can simplify and automate lease information that you can leverage for more successful lease negotiations.

  About Visual Lease:

  Visual Lease is the #1 lease optimization solution provider, empowering organizations to leverage their lease portfolio for strategic financial and operational outcomes. Our powerful and secure platform serves as a centralized system of record for all lease financial, operational and legal data, and is purpose-built to support every team that interacts with a company’s lease portfolio. Informed by nearly three decades of experience, our solutions help companies easily sustain compliance with FASB, IFRS, GASB and ISSB reporting requirements, and mitigate the risks and maximize the value associated with their lease records. Our award-winning software is used by 1,500+ organizations to manage more than 1 million real estate, equipment and other leased asset records globally. For more information, visit visuallease.com.

  The post A Complete Guide to Commercial Lease Negotiations first appeared on Visual Lease.]]> https://visuallease.com/a-breakdown-of-gasb-96-6-things-you-need-to-know/ Tue, 20 Feb 2024 13:00:03 +0000 https://visuallease.com/?p=9081 We’re diving into the intricacies of GASB 96, a significant standard that government entities need to adopt, especially following the implementation of GASB 87. The Essence of GASB 96 GASB...
  The post A Breakdown of GASB 96: 6 Things You Need to Know first appeared on Visual Lease.]]> We’re diving into the intricacies of GASB 96, a significant standard that government entities need to adopt, especially following the implementation of GASB 87.

  1. The Essence of GASB 96

     GASB 96 deals with subscription-based information technology arrangements (SBITA), a new area of focus for government entities. This standard requires these entities to identify SaaS agreements and include them on their balance sheets for the first time, ensuring consistent treatment for state and local governments.

  2. Preparation and Comparison with GASB 87

     If your organization has already tackled GASB 87, you’re in an excellent position to handle GASB 96. The process and methodology are similar, aiming to bring uniformity in reporting. GASB 96, like its predecessor, necessitates identifying and consolidating relevant agreements into the balance sheet, creating both an asset and a liability.

  3. Timing and Challenges

     The GASB 96 regulation became effective as of June 15, 2022. Some entities were still grappling with GASB 87, hence the staggered approach to adopting GASB 96. The primary challenge lies in the capacity and bandwidth to implement these standards efficiently.

  4. Roles of IT and Accounting Departments

     The IT department and the accounting team play a pivotal role in this transition. GASB 96 will primarily impact IT, as it revolves around technology agreements. These departments must comb through contracts to classify and account for them appropriately under the new standard.

  5. Cost Considerations and Implementation

     Implementing GASB 96 involves identifying costs at different contract stages, such as preliminary, initial implementation, and operation stages. These need to be either capitalized or expensed, adding a layer of complexity to the process.

  6. Leveraging Technology

     Organizations implementing lease accounting technology for GASB 87 will find it beneficial to use similar technology for GASB 96. The similarity in concepts between the two standards means that adapting existing software solutions can streamline adoption.

  The transition to GASB 96 might be smoother than GASB 87 due to its specific focus on information technology agreements. However, the primary challenge remains the limited resources available to organizations to adopt these comprehensive standards concurrently.

  In conclusion, GASB 96 represents a significant shift in how subscription-based IT arrangements are reported and accounted for, mirroring the changes brought about by GASB 87 in lease accounting. As organizations adapt to these new standards, understanding and leveraging the right tools and strategies will be essential to successful implementation.

  The post A Breakdown of GASB 96: 6 Things You Need to Know first appeared on Visual Lease.]]> https://visuallease.com/2024-lease-accounting-trends-and-solutions/ Fri, 16 Feb 2024 13:00:05 +0000 https://visuallease.com/?p=9079 In our latest blog post, we delve into the findings of our Visual Lease Data Institute (VLDI) research that sheds light on the evolving terrain of lease accounting. About the...
  The post 2024 Lease Accounting Trends and Solutions first appeared on Visual Lease.]]> In our latest blog post, we delve into the findings of our Visual Lease Data Institute (VLDI) research that sheds light on the evolving terrain of lease accounting.

  About the Research: We surveyed senior finance and accounting professionals alongside financial management experts in government sectors.

  The research offers a revealing look at the challenges and solutions in the realm of lease accounting. As we unpack the intricacies of standards ASC 842 and GASB 87, we discover the significant impact of talent shortages, the struggle for knowledge retention, and the pivotal role of innovative software solutions in streamlining lease accounting processes.

  Challenges in Lease Accounting

  A critical finding is the impact of talent shortages and retention issues on adopting lease accounting standards.

  • Both sectors report their teams being stretched thin, with significant concerns over employee burnout.
  • Knowledge maintenance is another major hurdle, with a substantial percentage of both sectors finding it challenging to maintain compliance.

  Overcoming Lease Accounting Challenges with Technology

  Successful companies have overcome talent shortages by leveraging centralized systems for lease accounting and administration.

  • Third-party lease accounting software has been instrumental in streamlining tasks, improving accuracy, and ensuring regulation compliance.
  • Such software saves significant hours for private and public entities and provides essential customer support.

  The journey toward lease accounting compliance is fraught with challenges, but organizations can navigate these complexities effectively with the right tools and support. Visual Lease’s insights and solutions provide a roadmap for businesses to turn these challenges into opportunities for growth and strategic advantage.

  For more insights, visit the VLDI section of our website.

  About The Visual Lease Data Institute

  The Visual Lease Data Institute is a hub for key data trends insights on lease accounting, management, and optimization. It’s a resource designed to equip businesses with the necessary knowledge for lease accounting compliance and to use leases as strategic assets. The institute’s expertise is recognized widely, with mentions in prominent publications like The Wall Street Journal and Forbes.

  The post 2024 Lease Accounting Trends and Solutions first appeared on Visual Lease.]]> https://visuallease.com/tax-lessons-from-the-covid-19-pandemic/ Thu, 15 Feb 2024 13:00:05 +0000 https://visuallease.com/?p=9077 We’re delving into the complex world of lease accounting and its tax implications, particularly in the wake of the COVID-19 pandemic. We’ll share valuable insights into how businesses, especially retailers,...
  The post Tax Lessons from the COVID-19 Pandemic first appeared on Visual Lease.]]> We’re delving into the complex world of lease accounting and its tax implications, particularly in the wake of the COVID-19 pandemic. We’ll share valuable insights into how businesses, especially retailers, navigated the challenges posed by the pandemic using their lease agreements.

  During the pandemic, many businesses had to engage with landlords for financial concessions without fully considering these negotiations’ tax and cash implications. This lack of understanding led to unexpected tax consequences.

  Key Lessons for Retailers

  Retailers learned crucial lessons about leveraging their lease agreements during the early days of COVID-19. Educating clients on the tax implications of their lease decisions was vital.

  • One significant aspect was understanding the principles of code section 467, which ensures the matching of income and expenses in leasing transactions.
  • Without this knowledge, businesses risked incurring tax liabilities without the corresponding cash flow.

  E-Commerce Pivot and Tax Consequences

  While some retailers successfully pivoted to e-commerce, many were unprepared for this shift, leading to significant financial strains. Additionally, landlords forgoing rent presented another set of challenges, as the deferred payments still triggered tax liabilities under certain conditions. Businesses had to navigate these complexities without fully understanding the tax implications.

  Mitigating Negative Impacts with Better Understanding

  A firmer grasp of lease accounting and tax ramifications could have helped businesses mitigate the adverse effects of the pandemic. Structuring leases differently, for instance, could align cash flow with income recognition, providing much-needed relief.

  Broader Industry Implications

  These issues weren’t limited to retailers; other industries faced similar challenges. For example, manufacturers owning property had to consider sale and leaseback arrangements to survive, which required careful tax planning to avoid unintended consequences.

  The Role of Tax Professionals in Business Decisions

  Businesses need to involve tax professionals in their decision-making processes. While tax considerations shouldn’t drive business decisions, they are crucial in structuring transactions efficiently to avoid adverse tax implications.

  The pandemic underscored the importance of understanding the intersection of lease accounting and tax implications. Businesses that navigated this complex landscape effectively were able to turn challenges into opportunities, demonstrating the critical role of informed decision-making and expert guidance in the ever-evolving business environment.

  The post Tax Lessons from the COVID-19 Pandemic first appeared on Visual Lease.]]> https://visuallease.com/6-best-practices-for-asc-842/ Wed, 14 Feb 2024 13:00:23 +0000 https://visuallease.com/?p=9076 Adopting the ASC 842 lease accounting standard has been one of the most impactful changes in accounting practices, particularly for private companies gearing up for compliance. Drawing from the experience...
  The post 6 Best Practices for ASC 842 first appeared on Visual Lease.]]> Adopting the ASC 842 lease accounting standard has been one of the most impactful changes in accounting practices, particularly for private companies gearing up for compliance. Drawing from the experience of public companies that have already transitioned, here are some key insights and best practices:

  1. ASC 842 Is a Major Shift

     Auditing costs have been on the rise, driven by factors such as inflation, the impact of COVID-19, and company restructuring activities. According to a Gartner survey, a significant 62% of companies expect an increase in their audit fees. This upward trend in costs is directly linked to lease accounting.

  2. Preparation Beyond Technology

     Compliance with ASC 842 involves more than just implementing technology. It’s about thoroughly understanding and managing lease contracts, and ensuring cross-functional team involvement, particularly from finance personnel.

  3. Challenge of Lease Management

     Many companies struggle with lease management due to a lack of a centralized system or owner. This can lead to challenges in accurately accounting for leases.

  4. Day 1 Compliance and Beyond

     Achieving compliance starts by bringing all leases onto the balance sheet as a right of use asset and related liability. However, it also involves tracking and accounting for every lease change throughout the reporting period.

  5. Risks of Inaccuracy

     Without the proper tools and processes, there is a risk of inaccuracies in journal entries and disclosures, especially for companies with a large number of leases.

  6. The Burden of Volume

     The volume of leases can significantly complicate compliance. For instance, companies need to book an opening journal entry for all active leases at the start of the year, which can be a daunting task for those with numerous leases.

  In conclusion, transitioning to ASC 842 requires a comprehensive approach that goes beyond just adopting new software. It’s crucial for companies to act promptly, ensure thorough preparation, and involve cross-functional teams to navigate this change successfully.

  The post 6 Best Practices for ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/the-importance-of-lease-accounting-automation/ Tue, 13 Feb 2024 13:00:08 +0000 https://visuallease.com/?p=9074 In today’s fast-paced business environment, lease accounting has become an increasingly complex task for organizations. Manual processes and outdated tools like Excel not only pose a high risk of errors...
  The post The Importance of Lease Accounting Automation first appeared on Visual Lease.]]> In today’s fast-paced business environment, lease accounting has become an increasingly complex task for organizations. Manual processes and outdated tools like Excel not only pose a high risk of errors but also result in rising audit fees. To address these challenges, companies are turning to lease accounting automation. In this blog post, we will explore the main reasons why lease accounting automation is crucial for businesses.

  Rising Audit Fees

  Auditing costs have been on the rise, driven by factors such as inflation, the impact of COVID-19, and company restructuring activities. According to a Gartner survey, a significant 62% of companies expect an increase in their audit fees. This upward trend in costs is directly linked to lease accounting.

  Connection to Lease Accounting

  Achieving and maintaining compliance with lease accounting standards, such as ASC 842, GASB 87, and IFRS 16, is a complex task. However, automation can significantly reduce the costs associated with lease accounting. By leveraging the power of automation, organizations can streamline their lease accounting processes and ensure compliance, leading to potential cost savings.

  Impact on Audit Fees

  Companies that automate at least 25% of their internal controls reported paying nearly 30% less in audit fees. This substantial reduction in costs can offset the annual expenses of lease accounting software subscriptions. By investing in the right lease accounting technology, businesses can realize significant financial benefits.

  Risks of Manual Processes

  Lease accounting involves intricate calculations, making it highly susceptible to human error. Relying on manual processes, especially tools like Excel, increases the risk of inaccuracies in lease accounting. To mitigate this risk, organizations need to embrace automation.

  Consequences of Errors

  Errors in lease reporting can have serious repercussions for businesses. A survey conducted among senior finance and accounting professionals revealed widespread concern about the potential for misreporting lease information. The main worries include increased audit fees and fines, potential damage to the company’s reputation, risk of legal action, and harm to personal professional reputation.

  Benefits of Automation

  Implementing the right lease accounting technology can mitigate risks, enhance operational efficiency, and lead to significant savings on audit costs. By automating lease accounting processes, organizations can ensure compliance with accounting standards, streamline their operations, and eliminate the risk of errors.

  In conclusion, lease accounting automation is no longer just a luxury but a necessity for businesses in today’s complex financial landscape. By embracing automation, companies can reduce audit fees, mitigate risks, and ensure accurate and streamlined lease accounting. To stay ahead of the competition and navigate the challenges of lease accounting, organizations must invest in the right lease accounting technology.

  The post The Importance of Lease Accounting Automation first appeared on Visual Lease.]]> https://visuallease.com/4-steps-to-lease-accounting-compliance/ Mon, 12 Feb 2024 16:20:30 +0000 https://visuallease.com/?p=9072 The management letter from auditors, typically received by CFOs after the annual audit, highlights key financial findings and suggests improvements for internal controls. It also informs about new accounting standards...
  The post 4 Steps to Lease Accounting Compliance first appeared on Visual Lease.]]> The management letter from auditors, typically received by CFOs after the annual audit, highlights key financial findings and suggests improvements for internal controls. It also informs about new accounting standards that need adoption.

  Steps for Lease Accounting Compliance

  To ensure compliance with lease accounting standards, companies should follow these steps:

  In lease accounting specifically, the completeness assertion claims that all leases have been captured and properly capitalized on the balance sheet.

  1. 1. Familiarize with Deadlines

        Understand and allocate sufficient time for gathering lease documents and processing necessary data.

  Create a Plan and Identify Stakeholders

  Recognize major milestones and assign key players or teams to each initiative, understanding their roles and the importance of deadlines.

  Centralize Relevant Documents

  Use a centralized system for easy access, analysis, and updates of lease information. Invest in efficient technology for this purpose.

  Develop Business Requirements

  Before selecting technology or partners, consult with internal stakeholders for their input. This will aid in smooth adoption and ongoing compliance.

  Compliance with the latest lease accounting standards, (ASC 842, GASB 87, and IFRS 16), is not just a regulatory requirement but a strategic opportunity. The management letter serves as a vital roadmap in this process, pointing out critical areas that need attention. By understanding the importance of deadlines, creating a well-thought-out plan, centralizing documentation, and involving key stakeholders in the decision-making process, companies can turn what seems like a daunting task into a manageable and beneficial undertaking.

  Takeaway: Remember, compliance is not just about meeting standards; it’s about enhancing the overall financial health and transparency of your organization. By adopting a proactive approach and leveraging technology effectively, businesses can not only meet the necessary compliance requirements but also gain insights that drive better lease management and financial decisions. In the evolving landscape of financial reporting and management, staying ahead in compliance is not just good practice—it’s a competitive advantage.

  The post 4 Steps to Lease Accounting Compliance first appeared on Visual Lease.]]> https://visuallease.com/4-reasons-to-avoid-excel-for-lease-accounting/ Thu, 07 Dec 2023 16:00:58 +0000 https://visuallease.com/?p=7226 Is Excel good for lease accounting? 1. Lease terms constantly change, and it’s hard to keep up 2. Lease accounting calculations are complex and time consuming 3. Excel spreadsheets are...
  The post 4 Reasons to Stop Using Excel Spreadsheets for Lease Accounting first appeared on Visual Lease.]]>
  • Is Excel good for lease accounting?
  • 1. Lease terms constantly change, and it’s hard to keep up
  • 2. Lease accounting calculations are complex and time consuming
  • 3. Excel spreadsheets are prone to human error
  • 4. Excel lacks historical data required for audits
  • Benefits of lease accounting software
  • Ensuring ASC 842 compliance
  • Get Started!

  Your business already uses Excel for many accounting calculations, including for ASC 840 lease accounting, so it’s understandable that you may want to consider continuing to use it as an option for lease accounting under ASC 842. And although it’s inexpensive to use and there’s comfort in using it, it may only get you so far in ensuring accurate lease accounting reports and calculations.

  Is Excel good for lease accounting?

  The reality is Excel will create challenges supporting large lease portfolios and the complex calculations that are required to comply with the new lease accounting standards. Ideally, the lease accounting solution you select should make it easy to view every lease – and address any changes made during the lease term, something that will be more difficult using Excel. Improperly tracking your leases and performing manual calculations using Excel puts you at risk of inaccurate data and reports.

  In this blog, we will discuss why Excel is not a sustainable choice to accomplish lease accounting compliance, and why lease accounting software is critical to ensure accurate, confident compliance.

  1. Lease terms constantly change, and it’s hard to keep up

  As leases change (expire, terminate, etc.), it’s virtually impossible to keep track of each change using Excel. One of the main reasons this is so difficult to do manually is due to the large volume of leases held by organizations. Businesses often have hundreds, even thousands of leases, each with their own unique terms that regularly need to be tracked to ensure accurate lease accounting reports.

  Unlike Excel, a fully integrated lease management and accounting technology solution is designed to centralize lease data in one location and, therefore, support ongoing lease maintenance. This enables you to view and maintain lease clauses and options under one single source of truth – without having to manually sift through data. Lease management software simplifies and streamlines the process of updating lease data, which ensures always accurate, reliable lease financials required for compliance.

  For example, technology like Visual Lease provides automated critical date alerts so you can always know when leases require action. Excel lacks these built-in tools, which therefore puts you at risk of missing important options within your leases.

  2. Lease accounting calculations are complex and time consuming

  The calculations required to generate journal entries and disclosure reports for ASC 842 must be accurate to achieve and sustain compliance. Automated lease accounting technology is the only way to confidently create reliable, accurate reports.

  Excel doesn’t have the capability to support the unique nuances required for lease accounting calculations. Utilizing Excel for lease accounting will likely take a lot of time and resources to produce calculations, and you may not be able to rely on those calculations, as there isn’t an efficient, sustainable way to validate accuracy. Even if only one element of your Excel formula is off base, it can negatively impact your calculated numbers – and you may not even realize the error before it’s too late. Additionally, Excel has a limit on the number of transactions that can be tracked and reported.

  Lease accounting technology automates these otherwise complex reports and calculations, which saves you significant time that would be spent manually producing them in Excel, and also ensures the calculations are trustworthy. In fact, lease accounting software like Visual Lease provides proven calculations that are backed by a SOC I Type II audit.

  3. Excel spreadsheets are prone to human error

  Lease accounting is too important to risk manual errors. Just one mistake could lead to a failed audit, which is why lease accounting automation is so critical.

  Using Excel to produce disclosure reports will typically raise red flags during your audit. Your lease data is already subject to a much higher degree of scrutiny by your auditors due to the new lease accounting standards, especially for initial adoption, so when it’s time for your audit, auditors appreciate a defined, reliable process that eliminates the room for human error within calculations.

  An auditor knows if you utilize a lease accounting solution that is backed by a SOC I Type II report, your financial reporting and calculations should be reliable, and they won’t need to spend as much time testing the detailed transactions as they would with manual spreadsheets.

  If you use Excel, auditors will most likely need to take a different approach to their auditing process, which can be time-consuming and costly. For instance, they may need to select a larger sample size of transactions to reliably test the details of your Excel calculations.

  It begs the question, are you really saving money (and time) by using Excel instead of proven lease accounting technology? A failed audit can lead to increased fees and fines, along with damage to your business’ reputation. Why put yourself in a position where this can easily happen with Excel when you don’t have to?

  4. Excel lacks historical data required for audits

  Imagine inputting lease data into an Excel spreadsheet and the next day there are numerous changes to the data – you don’t know who made the changes and when. As leases change throughout the year, there needs to be an effective, reliable way for departments to capture any lease modifications to their portfolio, so that their lease data stays up to date. Doing this in Excel requires constant manual intervention and upkeep and can lead to a lot of questions raised by auditors and other stakeholders across your organization.

  Providing transparent updates – with a complete audit trail of which update was made and when – will be incredibly important at the time of your financial audit. In Excel, there isn’t a reliable way to track who’s making changes and when the edits take place. This puts your business at risk of producing inaccurate, outdated information.

  Lease accounting software provides full audit trail functionality that enables you and your auditors to see who, what, where and when every change to your lease data has been made. Having the history of every change to your leases is necessary to create a reliable lease accounting process.

  Benefits of lease accounting software

  Excel is one of the most accessible tools in an accountant’s arsenal. However, it wasn’t built to handle the thoroughness and accuracy required for lease accounting. To achieve and maintain lease accounting compliance, you’ll need to invest in a solution that was designed to set your business up for success.
  Lease accounting isn’t just a one-and-done disclosure, it demands consistent upkeep of your entire lease portfolio. Lease accounting software is an integral part of conducting complex calculations with confidence, ensuring all your leases are up-to-date and achieving (and maintaining) lease accounting compliance.

  Ensuring ASC 842 compliance

  Lease accounting standards and constantly changing. This means spreadsheets need to be constantly reformatted to ensure you are remaining compliant with the latest regulation changes, requiring a robust software solution.

  When it comes to ensuring your leases are compliant, don’t default to a spreadsheet. Make the move to a third-party verified, built-for-compliance lease accounting software solution.

  Get Started!

  Want to ditch the spreadsheets and learn how Visual Lease’s lease accounting software can help you sustain compliance? Click here to see our solution in action.

  The post 4 Reasons to Stop Using Excel Spreadsheets for Lease Accounting first appeared on Visual Lease.]]> https://visuallease.com/why-you-should-retire-excel-in-lease-accounting/ Thu, 07 Dec 2023 13:50:31 +0000 https://visuallease.com/?p=7827 3 Reasons to Stop Relying on Excel Spreadsheets 1. Leases are constantly changing 2. Excel can lead to non-compliance with accounting standards 3. The Office of Finance has evolved 3...
  The post Should I Use Excel or Switch to Lease Accounting Software? first appeared on Visual Lease.]]>
  • 3 Reasons to Stop Relying on Excel Spreadsheets
  1. 1. Leases are constantly changing
  2. 2. Excel can lead to non-compliance with accounting standards
  3. 3. The Office of Finance has evolved
  • 3 Reasons to Switch to Lease Accounting Software
  1. 1. Centralize your lease data in one place
  2. 2. Be efficient & save time with lease management software
  3. 3. Reduce your risk and stay compliant
  • Switch to Visual Lease Accounting Software

  Does your business still use Excel for lease accounting? If so, you’re not alone — many other businesses do the same.

  But there’s a limit to what Excel can do for your organization’s lease portfolio. The reality is that leases are complex, dynamic documents that need a more comprehensive accounting option than Excel. Spreadsheets lack the ability to accurately and efficiently support large lease portfolios and the complex calculations required to comply with lease accounting standards.

  To stay compliant with accounting standards (ASC 842, IFRS 16, GASB 87) and avoid costly mistakes or fines, your business must move to a solution that is built to accommodate the dynamic nature of leases.

  Spreadsheets were never designed to handle processes as complicated as lease accounting. In fact, 100% of senior Real Estate executives believe it is impossible to sustain lease accounting compliance (e.g., ASC 842, IFRS 16, GASB 87) without proper lease administration practices in place.

  3 Reasons to Stop Relying on Excel Spreadsheets

  Here are three major reasons that businesses are unable to rely on Excel for sustained lease accounting compliance:

  1. Leases are constantly changing.

  Leases evolve over time — including expirations, terminations and renewals — making it almost impossible to manually keep track of every change within a spreadsheet. Without sufficient controls to track these ongoing changes, businesses are at risk of reporting on outdated lease data and missing important lease options. As organizations try to keep up with each changing lease, it won’t be long before accounting professionals leave Excel behind for good.

  2. Excel can lead to non-compliance with accounting standards.

  Lease accounting requires transparency in how businesses account for assets and liabilities. Auditors will check to ensure every lease is reliable and that your calculations are accurate. Just one mistake could lead to a failed audit, increased fees and fines, risk of legal action and more. There’s too much at risk to use Excel.

  3. The Office of Finance has evolved.

  For many organizations, the Office of Finance is now responsible for more strategic business initiatives and must accomplish more with less while navigating a weakening economy. Excel exacerbates this issue by requiring long hours of tedious, manual work that’s prone to human error.

  3 Reasons to Switch to Lease Accounting Software

  Lease accounting requires consistent upkeep of your entire lease portfolio. Investing in lease accounting software like Visual Lease helps ensure a seamless process and support ongoing compliance. Here’s why:

  1. Centralize your lease data in one place.

  Fully integrated lease management and accounting technology helps businesses closely maintain their lease data by organizing it in one location. As a result, teams can easily view lease clauses and options under a single source of truth without needing to manually sift through data. This, in turn, ensures accurate, reliable lease financials required for compliance.

  2. Be efficient & save time with lease management software

  As financial teams handle more responsibilities with increasingly limited resources, lease accounting software makes tracking leases easier and more efficient. In fact, according to Visual Lease’s 2022 Lease Market Analysis, private companies saved an average of 600 hours by using third-party lease accounting software.

  3. Reduce your risk and stay compliant.

  Lease accounting tools circumvent the human errors that often occur in Excel. In particular, Visual Lease automates otherwise complex reports and calculations and explains its calculations in every screen, leading to a more confident, reliable financial report. Additionally, when your business uses lease accounting software, auditors will have quick and easy access to your financial reporting and calculations.

  Excel wasn’t designed to handle the in-depth, complex work required for lease accounting. And since leases are often a company’s second-largest expense, relying on Excel isn’t worth the risk of costly audits and fines. Instead, investing in a lease accounting software solution like Visual Lease ensures your business can stay compliant, avoid costly fees, identify cost-saving opportunities and leverage leases as a more strategic business asset.

  Switch to Visual Lease Accounting Software

  Visual Lease makes the transition from Excel to lease accounting software easy, offering an intuitive platform with automated data input, standardized reporting, and compliance tracking. Our proven methodology will make the switch from spreadsheets to software quickly and efficiently.

  Request a demo today and make the switch!

  The post Should I Use Excel or Switch to Lease Accounting Software? first appeared on Visual Lease.]]> https://visuallease.com/lease-liabilities-the-true-impact-on-the-balance-sheet/ Wed, 06 Dec 2023 13:15:29 +0000 https://visuallease.com/?p=2707
  

  • How to do Lease Liability Calculations
  • Calculating present value of future payments
  • Changes for Periodic Remeasurements for Lease Liabilities
  • What is a Right of Use (ROU) Asset?
  • How to Calculate ROU for Leases?
  • Example of Lease Liabilities on a Balance Sheet
  • Example of Changes in Lease Liability Reporting
  • Performing Lease Accounting Calculations

  The new lease accounting standards, ASC 842 and IFRS 16, bring greater visibility into corporate lease obligations. For many companies worldwide, the impact on their balance sheet is expected to grow significantly. In fact, overall balance sheets could increase by as much as $2 trillion due to the accounting change, according to the Wall Street Journal.

   

  Although the new lease accounting rules have affected the balance sheets for many companies, will they also impact business valuations? How have private companies, which have transitioned since December 15, 2021, to the new ASC 842 standards, been affected?

  Request Demo

  

  In this article, we’ll look at the true impact ASC 842 and IFRS 16 have on lease liability.

  How to do lease liability calculations

  Under the new lease liability calculation rules, there are a number of assumptions you need to make. These include:

  • The lease’s residual value guarantee
  • Any rights to exercise options for renewal, termination, or purchase

  The residual value guarantee — the estimated fair value of the lease upon termination — and additional options are used as an estimate of probable amounts owed.

  Calculating present value of future payments

  Using these assumptions, you need to calculate the present value of the minimum future lease payments. The discount rate can be the rate implicit in the lease, which is the rate where lease payments and unguaranteed residual value are equal to the fair value of the asset and its associated costs for the lessor.

  If the implicit rate isn’t known, you can use your organization’s incremental borrowing rate (IBR). According to IASB, IBR is the rate that the lessee could realistically borrow the funds necessary for a similar asset under similar terms.

  Changes for Periodic Remeasurements for Lease Liabilities

  These lease liability calculations will need to be remeasured periodically, as the assumptions you make at the inception of a lease often change over time. Not only might the rate or payment estimates vary, but the lease agreement itself could change due to abandonments, asset impairments, and other modifications.

  You’ll likely need to perform these calculations for nearly all of your leases, even if they were previously considered operating leases…
  Under the new lease accounting standards, nearly all leases must be brought onto the balance sheet with ROU asset and liability calculations.

  What is a Right of Use (ROU) Asset?

  For a lessee, a right-of-use or right-to-use lease asset is defined as the lessee’s right to occupy, operate or hold a leased asset legally owned by another party during a specific lease term. The new standards require you to record the actual right-to-use of the asset (i.e. the right to use a cargo truck) rather than the actual asset (i.e. the cargo truck itself). This means that the right-of-use asset is an intangible asset.

  How to Calculate ROU for Leases?

  The ROU asset is calculated starting from the initial liability of the lease, plus initial direct costs, plus prepaid (or accrued) lease payments, less any lease incentives received. 

  Written as a formula, this is how to calculate an ROU asset:

  Right-of-use (ROU) asset = 

  Lease liability present value of lease payments not yet paid at that date

  + initial direct costs incurred by lessee

  + or – any lease payments made at or before commencement date

  – applicable lease incentives received

  Example of Lease Liabilities on a Balance Sheet

  As stated above, accounting for leases under ASC 842 will likely have a material impact on your balance sheet going forward.

  In the past, operating leases were unrecorded liabilities, and the only accounts that appeared on balance sheets for these were prepaid or deferred rent.

  But now all operating leases except for short-term leases must be capitalized on the balance sheet. This is the most significant change under ASC 842, and one of the most substantial changes to accounting rules in decades.

  This is a 7-year real estate lease that, under the old rules, was classified as an operating lease. In the current accounting period (see above), the deferred rent balance of $23,610 is small in comparison to Total Assets of $9.8 million and Total Liabilities of $5.5 million. Notice that there’s no visibility into the nearly $2.5 million future obligation under this lease.

  

  Example of Changes in Lease Liability Reporting

  Under ASC 842, however, the impact is substantial. Using a discount rate of 5%, the present value of future payments is almost $2.3 million. This brings the Total Assets for the accounting period to $11.8 million, and Total Liabilities to $7.6 million. With no difference on the P&L between calculations, we’ve made $324,000 in lease payments, yet only reduced the lease liability on the balance sheet by $216,000.

  Keep in mind that this is just one lease among a potentially large portfolio of leases for real estate, equipment, and more. As you can imagine, these changes will significantly inflate balance sheets and could potentially impact the comparability of business valuations in the short-term.

  Performing Lease Accounting Calculations

  When you have multiple leases, it’s very challenging to manage the calculations required under the new lease accounting rules for each reporting period, especially if you’re using Excel spreadsheets. “Making the switch to lease accounting software is critical to automate lease liability calculations and ease the transition to the new standards for your business.

  Lease accounting software providers, like Visual Lease, ensure you’re compliant with the latest lease changes while easing the burden on your accounting team in terms of:

  • Managing your lease portfolio
  • Calculating lease liabilities
  • Meeting your reporting requirements

  Take the stress out of lease liabilities by contacting our team of experts today. Visual Lease makes it simple to streamline your lease liability calculations and ditch your Excel spreadsheets.

  If you want to see for yourself how Visual Lease can streamline your lease liability calculations, schedule a free demo now.
  Learn More
  
  The post The Impact of New Lease Accounting Standards on Valuations & the Balance Sheet first appeared on Visual Lease.]]> https://visuallease.com/what-does-completeness-assertion-mean-in-lease-accounting/ Tue, 05 Dec 2023 13:00:49 +0000 https://visuallease.com/?p=7709 What is completeness assertion in lease accounting? Auditing completeness under ASC 842 What is audited under completeness assertion? How to ensure accurate completeness assertions Getting started with lease compliance Inaccurate...
  The post What Does Completeness Assertion Mean in Lease Accounting? first appeared on Visual Lease.]]>
  • What is completeness assertion in lease accounting?
  • Auditing completeness under ASC 842
  • What is audited under completeness assertion?
  • How to ensure accurate completeness assertions
  • Getting started with lease compliance

  Inaccurate lease accounting can lead to a host of problems for an organization, such as wasting time and resources and a failed audit. In the final stages of the auditing process, accounting professionals will test the assertions in a company’s financial statements, including the completeness assertion. Let’s look at what completeness assertion is in lease accounting and how to ensure its accuracy when preparing for audits.

  What is completeness assertion in lease accounting?

  On a financial statement, completeness assertion affirms that the statement is thorough, includes and details all required items for a particular accounting period and that the organization’s entire inventory is included in the total inventory figure.

  In lease accounting specifically, the completeness assertion claims that all leases have been captured and properly capitalized on the balance sheet.

   

  Auditing completeness under ASC 842

  Completeness is a significant audit area for leases. With the ASC 842 standard, organizations must recognize assets and liabilities on the balance sheet for both operating and finance leases. It’s now crucial for companies—whether private or public—to have an accurate and thorough accounting of all leased assets to ensure completeness.

  What is audited under completeness assertion?

  When a business is audited under ASC 842, an auditor will assess completeness across several areas, including:

  • Lease calculations: Auditors make sure initial balances are calculated correctly and that lease expenses and ROU asset amortization are accurately recorded. They’ll also check to make sure all lease transactions are recorded within the stated period.
  • Quantitative and qualitative footnote disclosures: Auditors check footnote disclosures to ensure all information—including assets, liabilities, lease expenses, cash flow and more—are properly recorded. They also look at the qualitative information that explains what the numbers mean for the company.
  • Embedded leases: It’s easy to overlook or improperly record embedded leases, which are leases within a larger contract. Auditors make sure all embedded leases are clearly and correctly recognized in your company’s financial statements.

   

  How to ensure accurate completeness assertions

  With the new accounting standards, each lease under a business now directly impacts the balance sheet. Not having an accurate, complete representation of all leases could result in an understatement of assets and liabilities.

  As a result, businesses must identify all arrangements that meet the definition of a lease per ASC 842 to ensure completeness. Ignoring this step can lead to a waste of time, money and professional resources, especially during audits, along with costly fines or penalties if financial statements are misrepresenting leased assets.

  Identifying a complete population of leases can be a large undertaking, depending on how centralized a business’ operations are. Typically, this process involves inquiries with department heads along with a detailed review of accounts payable. Because of this, it’s important to maintain seamless and ongoing communication across departments.

  Getting started with lease compliance

  Companies that are in the process of adopting ASC 842 may also find they need new systems or protocols to preserve completeness on an ongoing basis. The right lease administration and accounting software can help save time and resources by enabling teams to regularly capture all details of leased assets as well as efficiently compile all completeness evidence before audits.

  Interested in lease accounting?

  Take the next step and schedule a demo with Visual Lease to ease your lease accounting needs today!

  The post What Does Completeness Assertion Mean in Lease Accounting? first appeared on Visual Lease.]]> https://visuallease.com/asc-842-lease-accounting-excel-templates/ Wed, 01 Nov 2023 13:00:32 +0000 https://visuallease.com/?p=8849 Using ASC 842 Excel Templates How to Create Customized ASC 842 Excel Templates Best Practices for Data Entry and Formula Setup Best Practices for Document Organization Common Challenges with ASC...
  The post ASC 842 Lease Accounting Excel Templates first appeared on Visual Lease.]]>
  • Using ASC 842 Excel Templates
  • How to Create Customized ASC 842 Excel Templates
  • Best Practices for Data Entry and Formula Setup
  • Best Practices for Document Organization
  • Common Challenges with ASC 842 Excel Templates
  • ASC 842 Excel Templates vs Lease Accounting Software
  • Leaving Cumbersome Spreadsheets for a Purpose-Built Platform

  The ASC 842 lease accounting standard represents a significant shift in how organizations report their leases. Before ASC 842, operating leases were not included on the balance sheet, which neglected to provide a full picture of cash flows from leases. This meant companies and investors were unable to identify how much debt was carried within a business’ lease obligations.

  The new lease accounting standard requires organizations to include operating leases and financial leases on the balance sheet, which increases visibility into leasing costs and arrangements. This ensures an accurate depiction of company financials. Compliance with ASC 842 is essential for transparency, accuracy, and financial accountability.

  The calculations that are involved in staying compliant are extremely susceptible to error – particularly if done without automation.  However, many individuals and organizations initially turn to Excel templates for managing their lease accounting needs. In this blog post, we will explore both Excel templates and technology options for ASC 842 compliance.

  Using ASC 842 Excel Templates

  Excel templates can seem like a convenient and cost-effective solution for ASC 842 lease accounting. They offer flexibility in customization and can be tailored to an organization’s specific needs. However, setting up and managing Excel templates for ASC 842 compliance comes with its own set of challenges.

  How to Create Customized ASC 842 Excel Templates

  Setting up Excel templates for ASC 842 can be a time-consuming process. You’ll need to design templates that accurately capture all lease data, including lease terms, payments, and commitments. Creating these templates from scratch can be complex, and errors in template design can lead to inaccuracies down the line. That said, here are some tips to get you started:

  Step 1: Define Your Lease Data Categories

  Before you start building the template, it’s crucial to identify the data categories you need to track to comply with ASC 842. Common categories include:

  • Lease Details: Lease ID, lease term, commencement date, termination date, etc.
  • Payment Information: Monthly/quarterly/yearly lease payments, initial direct costs, etc.
  • Lease Modifications: Any changes or modifications to the lease terms.
  • Discount Rate: The rate used to calculate the present value of lease payments.
  • Lease Liability and Right-of-Use (ROU) Asset: Calculations of these values over time.
  • Lease Classification: Operating or finance lease classification criteria.
  • Lease Documents: Attachments for lease agreements, amendments, disclosures, etc.

  Step 2: Create a New Excel Spreadsheet

  Open Excel and create a new blank spreadsheet. You can start with a clean sheet or use Excel’s pre-designed templates as a starting point.

  Step 3: Set Up Columns and Headers

  In your spreadsheet, create columns for each data category identified in Step 1. Label each column with appropriate headers, such as “Lease ID,” “Commencement Date,” “Lease Term (Years),” “Monthly Payments,” and so on. You can also add headers for any additional information, such as lessor details, lease modifications, and classification criteria.

  Step 4: Format and Customize the Template

  Format the columns to ensure that data is displayed correctly. You may want to adjust column widths, apply cell formatting (e.g., date format, currency format), and add borders for clarity.

  Customize the template further by adding dropdown lists, data validation, or conditional formatting to enforce data consistency and accuracy. For example, you can create dropdown lists for lease classification options or lease modification types.

  Step 5: Add Formulas

  Incorporate Excel formulas to calculate values automatically. For ASC 842 compliance, you’ll need to calculate the present value of lease payments, lease liability, and ROU asset. These calculations involve using the discount rate and the lease payment schedule.

  For instance, you can use the NPV (Net Present Value) function to calculate the present value of lease payments over time.

  Step 6: Set Up Tabs and Document Management

  Create separate tabs or sheets within the Excel file for lease documents and attachments. Each document should be appropriately labeled and organized for easy reference.

  Step 7: Testing and Validation

  Before using the template for actual lease accounting, thoroughly test it with sample data to ensure that calculations and formulas work correctly. Validate the template’s accuracy against known lease scenarios.

  Step 8: User Training

  Provide training to the relevant personnel on how to use the template effectively and input data accurately.

  Remember that while this basic Excel template can help you get started with ASC 842 lease accounting, as your organization’s lease portfolio grows, and complexity increases, you may want to consider transitioning to specialized lease accounting software to streamline the process and ensure compliance more efficiently. Such software offers automation, audit trails, and advanced reporting capabilities, reducing the risk of errors and enhancing accuracy.

  Best Practices for Data Entry and Formula Setup

  When using Excel for ASC 842 lease accounting, implementing best practices for data entry and formula setup is crucial to ensure accuracy, compliance, and efficient lease management. Here are some best practices to consider:

  • Consistent Data Input: Ensure that lease data is entered consistently and uniformly throughout the spreadsheet. Use standardized naming conventions and units (e.g., dollars, square feet, months).
  • Data Validation: Implement data validation rules to prevent incorrect or inconsistent data entry. Use dropdown lists, date validation, and other data validation features to guide users.
  • Data Review: Periodically review and audit the data entered into the spreadsheet for accuracy and completeness. Regularly check for errors, missing information, or discrepancies.
  • User Training: Provide training to the individuals responsible for data entry. Ensure they understand the ASC 842 requirements and how to accurately input lease data into the spreadsheet.
  • Documentation: Document data sources, assumptions, and any changes made to lease agreements or data. This documentation is crucial for audit purposes and maintaining a clear audit trail.

  Formula Setup Best Practices:

  Excel templates require meticulous data entry to ensure accuracy. Formula setup can also be prone to human error. Mistakes in data entry or formulae can lead to incorrect calculations, potentially resulting in non-compliance with ASC 842. Keep these tips in mind:

  • Consistent Formulas: Use consistent formulas throughout the spreadsheet to calculate values like the present value of lease payments, lease liability, and ROU asset. Avoid mixing different formulas or calculation methods.
  • Cell References: Use cell references (e.g., cell names or structured references) instead of hardcoding values within formulas. This makes it easier to update data without having to modify the formulas manually.
  • Check Formulas for Accuracy: Double-check all formulas for accuracy and ensure that they are correctly referencing the appropriate cells and ranges.
  • Use Named Ranges: Define named ranges for critical data ranges or input cells. Named ranges make formulas more readable and easier to manage.
  • Separate Calculations: If your spreadsheet includes complex calculations, consider separating them into different worksheets or sections. This enhances the clarity of the workbook and makes it easier to troubleshoot issues.
  • Formula Auditing Tools: Excel offers built-in auditing tools such as the “Trace Precedents” and “Trace Dependents” functions. Use these tools to trace the flow of data and formulas within your spreadsheet.
  • Error Handling: Implement error handling in your formulas, such as IFERROR or IF statements, to provide meaningful error messages or alternative calculations in case of errors.
  • Documentation: Document complex formulas and calculations for reference and troubleshooting. Include explanations of how the formulas work and any assumptions made.
  • Regular Review: Regularly review and validate the accuracy of your formulas, especially if there are changes to lease agreements or data inputs. Ensure that formulas remain up-to-date and compliant with ASC 842 requirements.
  • Version Control: Implement version control practices to keep track of changes made to formulas. Clearly document when and why changes were made.

  Best Practices for Document Organization

  Keeping track of lease documents within Excel templates can be challenging. Without a centralized repository, it becomes easy to misplace or lose critical documents, which can create audit complications and compliance issues. Here are some best practices for document organization for ASC 842 excel sheets:

  1. Use Separate Tabs or Worksheets: Create separate tabs or worksheets within your Excel workbook to store different types of lease documents. For example:
  • One tab for lease agreements
  • Another for lease amendments
  • A tab for disclosures and correspondence
  • A separate tab for audit documentation
  2. Clear and Consistent Naming Conventions: Develop a clear and consistent naming convention for your documents. Include relevant information such as the lease ID, document type, and date. For example: “LeaseID_Agreement_2023-10-24.pdf.”
  3. Folder Structure: Consider creating a folder structure outside of Excel to complement your organization. Store actual documents in folders based on lease ID or categories (e.g., active leases, terminated leases, amendments). Excel can reference these documents using hyperlinks or file paths.
  4. Hyperlinks: Use hyperlinks within your Excel spreadsheet to directly link to the corresponding documents stored in your folder structure. This allows easy access to documents with a single click.
  5. Document Tracker: Create a document tracking table or list within Excel that includes columns for document name, document type, lease ID, location (file path or hyperlink), and any additional notes or comments.
  6. Version Control: If you have multiple versions of lease documents (e.g., lease agreements with amendments), clearly indicate the version number or date in the document name. Keep the most recent version easily accessible.
  7. Document Index: Consider creating an index sheet within your Excel workbook that lists all lease documents with their associated lease IDs and types. This can serve as a quick reference guide to locate documents.
  8. Color Coding and Formatting: Use color coding or formatting to highlight critical information or identify document status. For example, you could use different colors to distinguish between active leases and terminated leases.
  9. Document Metadata: Include metadata in your Excel spreadsheet, such as lease start and end dates, lessor information, and lease classification. This allows you to quickly filter and sort documents based on key criteria.
  10. Regular Auditing: Periodically review your document organization system to ensure that it remains up-to-date and compliant with ASC 842 requirements. Remove obsolete documents and update document links if necessary.
  11. Backup and Security: Ensure that you have appropriate backup and security measures in place for your document storage system, especially if it contains sensitive lease information.
  12. Training: Train your team members on the document organization system to ensure everyone understands how to access and manage lease documents effectively.

  Common Challenges with ASC 842 Excel Templates

  While Excel templates offer a degree of flexibility, they come with several inherent disadvantages. This is especially important when documenting lease agreements because it can cause financial metrics to be incorrect, leading to penalties. Here are some of the common challenges when using excel templates:

  1. Data Accuracy

  Human errors in data entry and formula setup can lead to inaccuracies in financial reporting, potentially resulting in compliance violations and financial penalties.

  2. Security Risks

  Excel files are susceptible to security breaches. Sensitive lease data may be at risk if proper security measures are not in place, jeopardizing data privacy and compliance.

  3. Version Control

  Managing multiple versions of Excel templates can be confusing and prone to errors. Ensuring that everyone is working on the latest version can be challenging, leading to data inconsistencies.

  4. Audit Complications

  During audits, Excel templates can complicate the process. Auditors may spend significant time verifying data accuracy and formulae, which can lead to additional audit costs and delays.

  Excel Templates vs Lease Accounting Software for ASC 842

  Transitioning to specialized lease accounting software like Visual Lease offers several advantages over Excel templates:

  1. Data Accuracy and Automation

  Lease accounting software automates data entry and calculations, reducing the risk of errors and ensuring compliance with ASC 842.

  2. Enhanced Security

  Lease accounting software typically comes with robust security measures, safeguarding sensitive lease data from potential breaches.

  3. Version Control and Collaboration

  Software solutions facilitate version control and collaboration among team members, ensuring that everyone is working with the latest, most accurate data.

  4. Audit Readiness

  Lease accounting software streamlines audit processes by providing auditors with easy access to accurate, well-organized lease data.

  Leaving cumbersome spreadsheets for a purpose-built platform

  While Excel templates may initially seem like a cost-effective solution for ASC 842 lease accounting, their limitations and potential pitfalls can lead to compliance issues, security risks, and inaccuracies. To ensure compliance with ASC 842 and streamline lease accounting processes, organizations should consider transitioning to specialized lease accounting software like Visual Lease. Making this transition can save time, reduce errors, enhance security, and ultimately contribute to more accurate and efficient lease accounting practices. Learn more about switching from Excel to Visual Lease.

  • 

    Verified User in Transportation/Trucking/Railroad
    Enterprise (> 1000 emp.)

    May 10, 2023

    Visual lease allows us to move away from manually tracking hundreds of lease in excel and does all the heavy lifting for us.

    Posted on
  • 

    Randy O.
    Enterprise (> 1000 emp.)

    May 17, 2023

    Before Visual Lease we tracked everything in Excel. With over 70 leases now, it was a win win situation!

    Posted on
  • 

    Sungmo Y.
    Enterprise (> 1000 emp.)

    Nov 4, 2022

    ASC 842 reporting. This was a huge project for us in 2019 as we prepared for the transition from ASC 840 to ASC 842 and the annual audit. We were tracking everything using Excel before and, without Visual Lease, it would have been really difficult.

    Posted on
  • 

    Verified User in Government Administration
    Enterprise (> 1000 emp.)

    Oct 26, 2022

    “We initially used Excel to track key data and journal entries. Now we use VL to perform all calculations and report on our financials, saving us time and less human error in our calcs.”

    Posted on
  • 

    Adam B.
    Mid-Market (51-1000 emp.)

    May 17, 2022

    This software streamlines our Accounting for leases and completely replaces our existing Excel solution (for both GAAP and IFRS)

    Posted on
  • 

    Ryan B.
    Enterprise (> 1000 emp.)

    Oct 20, 2022

    The ease of use and the lease accounting function which allows you to run multiple lease calculations and scenarios for a lease. It has allowed us to move away from excel based spreadsheets and calculations and automate the calculations. Additionally we have realized great benefit from the centralized tracking and administration. We set up system alerts which send out emails to allow us to stay on top of upcoming term renewal windows so we can assure we make the best strategic decision.

    Posted on
  • 

    Andrew G.
    Mid-Market (51-1000 emp.)

    Oct 22, 2020

    The biggest problems we have solved with Visual Lease are the ASC 842 accounting entries and having a great way to store and calculate hundreds of leases. These calculations are far more accurate than anything an excel could do.

    Posted on
  • 

    Verified User in Hospital & Health Care
    Enterprise (> 1000 emp.)

    Oct 22, 2020

    I can easily make modifications to a lease (extension, renewal, payment amount change) and the system will accurately calculate the updated lease schedule and generate the appropriate accounting entries. This is so much better than our previous Excel system which was very manual.

    Posted on
  
  
  The post ASC 842 Lease Accounting Excel Templates first appeared on Visual Lease.]]> https://visuallease.com/what-are-the-roles-of-lessors-and-lessees-in-lease-accounting/ Wed, 01 Nov 2023 13:00:17 +0000 https://visuallease.com/?p=7702 Table of Contents What is a lessee? What is a lessor? Who is the lessor and lessee in a contract? Benefits for a Lessor vs Lessee How to approach accounting...
  The post What are the roles of lessors and lessees in lease accounting? first appeared on Visual Lease.]]>

  Table of Contents

  • What is a lessee?
  • What is a lessor?
  • Who is the lessor and lessee in a contract?
  • Benefits for a Lessor vs Lessee
  • How to approach accounting for lease agreements for lessor or lessee
  • Lessor accounting obligations
  • Lessee accounting obligations
  • Impact of ASC 842

  Lease contracts play an important role in the day-to-day of most organizations. But does your business thoroughly understand each party’s responsibilities? What about the benefits? These answers are critical to maintaining accurate and healthy lease accounting.

  What is a lessee?

  A lessee is an individual or entity that rents or leases property, equipment, or other assets from another party, known as the lessor. In a lease agreement, the lessee is granted the right to use the leased asset for a specified period of time in exchange for regular payments, typically referred to as rent or lease payments.

  What is a lessor

  A lessor is an individual or entity that owns an asset and leases or rents it out to another party, known as the lessee, in exchange for regular payments, usually called rent or lease payments.

  Who is a Lessor vs. Lessee in a Lease Agreement?

  Under a contractual lease obligation — be it commercial real estate, equipment or vehicles — there is always a lessor and a lessee. A lease is generally defined as a contractual arrangement in which one party, the lessor, provides an asset for use by the other party, the lessee. This arrangement is based on periodic payments for an agreed amount of time.

  Benefits for a Lessor vs Lessee

  Lease contracts offer distinct advantages for both lessors and lessees, contributing to their respective financial strategies and operational efficiencies.

  Benefits for a Lessor:

  1. Income Generation: By leasing out assets, lessors can generate consistent income through periodic lease payments, providing a steady revenue stream.
  2. Asset Utilization: Lessor can maximize the utilization of their assets by leasing them out to lessees, ensuring that the assets are not idle and generating returns.
  3. Risk Mitigation: Lessor retains ownership of the asset, allowing them to mitigate certain risks associated with ownership, such as maintenance and depreciation.
  4. Portfolio Diversification: By leasing out multiple assets across various industries or sectors, lessors can diversify their investment portfolio and reduce overall risk.

  Benefits for a Lessee

  1. Cost-Efficiency: Lessees can access and use high-value assets without the need for significant upfront capital investment, preserving their cash flow for other business operations.
  2. Flexibility: Leasing offers flexibility in terms of asset usage, allowing lessees to adapt to changing business needs without being tied down by long-term ownership commitments.
  3. Up-to-Date Technology: Leasing enables lessees to access the latest technology and equipment without the burden of owning outdated or obsolete assets, ensuring they remain competitive in their respective industries.
  4. Asset Management: Lessees can benefit from simplified asset management, as maintenance and upkeep responsibilities often fall on the lessor, reducing operational burdens.

  How to approach accounting for lease agreements for lessor or lessee

  Although different types of leases exist — such as finance and operating leases — the obligations have one thing in common. When it comes to lease accounting, leases must be reported accurately to meet regulatory compliance standards.

  Lessor accounting obligations

  Accurate accounting is vital to the health of any organization. As a lessor, accounting accuracy requires correctly classifying your leases—whether as sales-type, direct financing or operating.

  Under lease accounting standard ASC 842, ownership transfers to the lessee for accounting purposes for sales-type and direct financing leases. Sales-type leases require lessors to derecognize the underlying asset and instead recognize the lease’s net investment, selling profit or loss arising from the lease, and track the balance and interest income over time. Lessors record direct financing leases in a similar manner but defer the asset’s profit or loss.

  Operating leases give the lessee the right to use the asset but not ownership of it. Therefore, lessors record the asset, its related depreciation and lease payments in the books.

  Lessee accounting obligations

  Lessees must classify their leases as either finance or operating under the ASC 842 lease accounting standard. Both types of leases must appear in the organization’s balance sheet unless the term is 12 months or less, which is considered a short-term lease. For operating leases, lessees are expected to record payments as operating costs on the organization’s income statement.

  Impact of ASC 842

  How lease agreements are presented on balance sheets has changed for both lessors and lessees under ASC 842. Lessees now need to list all leasing obligations, including operating leases, on the balance sheet, categorizing them as either operating or finance leases. Lessors, who were already classifying leases, are less affected. Accurate classification and accounting are essential, and lease management software can assist in meeting these new requirements.

  Whether you are a lessor or a lessee, using a robust software solution like Visual Lease can help maintain accurate lease accounting — and protect the financial health of your business.

  The post What are the roles of lessors and lessees in lease accounting? first appeared on Visual Lease.]]> https://visuallease.com/how-to-calculate-the-present-value-pv-of-future-lease-payments-in-excel/ Mon, 30 Oct 2023 13:00:40 +0000 https://visuallease.com/?p=8845 Table of Contents How to Calculate the Present Value of Lease Payments in Excel Step 1: Organize Data Step 2: Use the PV Function Step 3: Repeat as Needed Cons...
  The post Calculating Present Value of Lease Payments first appeared on Visual Lease.]]>

  Table of Contents

  • How to Calculate the Present Value of Lease Payments in Excel
  • Step 1: Organize Data
  • Step 2: Use the PV Function
  • Step 3: Repeat as Needed
  • Cons of Using Excel: Changes in Lease Payment Schedule
  • The Importance of Lease Calculations in Compliance
  • Calculating the Present Value of Lease Payments with Visual Lease Accounting Software
  • Improving your Lease Management Process
  • Make the Switch from Excel to Visual Lease Software

  Leasing is a common practice for businesses of all sizes, offering flexibility and financial advantages. However, to accurately account for leases and comply with accounting standards like ASC 842, calculating the Present Value of Lease Payments (PV) is essential. While Excel is a commonly used tool for this task, there are better technologies to ensure compliance. In this article, we’ll walk you through the steps to calculate the Present Value of Lease Payments in Excel and highlight the importance of accuracy in lease calculations. We’ll also explore why switching to an established provider is a smart move for lease accounting.

  How to Calculate the Present Value of Lease Payments in Excel

  Excel is a versatile tool for various financial calculations, including determining the present value of lease payments. Follow these steps to perform the calculation:

  Step 1: Organize Data

  Before diving into calculations, ensure that you have all the necessary lease data organized. This should include:

  • Interest rate per period (rate)
  • Total number of payment periods (nper)
  • Payment amount for each period (pmt)

  Having this information at your fingertips will make the calculation process much smoother.

  Step 2: Use the PV Function

  In an empty cell, use the Excel formula for calculating the present value. The formula typically used is:

  =PV(rate, nper, pmt)

  • Rate: Enter the interest rate per period. Ensure that the rate is consistent with the payment frequency (e.g., annual rate for annual payments).
  • NPER: Input the total number of payment periods over the lease term.
  • PMT: Enter the payment amount for each period. Make sure to include any relevant negative sign (for outflows).

  After inputting these values, Excel will calculate the present value of lease payments, which represents the total value of future lease payments in today’s dollars.

  Step 3: Repeat as Needed

  If you have multiple lease agreements or different payment schedules, you can repeat the above steps for each lease to calculate their respective present values.

  Cons of Using Excel: Changes in Lease Payment Schedule

  The PV function in Excel is easy to use, but it is very limited in function. It cannot accommodate changes in the payment schedule during the lease term. That is why most users will utilize the NPV function instead. While it accommodates changes, each payment must be entered individually, even if the payments are unchanged, as well as periods where the payment amount is zero.

  Both PV and NPV only deal with full periods (usually based on a month, although other periods can be selected).  Sometimes, though, a partial period is required in the calculation of NPV, for example when the payment is not at the beginning or end of the calendar month. That can be done with Excel, but this requires creating a complex model.  Also, the payment methodology (beginning or end of period, see below) is important for making PV work with lease accounting schedules. This is an extra step in the PV or NPV functions, one not often used. This can create errors which are difficult to reconcile.

  The Importance of Lease Calculations in Maintaining Compliance

  Accurate lease calculations are crucial for several reasons, ranging from financial transparency and regulatory compliance to effective decision-making and risk management. Here are some of the most common reasons why having accurate lease calculations is important:

  • Financial Transparency: Accurate calculations ensure that your financial statements accurately represent your organization’s financial position, helping stakeholders make informed decisions.
  • Compliance: Regulatory standards like ASC 842 demand accuracy in lease calculations. Errors can lead to compliance violations and regulatory penalties.
  • Audit Preparedness: Accurate calculations make audit processes smoother, reducing the risk of audit issues and delays.
  • Budgeting and Planning: Precise lease calculations aid in budgeting and financial planning, helping organizations allocate resources effectively.
  • Contract Negotiations: Accurate calculations provide a strong foundation for lease negotiations, allowing organizations to make informed decisions about lease terms.

  Each of the lease accounting standards (ASC 842, IFRS 16, GASB 87) specifies methodology for calculating interest, straight-line rent, ROU Asset amortization, and Liability reduction.  If the present value calculation does not perfectly align with the schedule, the ROU Asset and Liability will not amortize to zero at the end of the lease term.  This is a red flag for auditors.

  Calculating the Present Value of Lease Payments with Visual Lease Accounting Software

  While Excel is a useful tool, it has limitations, and managing complex lease portfolios can be challenging. That’s where Visual Lease software comes in.

  Visual Lease can calculate the Net Present Value of a lease accounting schedule in one of two ways. The following describes these ways in terms of the Excel function NPV, and B1 through BN are the individual payments:

  • Beginning of the Period: This method deducts the payment amount from the principal, then calculates the periodic interest. The formula is NPV(Annual Rate/12, B2:Bn) + B1 .
  • End of the Period: This method calculates the periodic interest, then deducts the payment amount from the principal. The formula is NPV(Annual Rate, B1:Bn).

  If the initial period is partial (begins any day other than first of a month), the methods are as follows, referencing the Excel function PV. The platform creates individual present values for each period i as PV(Annual Rate/12,Period,,-Bi) where Bi is the payment for the ith period, and sums the values for the initial liability value, according to one of these methods:

  • Beginning of the Period: This method uses the full face value of the first payment. It then discounts the second payment by the fractional initial month. For each subsequent payment, it increases each subsequent period by adding 1 to the prior period value.
  • End of the Period: This method discounts the first payment by the fractional initial month. For each subsequent payment, it increases each subsequent period by adding 1 to the prior period value.

  The Net Present Value of payments affects the Right of Use Asset Starting Balance, Total Ending Liability Starting Balance, and Interest for all schedules affecting the balance sheet.

  Users can easily select their preference in the Net Present Value Calculation Method drop-down within VL. This can

  Visual Lease simplifies the process of calculating PV and offers numerous advantages:

  • Automation: Visual Lease automates lease calculations, reducing the risk of errors and saving you time.
  • Accuracy: With a dedicated platform for lease accounting, Visual Lease ensures accuracy in all calculations, helping you stay compliant with accounting standards.
  • Comprehensive Reporting: Generate detailed and customizable reports for better insights into your lease portfolio.
  • Centralized Document Management: Store and manage all lease documents in one secure location.
  • Audit Trail: Visual Lease maintains an audit trail, making it easier to track changes and ensure transparency.
  • Compliance: Visual Lease is designed to keep you compliant with the latest accounting standards, reducing the risk of regulatory issues.

  Improving your Lease Management Process

  Calculating the present value of lease payments is a critical aspect of lease accounting. While Excel can handle these calculations, it comes with limitations and potential risks. Transitioning to Visual Lease software not only simplifies the process but also offers enhanced automation, accuracy, compliance, and reporting capabilities. If you’re serious about lease accounting, Visual Lease is the smart choice to ensure accuracy and efficiency in your lease management processes.

  Making the Switch from Excel to Visual Lease Software

  When Excel can’t keep up with multiple leases and running reports is an extremely manual process, it’s time to consider a better option. Switching from Excel to Visual Lease is a straightforward process. Visual Lease’s proven migration methodology ensures completeness, consistency and sustainable workflows.

  

  Visual Lease offers an easy transition, and like our customers, your organization can quickly realize the benefits of using specialized lease management software:

  • CURO Group Holdings Corp. saved hundreds of hours with portfolio automation
  • Bassett Furniture gained 50% more efficiency by using VL as a system of record
  • PennState Health saved over 180 hours of work per year by integrating technologies
  • Efficiency: Visual Lease streamlines lease management, saving you time and reducing manual data entry.
  • Accuracy: With automated calculations, you can trust that your lease data is accurate.
  • Compliance: Visual Lease ensures compliance with ASC 842 and other accounting standards.
  • Advanced Reporting: Access advanced reporting and analytics to gain valuable insights into your lease portfolio.
  • Document Management: Store and organize all lease-related documents within the platform.
  • Audit Readiness: Visual Lease prepares you for audits with accurate and well-documented lease data.

  Switch to Visual Lease today to experience the difference.

  The post Calculating Present Value of Lease Payments first appeared on Visual Lease.]]> https://visuallease.com/leasehold-improvements-what-you-need-to-know-for-asc-842/ Wed, 25 Oct 2023 14:00:12 +0000 https://visuallease.com/?p=5658

  

  Table of contents: 

  • What are leasehold improvements?
  • Examples of leasehold improvements
  • Are Leasehold Improvements Considered Lease Incentives?
  • How leasehold improvements impact ASC 842

  As you navigate the complexities of ASC 842 compliance, you may be wondering how and when to account for leasehold improvements.

  What are leasehold improvements?

  From an accounting standpoint, leasehold improvements are any modifications, enhancements or additions made by a tenant to their leased space (or the “leasehold interest”) that add business value.

  Tenants often make these improvements to their leased spaces to:

  • Customize the layout and design of their leased space
  • Improve ergonomics and make the space more employee- or customer-friendly
  • Brand the leased space with a company’s look and feel

  Examples of leasehold improvements

  Leasehold improvements can be any update or change to a leased property’s interior finishes beyond what the landlord provides as standard.

  They may include upgrades to drywall, electrical, flooring, carpentry and similar features, as well as permanently affixed displays, shelving, partitions, lighting, signage and other enhancements that help customize the space.

  Leasehold improvements may be made at any time during the term of a lease — or before moving into a space.

  For instance, in a new shopping mall, a landlord typically provides a “vanilla box” that a retailer will want to customize with improvements — adding dressing rooms, sales counters and other features that will make the leasehold interest more valuable as a business location.

  Furthermore, enhancements that are not considered a leasehold improvement include modifications to exterior or shared spaces, as well as interior features such as data cabling, furniture, non-permanent fixtures or equipment that can be removed when the tenant moves out.

  Are Leasehold Improvements Considered Lease Incentives?

  Leasehold improvements and lease incentives are distinct concepts in the realm of leasing agreements. Leasehold improvements refer to modifications or enhancements made to a leased property by the tenant to better suit their specific needs or business operations. These improvements typically remain with the property at the end of the lease term. On the other hand, lease incentives are concessions offered by landlords to attract tenants, such as rent-free periods, cash allowances, or assistance with moving costs. While both leasehold improvements and lease incentives can enhance the overall leasing experience, they serve different purposes: the former focuses on customizing the space, while the latter aims to make the lease agreement more appealing to potential tenants.

  How do leasehold improvements impact ASC 842?

  Leasehold improvements are reported as property, plant and equipment (PP&E) assets on the balance sheet. ASC 842 does not change the way they are handled, unless a tenant uses a tenant improvement allowance to make their improvements.

  When a tenant makes leasehold improvements using a tenant improvement allowance, ASC 842 requires a different treatment than the previous accounting under ASC 840. Under ASC 842, a tenant improvement allowance is treated as a lease incentive that reduces the ROU asset. If the tenant improvement allowance is not yet received, the lease liability is also reduced in future minimum lease payments.

  Here are the basics you need to know about leasehold improvements relating to ASC 842 compliance:

  What is a tenant improvement allowance?

  A tenant improvement allowance (also called a TI allowance or TIA) may be offered to a tenant by a landlord, which the tenant may choose to use to pay for leasehold improvements. It is one of several types of lease incentives that a landlord may offer to attract tenants and is often part of lease negotiations.

  The TI allowance amount will be included in the lease, along with how it will be paid. For example, it may be offered as a rent discount, paid directly to contractors or provided as a reimbursement to the tenant after the work is complete. The lease may also stipulate what leasehold improvements the allowance may cover.

  Reporting a TI allowance for leasehold improvements

  Under ASC 840, a TI allowance (or other lease incentive) was generally reported as a separate liability. The liability would have been reduced on a straight-line basis and reduced rent expense.

  Now, under ASC 842, if a TI allowance is paid to a tenant up front, it reduces the tenant’s ROU asset, but adds a leasehold improvement asset in the amount that was paid. In other words, the tenant now has a lower lease cost and a separate monthly expense related to the leasehold improvement.

  For example, suppose an ROU asset is calculated at $1 million and the landlord offers a lease incentive of $100,000 in a TI allowance. The result would be a $100,000 reduction in the ROU asset and $100,000 in leasehold improvement (PP&E) assets:

  ROU asset $1,000,000 – TI allowance $100,000 = Total assets $900,000 lease + $100,000 PP&E

  Tracking and managing lease details

  Although leasehold improvements themselves are not affected by ASC 842, there are implications in the context of lease incentives and TI allowances as part of new lease negotiations.

  Understanding leasehold improvements, lease incentives and the latest accounting treatments is critical to compliance with ASC 842. At the very least, tenants should keep track of all leasehold improvement costs, since they are assets that can be amortized or depreciated.

  Leasehold improvements and lease incentives are just some of the critical details that need to be tracked for effective lease accounting and management. A technology solution like Visual Lease makes it easy for you to track these and other crucial aspects of your lease portfolio.

  To learn more, contact us at (888) 876-6500 — or to see Visual Lease in action, request a demo. 

  Read More Content About ASC 842
  

  

  ASC 842 Compliance Software

  

  ASC 842 Summary

  

  ASC 842 Balance Sheet

  The post Leasehold improvements: What you need to know for ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/is-your-lease-accounting-in-need-of-a-digital-transformation/ Mon, 23 Oct 2023 21:10:57 +0000 https://visuallease.com/?p=8810 Lease accounting and management have evolved into intricate processes, posing fresh challenges for financial leaders. From grappling with an accountant shortage to seeking enhanced lease flexibility during economic uncertainty and...
  The post Is Your Lease Accounting in Need of a Digital Transformation?  first appeared on Visual Lease.]]> Lease accounting and management have evolved into intricate processes, posing fresh challenges for financial leaders. From grappling with an accountant shortage to seeking enhanced lease flexibility during economic uncertainty and preparing for imminent ESG reporting obligations, the office of finance has never been in more need of a robust system of record and process automation. 

  Digital transformation necessitates a robust technology-driven framework, underpinned by effective controls, to navigate (and automate) the complexities of lease accounting and meet eventual ESG reporting standards.  

  To achieve digital transformation in lease accounting, organizations can consider these best practices: 

  Digitize your leases and centralize them in a dedicated system of record 

  Leases are complex and dynamic documents –  it’s critical that organizations understand and digitize the terms of their lease. Misunderstandings about financial obligations often result in delayed payments, overpayments, and missed opportunities for cost savings. By tracking leases systematically, organizations can optimize their portfolios and even identify opportunities for value creation.   

  For example: A company has 20 forklifts, split 10 each at 2 warehouses. One warehouse is 50% idle, while the other is overcapacity and oftentimes has forklifts down for service. Reallocating some of the assets to the overcapacity facility (portfolio optimization) saves money from excessive wear and tear and increases capacity.   

  A lease management system allows organizations to view and track key clauses, obligations and other lease information including master leases, subleases, lease options, critical dates and special scenarios in real estate, equipment, operating or any other leased asset. 

  Take Preemptive Action on ESG Reporting 

  With numerous ESG regulations already in place and more on the horizon, organizations must proactively prepare to meet these reporting requirements. Investors, employees, and customers are closely monitoring ESG disclosures, demanding greater transparency. Without the ability to report on environmental aspects of their leased and owned assets, such as water consumption and carbon emissions, property owners risk alienating key stakeholders. They may also find themselves ill-prepared to comply with forthcoming climate change regulations and reporting standards.  

  Providing organizations with environmental transparency aligns with their internal ESG objectives, making it an attractive proposition. By implementing robust lease controls and leveraging a carbon accounting tool, organizations can position themselves as pioneers in this space. 

  Lease accounting was never a walk in the park, and its complexities have only deepened with the introduction of ESG reporting standards. As these standards continue to expand, organizations and their accounting teams must adapt. Digitizing and implementing the right technology is the key to successful reporting and upkeep in this evolving landscape, ensuring teams can meet an expanding array of business requirements. 

  Discover more about the VL ESG Steward here. 

  The post Is Your Lease Accounting in Need of a Digital Transformation?  first appeared on Visual Lease.]]> https://visuallease.com/top-3-best-practices-for-lease-management/ Mon, 23 Oct 2023 14:00:04 +0000 https://visuallease.com/?p=8798 Lease management is more complicated than ever before. Tenants and landlords are navigating a lot of hurdles, including organizations’ need for greater flexibility – according to the Visual Lease Data...
  The post Top 3 Best Practices for Lease Management first appeared on Visual Lease.]]> Lease management is more complicated than ever before. Tenants and landlords are navigating a lot of hurdles, including organizations’ need for greater flexibility – according to the Visual Lease Data Institute companies are prioritizing agility within their leases, with 88% of senior Real Estate Executives reporting that companies are planning for physical space needs just one year or less in advance – and now ESG reporting requirements on the horizon. The standards released by the International Sustainability Standards Board (ISSB) are expected to be followed soon by guidelines from the SEC, adding another layer of complexity specifically for landlords who will be responsible for this reporting.

  All of these changes require the right technology-backed controls framework to successfully meet both lease accounting and ESG reporting standards. Here are three ways the right lease management can help organizations stay on top of these changes. 

  1. Ensure clear communication and documentation

  Leases are complex and dynamic documents –  it’s critical that tenants understand and can track the terms of their lease. Misunderstandings about expenses and what’s owed can often lead to late payments and negatively impact a tenant-owner relationship. This also helps property owners track tenant payments to identify more financially stable and accountable tenants who pay rent and other expenses on time. The right lease controls ultimately benefit both parties through improved communication and a better understanding of the lease agreements.

  2. Increase lease agility and flexibility

  Tenants increasingly want the flexibility to react to changing circumstances, whether that is a dynamic work schedule or an uncertain economy. The ability to track a tenant’s performance or occupancy through lease management will help inform property owners on how to structure future agreements and establish more individualized terms for each tenant. Lease management can also improve communication between both parties by allowing them to quickly convey messages like important dates about the building and potentially dangerous weather.

  3. Staying ahead of ESG reporting requirements

  ESG regulations are here and more are around the corner, so company leaders need to be planning ahead to stay in front of reporting requirements. This reporting is also likely to be closely watched by investors, employees and customers who all have indicated they expect to see greater transparency from companies when it comes to where things stand with ESG.

  Owners run several risks if they do not have the ability to report on their leased and owned asset portfolios’ environmental output – from water usage to carbon emissions and on. These risks include falling out of favor with key stakeholders, including employees, tenants and investors, and being wildly unprepared for climate change regulations and reporting standards. Having the ability to provide this level of environmental transparency to tenants will only gain in appeal as it allows them to use these metrics toward their own internal ESG goals as well. Implementing strong lease controls and the right tracking technology, like the VL ESG Steward, now will position these owners ahead of the rest. 

  The bottom line: The right lease controls will enable successful reporting within a complex system.

  Lease accounting has never been easy, and it’s only become more complicated with the introduction of new ESG reporting standards, which will ultimately fall to organizations and their accounting teams to manage and maintain. ESG standards are only expected to expand, which means companies will have to further adapt their accounting to suit regulations. The right controls in place will enable successful reporting and maintenance for teams that must meet a growing range of business needs. 

  Learn more about the VL ESG Steward here.

  The post Top 3 Best Practices for Lease Management first appeared on Visual Lease.]]> https://visuallease.com/understanding-californias-new-climate-disclosure-laws-sb-253-and-sb-261/ Wed, 11 Oct 2023 13:00:03 +0000 https://visuallease.com/?p=8751 California has taken a significant step toward addressing climate change by enacting the ground-breaking California Climate Accountability Package. This legislation not only sets the stage for comprehensive reporting of carbon...
  The post Understanding California’s New Climate Disclosure Laws – SB 253 and SB 261 first appeared on Visual Lease.]]>

  California has taken a significant step toward addressing climate change by enacting the ground-breaking California Climate Accountability Package. This legislation not only sets the stage for comprehensive reporting of carbon emissions but also expands the scope of companies impacted, going beyond publicly traded entities. 

  In this post, we’ll delve mainly into the details of SB 253, its implications, and the broader landscape of environmental disclosure.

  What is the California Climate Accountability Package?

  The California Climate Accountability Package comprises two bills, Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), which mandate both public and private companies operating in California to disclose their greenhouse gas (GHG) emissions as well as climate-related financial risk. These bills were signed into law by Governor Newsom on October 9, 2023.

  What is SB-253? Who does it impact?

  SB-253, at its core, establishes a robust reporting framework for carbon emissions. Unlike other environmental disclosure laws, SB-253 primarily focuses on carbon emissions and does not encompass additional factors like water waste or biodiversity standards. However, it goes further than future federal SEC guidelines, as it applies to both public and private companies with a revenue threshold of at least $1 billion, doing business in California – expanding the potential scope to a wide range of entities.

  What’s Included in SB-253:

  • Expanded Coverage: While the SEC regulations will apply primarily to publicly traded companies, SB-253 extends its reach to private companies that meet the revenue threshold, making it applicable to a more extensive group of businesses. The mandated Scope 3 disclosure brings many additional companies under coverage (regardless of their revenue).
  • Mandated Scope 3 Disclosures: One significant feature of SB-253 is the requirement for reporting on scope 3 emissions. Although it leaves room for interpretation, this expands the responsibility of businesses to account for indirect emissions, such as employee commutes and business travel.
  • Financial Risk Disclosure: SB-253 introduces the Climate-Related Financial Risks Act (SB-261), applicable to companies with a lower revenue threshold of $500 million. This aspect focuses on financial risk disclosure, emphasizing the need for companies to understand and report on the environmental impact of their operations.
  • Incremental Reporting: Companies will need to start gathering data for scope 1 and scope 2 emissions from January 2025, with the first reporting year set for 2026. For scope 3, data collection begins in January 2026. This gradual approach allows companies time to prepare for the reporting requirements.
  • Increasing Assurance Levels: The law outlines a transition from limited assurance to reasonable assurance for reporting by 2030. This progression emphasizes the importance of accurate and reliable reporting, requiring businesses to prove their emissions data through a full audit trail.

  SB-253 represents a significant shift in the landscape of climate disclosure, not only in California but potentially influencing environmental reporting practices nationwide. Its broader coverage, scope 3 requirements, and increasing assurance levels place a premium on accurate data collection and reporting.

  The Impact of SB-253:

  The California Climate Accountability Package is set to transform climate disclosure practices and emissions reporting for more than ~10,000 companies. Advocates argue that this enhanced accountability will drive large corporations, major greenhouse gas emitters, to reduce their carbon footprint. It also empowers consumers and regulators to identify laggard companies and push them toward climate action, while revealing firms with significant climate-related financial risks. Forward-thinking companies already measuring and disclosing their greenhouse gas emissions will benefit from the proposed reporting framework, which emphasizes their initiatives. 

  Businesses are gearing up for upcoming disclosures, like the SEC Climate Proposal, reflecting investors’ demand for consistent, reliable climate-related financial information. Many organizations are committed to achieving net-zero emissions, and transparency will enable investors to assess their progress. The new reporting requirements will also help identify value-creation opportunities through accurate carbon accounting, offering insights into emissions profiles and hotspots. These insights can lead to cost-of-capital reductions for sustainability-oriented firms and cater to consumers willing to pay premiums for eco-conscious brands or adjust their buying habits to reduce their carbon footprint.

  California’s SB-253 is a significant step toward comprehensive climate disclosure. It not only expands the reporting scope but also emphasizes the need for accurate data and reasonable assurance. Whether driven by compliance or operating in self-interests, businesses should recognize the importance of environmental reporting in a world increasingly focused on sustainability and climate action. SB-253 sets the stage for a more transparent and accountable future, where businesses must take responsibility for their carbon emissions.

  What is SB-261?

  SB 261, also referred to as the Climate-Related Financial Risk Act, is a California statute designed to enhance transparency regarding climate-related financial risks confronting certain businesses. This legislation mandates that companies with annual revenues exceeding $500 million must:

  • Compile biennial reports detailing their climate-related financial risks and strategies for risk mitigation.
  • Commence reporting by no later than January 1, 2026.
  • Adhere to the guidelines outlined in the Task Force on Climate-Related Financial Disclosure (TCFD) framework.

  In essence, SB 261 strives to shed light on the financial vulnerabilities businesses encounter due to climate change, promoting greater awareness and preparedness.

  How Can VL ESG Steward Help?

  For businesses affected by SB-253 and SB-261, tracking and reporting emissions accurately is paramount. VL ESG Steward provides a platform for capturing, tracking, and reporting on direct and indirect emissions, offering a full audit trail to ensure data accuracy. As regulations evolve, VL continues to enhance its capabilities to meet the specific reporting needs of businesses.

  The post Understanding California’s New Climate Disclosure Laws – SB 253 and SB 261 first appeared on Visual Lease.]]> https://visuallease.com/asc-842-practical-expedients-and-transition-requirements/ Tue, 10 Oct 2023 13:00:10 +0000 https://visuallease.com/?p=1997
  

  Table of Contents:

  1. What are Practical Expedients?
     1. Introduction to practical expedients in ASC 842 and IFRS 16 adoption.
  2. ASC 842 Transition Methods
     1. An overview of transition methods in ASC 842 designed to facilitate the shift from the previous lease accounting method to the new standard.
  3. Three ASC 842 Practical Expedients in One Package
     1. Understanding the all-or-nothing approach of the three expedients package.
  4. What does the ASC 842 Practical Expedients Package Mean for Lease Accounting and Compliance?
     1. Addressing implications like lease reclassification, embedded leases, and initial direct costs.
  5. Hindsight Expedient Applied to ASC 842 Transition Requirements
     1. Exploring the use of the hindsight expedient for lease classifications.
  6. Practical Expedient Combining Lease and Non-Lease Components
     1. Understanding an expedient for allocating fixed consideration across lease and non-lease components.
  7. Practical Expedient for Restating Prior Year Financials
     1. Explaining the expedient for restating financials under ASC 842.
  8. Practical Expedient for Short-Term Leases
     1. Details on the expedient for handling short-term leases under GAAP.
  9. Practical Expedient for Private Company Discount Rates
     1. Insights into using risk-free interest rates as an alternative to incremental borrowing rates.
  10. Practical Expedient for Land Easements
      1. Addressing the expedient related to land easements existing before the effective date of the new standard.
  11. Accounting Standards Update (ASU) 2023-01, Leases (Topic 842): Common Control Arrangements
      1. Overview of the ASU and its impact on accounting for common control leases.
  12. Practical Expedient for Related Party Leases
      1. Exploring the expedient for handling related party leases.
  13. IFRS 16 Practical Expedients
      1. An overview of practical expedients available under IFRS 16.

  What are Practical Expedients?

  Practical expedients are considerations, or shortcuts companies can elect to lessen their burden in the adoption of ASC 842 and IFRS 16. They were designed to provide relief for companies during the transition to the new standards.

  Why Practical Expedients Matter: Early Decision-Making

  In the time since FASB passed the new accounting standard ASC 842 in 2016, the organization has issued periodic updates to the codification for generally accepted accounting principles (GAAP). These Accounting Standards Updates (ASUs) include practical expedients that have been created to simplify ASC 842 transition requirements.

  As we mentioned in our blog on lease data collection tips, strategic accounting decisions need to be made early on, before data collection for FASB ASC 842 compliance begins. That includes choosing which practical expedients to use.

  ASC 842 Transition Methods

  Transition methods in ASC 842 are practical expedients designed to facilitate the transition from the previous lease accounting method to the new standard.

  Discount Package:

  The discount package allows lessees to apply a single discount rate to a group of leases with reasonably similar characteristics. This simplifies the process and saves time during the transition.

  Hindsight Package:

  The hindsight practical expedient permits lessees to use hindsight for lease renewals and purchase options when determining the lease term. However, this option is rarely chosen due to its complexity and potential accounting implications.

  Package of 3:

  The package of 3 expedient primarily benefits organizations during the transition phase. It allows lessees to avoid reassessing whether expired or existing contracts are or contain leases, reclassifying leases, and reevaluating initial direct costs for existing leases. This streamlines the transition process and reduces the burden of reassessing multiple lease aspects.

  Three ASC 842 practical expedients in one package

  Among the practical expedients created to ease the ASC 842 transition requirements is a package deal — three expedients that must be elected all together or not at all.

  When you elect this package of practical expedients, it must be applied consistently to all leases. In addition, you need to disclose that the three expedients have been used.

  Basically, these all-or-nothing practical expedients say that:

  1. You don’t need to reassess the lease classification for any expired or existing leases
  2. You don’t need to reevaluate whether any existing or expired contracts contain leases
  3. You don’t need to reassess previously recorded initial direct costs for any existing leases

  What does the ASC 842 practical expedients package mean for lease accounting and compliance?

  • No lease reclassification: Any lease that is classified as an operating lease under ASC 840 can remain an operating lease under ASC 842. Likewise, a lease classified as a capital lease under ASC 840 can remain a capital lease — though its name under ASC 842 is now “finance lease.” Keep in mind that this practical expedient only applies if there are no errors with the initial classification.

  If you want to reassess the classification of a lease, you certainly can — BUT that means reassessing all your leases, because this expedient cannot be applied selectively to only some leases and not others.

  • No reevaluation of embedded leases: As long as you have been correctly accounting for leases embedded in existing service and outsourcing contracts under ASC 840, you don’t have to reevaluate them. However, even if you elect the ASC 842 practical expedients package, you might want to look at your existing service and outsourcing agreements to be sure your embedded lease records are complete.

  • No reassessment of initial direct costs: For any existing leases, the initial direct costs that are capitalized under ASC 840 also qualify to be capitalized under ASC 842. For instance, ASC 840 says you could allocate a portion of your internal expenses — such as salaries for internal real estate staff — to initial direct costs. But ASC 842 defines initial direct costs as costs you incurred only because you signed a lease, such as broker fees or external legal costs.

  However, with this expedient, you don’t need to reassess those previously allocated internal costs according to the definition of initial direct costs under ASC 842. So, it saves you from reassessing initial direct costs and the resulting equity adjustments.

  Why elect the ASC 842 practical expedients package?
  This package of three expedients significantly reduces the time and effort you’ll need to spend going back to reevaluate lease accounting decisions made under the previous standards. It also helps to reduce the time and cost of preparing financial statements to meet ASC 842 transition requirements.
  However, you might not want to elect the package if you will benefit from lease reassessments. For example, if most of your operating leases would qualify as finance leases under ASC 842 and that reclassification would have an impact on EBITDA, you might decide not to elect the practical expedients package.
  Hindsight expedient applied to ASC 842 transition requirements

  Another of the ASC 842 practical expedients — hindsight — can be used either with the package of expedients described above or alone.

  The hindsight practical expedient says that when determining lease classifications, a company can consider the actual outcome of lease renewals, termination options, and purchase options that were previously evaluated. Specifically, for the periods that are being compared and restated, you can use hindsight to:

  • Determine the lease term based on the likelihood of exercising lessee options to extend or terminate a lease or to purchase the underlying asset
  • Assess any impairment of right-of-use assets

  The hindsight expedient must be applied to all leases during the comparative period. For a company with a large lease portfolio, that could be labor intensive and should also be considered when deciding whether to apply this expedient.

  Practical expedient combining lease and non-lease components

  Under ASC 842, a company needs to identify its fixed consideration and allocate it across both lease and non-lease components. This requires performing an analysis to determine a method of allocation for every contract.

  The problem is, it can be very difficult to determine the value of lease and non-lease components of a contract separately. In addition, the fixed consideration doesn’t include anything with variable costs, such as CAM, insurance, and taxes under most real estate leases.

  In response, this practical expedient spares you from having to perform analyses to determine allocation methods. Instead, you can simply calculate the present value of the fixed payments without having to perform an allocation to the lease and non-lease components.

  The advantage of this practical expedient is, once again, time savings. You don’t have to determine a method for allocating your fixed consideration, document that method for your auditors, and repeat the process for every lease.

  In addition, there is some flexibility to apply the expedient according to class of asset. For instance, you might choose to apply it to all your real estate leases but not your equipment leases, where the fair values for lease and non-lease components (such as maintenance) are easier to determine.

  However, keep in mind that if you elect this expedient, it must be applied consistently to all eligible non-lease components.

  Practical expedient for restating prior year financials

  Under ASC 842, lessees are required to recognize and measure their leases at the beginning of the earliest period presented in their financial statements. So, for example, a company adopting the new standard on January 1, 2020, would need to recognize and measure its leases as of January 1, 2018, in its comparative financial statements.

  To remove the burden of going back so far, this practical expedient provides the option to apply the new guidance at its effective date (in the example above, January 1, 2020) without having to adjust the comparative financial statements (in the example, 2019 and 2018). Instead, in this example, the company would recognize a cumulative adjustment in equity as of January 1, 2020.

  This practical expedient simplifies ASC 842 transition requirements, eliminating the need to record leases that expired prior to the effective date or consider the effects of lease modifications during the comparative periods.

  Practical expedient for short-term leases

  Under GAAP, a short-term lease is defined as a lease that is 12 months or less without a purchase option that the lessee is likely to exercise.

  The short-term lease exemption says you don’t have to capitalize those short-term leases and record them on your balance sheet for ASC 842. You can simply continue to treat them as operating leases under ASC 840.

  Electing this practical expedient will save you time in capitalizing your leases. However, while short-term leases may not be going on your balance sheet, you will still need to disclose them, and their value, in the notes of your financial statements.

  Practical expedient for private company discount rates

  This practical expedient offers a straightforward alternative to one of the more difficult components of the new standards: discount rates. The expedient says that private companies can use their risk-free interest rate in one of two circumstances:

  • Instead of calculating their incremental borrowing rate (IBR)
  • When there is no discount rate implicit in a lease contract

  If you don’t already know what your IBR is, applying this expedient offers an alternative to performing the complex IBR calculation. The downside is that the risk-free interest rate is typically very low, resulting in a higher liability on your books.

  Practical expedient for land easements

  Some companies have multiple land easements going back many years and may have accounted for those easements as leases. Other companies may have accounted for land easements as intangible assets.

  To simplify efforts to account for land easements, this practical expedient allows companies to choose to not apply the new leases guidance to land easements that existed before the effective date of the new standard.

  However, this may be done only if the easements were not previously accounted for as leases. In addition, companies must apply the new leases guidance for easements entered into or modified on or after the effective date.

  Accounting Standards Update (ASU) 2023-01, Leases (Topic 842): Common Control Arrangements

  The Common Control Arrangements, was issued by the Financial Accounting Standards Board (FASB) on March 27, 2023. The ASU addresses how private companies and not-for-profit entities that are not conduit bond obligors should account for leases between entities under common control.

  The ASU provides two main changes to the accounting for common control leases:

  1. A practical expedient that allows private companies to use the written terms of a lease, even if those terms are not legally enforceable, to determine the classification and accounting for the lease.
  2. A requirement that leasehold improvements between entities under common control be amortized over the useful life of the improvements, regardless of the lease term.

  The practical expedient is intended to simplify the accounting for common control leases and reduce the cost of compliance. The requirement to amortize leasehold improvements over the useful life of the improvements is intended to better reflect the economics of these arrangements.

  The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.

  Key provisions of ASU 2023-01:

  • Practical expedient: Private companies and not-for-profit entities that are not conduit bond obligors may elect to use the written terms of a lease, even if those terms are not legally enforceable, to determine the classification and accounting for the lease. This practical expedient is intended to simplify the accounting for common control leases and reduce the cost of compliance.
  • Leasehold improvements: Leasehold improvements between entities under common control must be amortized over the useful life of the improvements, regardless of the lease term. This requirement is intended to better reflect the economics of these arrangements.
  • Effective date: The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.

  Practical expedient for related party leases

  In the case of related party leases, a practical expedient allows private companies to use the written terms of a lease, even if those terms are not legally enforceable, to determine the classification and accounting for the lease.

  This practical expedient was introduced in Accounting Standards Update (ASU) 2023-01, Leases (Topic 842): Common Control Arrangements. The ASU was issued in response to concerns from private company stakeholders that they would need to seek legal counsel or extensively analyze their lease contracts to determine the legally enforceable terms of the arrangement. The practical expedient allows these companies to avoid this costly analysis and instead rely on the written terms of the lease.

  IFRS 16 Practical Expedients

  Policy Election for Short-Term Leases:

  Lessees can choose not to apply the lease standard to leases with a duration of 12 months or less. Instead, they can follow the previous lease accounting guidelines, recognizing lease payments as profit or loss on a straight-line basis over the lease term. This expedient can be applied on a lease-by-lease basis.

  • Advantage: Time-saving for accounting short-term leases.
  • Disadvantage: Different lease accounting procedures for short-term and long-term leases.

  Policy Election for Low-Value Assets:

  Lessees are not required to apply the new standard to leases of low-value assets. They can use the previous accounting guidelines and recognize lease payments on a straight-line basis.

  • Advantage: Time-saving for accounting low-value asset leases.
  • Disadvantage: Using two different lease accounting methods.

  Policy Election for Non lease Components:

  Lessees can combine lease and non lease components as a single, combined lease component. Non lease components are elements that transfer goods or services, such as parking expenses or annual maintenance.

  Alternatively, lessees can allocate the consideration in the contract on a relative standalone price basis if they choose not to combine lease and non lease components. Estimations may be required if standalone prices are unavailable.

  This policy election can be applied to all, some, or none of the underlying assets.

  • Benefit: Time-saving in accounting for lease and nonlease components together.
  • Impact: Larger liability and ROU asset, affecting debt ratios and bank covenants.

  Policy Election for Footnote Disclosures:

  By choosing this policy election, the lessee must present ROU assets separately from other assets and lease liabilities separately from other liabilities, either in the statement of financial position or footnotes.

  • Advantage: Simpler footnote presentation in financial statements.
  • Consideration: If leases are not significant, adding line items may dilute the reader’s understanding.

  Policy Election for Hindsight:

  Lessees can elect to apply the new lease standard to all or only the most recent reporting periods without restating prior periods. The cumulative impact should be reported in retained earnings.

  • Advantage: No restatement of prior periods required.
  • Disadvantage: Inconsistent reporting of leases for each period, as prior periods remain unchanged.

   

   

   

   

  Learn about expedients now, choose your options early!
  The ASC 842 practical expedients you elect to use will have a huge impact on:
  • What lease data you need to collect
  • How you need to break the data down
  • How you will configure your lease accounting system
  Learn More
  
  While a practical expedient might save you time, your decision must also consider its potential impact on your financial reporting. So, although FASB has extended the compliance deadline — giving private companies until 2021 to report their leased assets on balance sheets — it’s important to understand the implications and make your decisions about ASC 842 practical expedients as soon as possible.

  If you are unsure what to do, speak with your accounting advisory partner, who can help to guide you through the ASC 842 transition requirements and your practical expedient decisions.

  You can also visit the FASB website to see the latest practical expedients and other ASUs that have been issued.

  The post ASC 842 Practical Expedients first appeared on Visual Lease.]]> https://visuallease.com/unraveling-common-area-maintenance-cam-charges-a-comprehensive-guide/ Mon, 09 Oct 2023 13:00:49 +0000 https://visuallease.com/?p=8733 In the world of commercial real estate leasing, Common Area Maintenance (CAM) charges play a pivotal role, impacting both landlords and tenants. CAM rent, often referred to as CAM fees,...
  The post Unraveling Common Area Maintenance (CAM) Charges: A Comprehensive Guide first appeared on Visual Lease.]]> In the world of commercial real estate leasing, Common Area Maintenance (CAM) charges play a pivotal role, impacting both landlords and tenants. CAM rent, often referred to as CAM fees, can significantly influence a tenant’s overall occupancy costs. In this comprehensive guide, we will delve into the intricate details of CAM charges, demystifying what CAM encompasses, the intricacies of CAM fees in leases, how it differs from operating expenses and implications for lease accounting.

  What is Common Area Maintenance (CAM)?

  Common Area Maintenance, or CAM for short, refers to the costs associated with maintaining and operating common areas within a commercial property or complex. These common areas typically include lobbies, hallways, elevators, parking lots, landscaping, and shared facilities like restrooms or fitness centers. CAM charges are an additional expense that tenants may incur beyond their base rent.

  CAM Fees in Leases

  CAM fees are often a point of negotiation in commercial lease agreements. When tenants lease space in a commercial property, they may be required to pay a share of the CAM expenses. The specific terms and calculations for CAM fees can vary widely depending on the lease agreement.

  The calculation of Common Area Maintenance (CAM) fees can vary depending on the terms outlined in the lease agreement. While there is no one-size-fits-all formula, here’s a general overview of how CAM fees are typically calculated:

  • Pro-Rata Share: CAM fees are often allocated based on a tenant’s pro-rata share of the total leasable space within the commercial property. This means that the larger the space a tenant occupies, the greater their CAM fee responsibility.
  • Expense Pool: Landlords accumulate all eligible CAM expenses incurred during a specified period, usually a fiscal year. These expenses include property management fees, landscaping costs, utilities for common areas, janitorial services, repairs, and other qualifying expenditures.
  • Calculating Tenant’s Share: To determine a tenant’s CAM fee for the period, landlords divide the tenant’s leasable square footage by the total leasable square footage in the property. This ratio is then applied to the total CAM expenses for that period. The formula may look like this:

  (Tenant’s Leasable Square Footage / Total Leasable Square Footage) x Total CAM Expenses = Tenant’s CAM Fee

  • Annual Reconciliation: Typically, CAM fees are estimated at the beginning of the lease term based on expected expenses. After the fiscal year ends, landlords perform an annual reconciliation. They compare the estimated CAM fees paid by tenants with the actual expenses incurred during that period. Depending on the lease terms, tenants may be required to pay any shortfall or receive a credit for overpayment.
  • Caps and Limits: Some lease agreements may include caps or limits on the annual increase in CAM fees to protect tenants from steep cost escalations. This helps tenants maintain cost predictability.

  What Does Common Area Maintenance Include?

  Common Area Maintenance charges encompass a wide range of expenses associated with the upkeep and operation of shared spaces. These expenses can include:

  • Property Management: Costs related to property management services, such as salaries, administrative costs, and management fees.
  • Utilities: Expenses for common area utilities like electricity, water, gas, and sewer.
  • Landscaping and Grounds Maintenance: Costs for maintaining outdoor spaces, including lawn care, tree trimming, and landscaping.
  • Janitorial Services: Expenses for cleaning and maintaining common areas like hallways, restrooms, and lobbies.
  • Repairs and Maintenance: The cost of repairing and maintaining common elements, including HVAC systems, elevators, parking lots, and structural repairs.
  • Security: Costs associated with security services and systems that protect the property and its tenants.
  • Insurance: Common area insurance, which covers liability and property insurance for shared spaces.
  • Taxes: Some leases include property tax expenses as part of CAM charges.

  Review Your Lease Agreement Carefully

  When leasing commercial space, it’s crucial for tenants to carefully review the lease agreement, especially the sections related to CAM fees. Tenants should understand how CAM charges are calculated, what expenses are included, and the frequency of CAM reconciliations.

  Negotiating CAM Charges

  During lease negotiations, tenants can often seek to limit the scope of CAM charges or cap the annual increase in CAM expenses. These negotiations can help provide cost predictability and protect tenants from unexpected cost escalations.

  CAM vs. Operating Expenses

  While CAM charges and operating expenses share similarities in that they both involve the upkeep of a commercial property, it’s essential to distinguish between the two:

  • CAM Charges: CAM charges are specifically associated with maintaining and operating common areas shared by multiple tenants within a commercial property. These expenses are typically billed separately from the base rent and are allocated among tenants based on their pro-rata share of the property’s total leasable space. CAM charges often cover items like property management, landscaping, janitorial services, utilities for common areas, and common area repairs.
  • Operating Expenses: Operating expenses, on the other hand, encompass the broader costs associated with running the entire commercial property, including both common areas and tenant-occupied spaces. These expenses may include property taxes, insurance premiums, building-wide utilities, structural repairs, and administrative costs related to the property’s overall operation. Unlike CAM charges, which are usually billed separately, operating expenses are often incorporated into the base rent or charged as a separate line item in the lease agreement.

  CAM Considerations in Lease Accounting:

  CAM charges play a significant role in lease accounting, particularly under ASC 842, which governs lease accounting for both lessees and lessors. CAM charges are a common component of commercial lease agreements and have specific accounting implications:

  • Lessee Recognition of CAM Expenses: Under ASC 842, lessees are required to recognize the total lease expense over the lease term on their balance sheet. This expense includes not only the base rent but also any additional payments, such as CAM charges.
  • Separate Identification of CAM Charges: Lessees must account for CAM charges separately from the base rent. They should record CAM charges as an expense when incurred, just like rent payments. This requires keeping a clear record of CAM expenses as they are invoiced or reconciled throughout the lease term.
  • Initial Recognition and Annual Reconciliation: Initially, CAM charges are estimated based on the lease agreement’s terms, and this estimate is included in the lessee’s total lease liability. However, CAM charges are subject to annual reconciliation. Lessees must adjust their liability and recognize any under- or overpayment of CAM charges in their financial statements based on actual expenses incurred.
  • Balance Sheet Impact: Including CAM charges on the balance sheet as part of the total lease liability affects a lessee’s financial ratios and metrics, such as leverage ratios and asset-to-liability ratios. This transparency provides a more accurate representation of the lessee’s financial obligations.
  • Income Statement Impact: CAM charges are recognized as expenses on the lessee’s income statement, impacting the lessee’s net income and other financial metrics.

  Armed with this knowledge, both landlords and tenants can navigate the realm of CAM charges with greater clarity and confidence. Whether you’re a property owner or a tenant, understanding CAM is paramount for making informed decisions and ensuring a harmonious and transparent landlord-tenant relationship in the world of commercial real estate leasing.
  

  The post Unraveling Common Area Maintenance (CAM) Charges: A Comprehensive Guide first appeared on Visual Lease.]]> https://visuallease.com/lease-clause-ideas-for-landlords-creating-the-best-lease-agreement/ Wed, 04 Oct 2023 13:00:35 +0000 https://visuallease.com/?p=8731 As a landlord, one of the most critical aspects of your rental property business is the lease agreement. A well-crafted lease agreement not only protects your interests but also provides...
  The post Lease Clause Ideas for Landlords: Creating the Best Lease Agreement first appeared on Visual Lease.]]> As a landlord, one of the most critical aspects of your rental property business is the lease agreement. A well-crafted lease agreement not only protects your interests but also provides clarity for both you and your tenants. In this blog post, we’ll explore essential lease clause ideas for landlords, aiming to help you create the best lease agreement possible. We’ll also discuss the key elements that should be included in your lease agreement to ensure a smooth and harmonious landlord-tenant relationship.
  1. Clearly Defined Lease Term Specify the lease term clearly in your agreement. Whether it’s a year-long lease or a month-to-month arrangement, outlining the duration of the lease provides both parties with a clear understanding of their commitment.
  2. Rent Amount and Due Date Clearly state the monthly rent amount and the due date. Make sure to include information about late fees and acceptable methods of payment.
  3. Security Deposit Details Outline the amount of the security deposit required, the conditions under which it may be withheld, and the timeline for returning the deposit after the lease ends.
  4. Maintenance and Repairs Specify the responsibilities of both the landlord and tenant when it comes to property maintenance and repairs. Define what constitutes normal wear and tear and what falls under the tenant’s responsibility.
  5. Property Access and Inspections Detail how and when you, as the landlord, can access the property for inspections, repairs, or other legitimate reasons. Ensure you adhere to local laws regarding notice periods for entry.
  6. Subletting and Assignment Determine whether subletting or assigning the lease is allowed. If not, make it clear that the tenant cannot transfer the lease to another party without your written consent.
  7. House Rules and Policies Include any specific house rules and policies, such as restrictions on smoking, pet policies, or noise regulations. Be sure to communicate any consequences for violating these rules.
  8. Utilities and Services Specify which utilities and services are included in the rent, and which are the tenant’s responsibility. This prevents confusion and disputes over utility payments.
  9. Maintenance of Landscaping If your property has a yard or landscaping, define whether the tenant is responsible for its upkeep or if you, as the landlord, will handle it.
  10. Notice Period for Lease Termination Clearly state the notice period required for either party to terminate the lease agreement. This helps prevent misunderstandings and ensures a smoother transition.
  11. Dispute Resolution Include a section on how disputes will be resolved, whether through mediation, arbitration, or the legal system. A clear dispute-resolution process can save both parties time and money.
  12. Renewal Procedures If you offer lease renewal options, outline the process for renewal, including any changes to rent or terms.
  13. Insurance Requirements Specify whether the tenant is required to maintain renters’ insurance and provide details on the coverage required.
  14. Guest Clauses Define rules regarding guests, such as the maximum length of time guests can stay, and whether overnight guests must be registered with the landlord.
  15. Fee Protection Clarify any fees associated with the lease, such as application fees or fees for bounced checks. State the purpose of these fees and the circumstances under which they may apply.
  16. Exit Inspection Include a provision for an exit inspection and walk-through when the lease ends. This helps document the condition of the property and any potential deductions from the security deposit.

  Creating the best lease agreement for landlords involves careful consideration of these essential lease clause ideas. A well-crafted lease agreement not only safeguards your interests but also promotes a positive landlord-tenant relationship. Remember that local laws and regulations may impact the specific language and clauses in your lease agreement. By prioritizing clarity and transparency in your lease agreements, you can set the stage for a successful and hassle-free rental experience for both you and your tenants.

  The post Lease Clause Ideas for Landlords: Creating the Best Lease Agreement first appeared on Visual Lease.]]> https://visuallease.com/navigating-nonprofits-asc-842-regulations-what-you-need-to-know/ Mon, 02 Oct 2023 13:00:50 +0000 https://visuallease.com/?p=8730 Much like their for-profit counterparts, nonprofits must also follow specific financial reporting standards, including Accounting Standards Codification (ASC) 842. This blog post will delve into the essential aspects of ASC...
  The post Navigating Nonprofits & ASC 842 Regulations: What You Need to Know first appeared on Visual Lease.]]> Much like their for-profit counterparts, nonprofits must also follow specific financial reporting standards, including Accounting Standards Codification (ASC) 842. This blog post will delve into the essential aspects of ASC 842 regulations and answer common queries like whether ASC 842 applies to nonprofits and when it becomes effective for compliance. Additionally, we will explore the world of Generally Accepted Accounting Principles (GAAP) applied in nonprofit accounting.

  Understanding ASC 842

  ASC 842 is a set of accounting standards developed by the Financial Accounting Standards Board (FASB). These standards specifically pertain to leases and were introduced to enhance transparency in lease accounting, providing a more accurate representation of an organization’s financial position. While ASC 842 is primarily associated with for-profit entities, it is important for nonprofits to understand its relevance as well.

  Does ASC 842 Apply to Nonprofit Organizations?

  The short answer is yes, ASC 842 does apply to nonprofit organizations. The FASB’s guidance on lease accounting, including ASC 842, is generally applicable to all entities that follow GAAP accounting standards. Therefore, nonprofits are not exempt from complying with ASC 842 when they enter into lease agreements.

  Nonprofit organizations often enter into leases for various assets, such as office spaces, vehicles, or equipment. These lease agreements can have a significant financial impact and should be accounted for in accordance with ASC 842.

  ASC 842 Effective Date for Nonprofit Organizations

  Understanding the effective date of ASC 842 compliance is crucial for nonprofit organizations. The FASB initially issued ASC 842 with staggered effective dates based on entity types. For public companies, the standard was effective starting in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Private companies and nonprofit organizations were granted more time to implement the standard.

  For nonprofit organizations, ASC 842 became effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. It’s essential to note that the effective dates might differ for certain nonprofit organizations based on their specific circumstances.

  GAAP Accounting for Nonprofits

  Nonprofit organizations, like for-profit entities, must adhere to Generally Accepted Accounting Principles (GAAP) when preparing their financial statements. ASC 842, being a part of GAAP, falls under these principles.

  GAAP accounting for nonprofits is designed to provide transparency and accuracy in financial reporting, ensuring that donors, grantors, and other stakeholders have a clear understanding of the organization’s financial health. Compliance with ASC 842 is crucial not only for meeting regulatory requirements but also for maintaining the trust of donors and supporters.

  H2: How to Nonprofits Can Prepare for ASC 842

  Nonprofit organizations can prepare for ASC 842 compliance by taking several proactive steps. Here are some key actions to consider:

  • Educate Your Team: Start by ensuring that your finance and accounting teams are well-informed about ASC 842 and its requirements. This may involve providing training or bringing in external experts to explain the nuances of the standard.
  • Identify Lease Agreements: Begin by identifying all lease agreements within your organization. This includes leases for office spaces, equipment, vehicles, or any other assets. It’s crucial to have a comprehensive list of all leases.
  • Gather Lease Data: Collect all relevant data related to your lease agreements. This includes lease terms, payment schedules, renewal options, and any other lease-specific information.
  • Assess Lease Classification: Determine whether each lease should be classified as an operating lease or a finance lease. ASC 842 requires different accounting treatments for each category.
  • Implement New Accounting Systems: You might need to update or implement new accounting systems to ensure they can handle the additional reporting requirements of ASC 842. Consider whether your existing software is capable of tracking and reporting lease data accurately.
  • Review Documentation: Ensure that your lease agreements and contracts are well-documented and readily accessible. Proper documentation is essential for compliance and financial reporting.
  • Engage Legal and Accounting Experts: Seek advice from legal and accounting professionals who are well-versed in ASC 842. They can help you interpret the standard and make informed decisions.
  • Develop New Policies and Procedures (Controls): Create policies and procedures that outline how your organization will handle lease accounting under ASC 842. This includes processes for initial recognition, subsequent measurement, and financial statement disclosure.
  • Consider Technology Solutions: Explore lease accounting software or technology solutions that can streamline the process of tracking and reporting lease data.
  • Perform Impact Assessment: Assess the financial impact of ASC 842 on your organization’s financial statements. This will help you understand how the standard will affect your balance sheet and income statement.
  • Communicate Changes: Ensure that relevant stakeholders, including board members, donors, and grantors, are aware of the changes brought about by ASC 842. Transparency is crucial in maintaining trust and support.
  • Testing and Validation: Before the compliance deadline, perform testing and validation of your lease accounting processes to identify any potential issues or discrepancies.
  • Stay Informed: Stay up-to-date with any updates or amendments to ASC 842. Accounting standards can evolve, so it’s essential to remain informed about changes that may affect your nonprofit.

  By proactively preparing for ASC 842 compliance, nonprofit organizations can ensure accurate financial reporting, maintain transparency, and meet regulatory requirements, ultimately safeguarding their financial stability and reputation.

  The post Navigating Nonprofits & ASC 842 Regulations: What You Need to Know first appeared on Visual Lease.]]> https://visuallease.com/demystifying-non-lease-components-in-asc-842/ Tue, 12 Sep 2023 13:00:25 +0000 https://visuallease.com/?p=8651 Leasing arrangements are a common aspect of business operations, allowing companies to secure assets and facilities without the commitment of ownership. However, within the realm of lease accounting, there’s a...
  The post Demystifying Non-Lease Components in ASC 842 first appeared on Visual Lease.]]> Leasing arrangements are a common aspect of business operations, allowing companies to secure assets and facilities without the commitment of ownership. However, within the realm of lease accounting, there’s a concept that often adds complexity to the equation: non-lease components. In this article, we’ll delve into what non-lease components are, their significance under ASC 842, and how they impact lease accounting.

  Understanding Non-Lease Components

  When discussing lease payments, we encounter three distinct categories that play a role in determining financial obligations:

  1. Lease Payments: These are relatively straightforward. Lease payments encompass the base rent or any other charges that contribute to calculating the ending liability. This liability, in turn, plays a pivotal role in the calculation of the right-of-use asset.
  2. Excluded Payments: Excluded payments, as the name suggests, are those that do not factor into accounting schedules. They have no bearing on the lease accounting process. Examples include real estate taxes, utility payments, and direct payments to other vendors that are unrelated to the lease.
  3. Non-Lease Components: Non-lease components are the focus of our discussion. These payments are intricately tied to the lease but are excluded from the definition and calculation of the right-of-use liability. These components arise from the lease agreement but are not integrated into the accounting framework in the same manner as lease payments.

  What are Non-Lease Components in ASC 842?

  Under the guidelines of ASC 842, non-lease components hold a unique position. They are payments made to the lessor that stem from the lease agreement but are treated differently in the accounting process. Examples of non-lease components commonly encountered include Common Area Maintenance (CAM) charges, operating expenses, and other variable expenses that are linked to the occupancy of the premises.

  Importantly, non-lease components are disclosed in financial statements and IASB disclosure reports, adding transparency to the financial picture. However, their treatment differs from lease payments. Unlike lease payments, non-lease components are expensed in the period they are paid. This distinction is crucial, as it means they do not contribute to the amortization schedule or impact the calculation of the right-of-use asset.

  Non-Lease Components Significance and Implications

  Understanding non-lease components is essential for accurate financial reporting and compliance with lease accounting standards. By recognizing these components and differentiating them from lease payments, companies can ensure that their financial statements are transparent, accurate, and compliant with ASC 842.

  In the complex landscape of lease accounting, grasping the intricacies of non-lease components is crucial. These components, distinct from lease payments and excluded payments, contribute to a comprehensive understanding of a company’s financial obligations. As outlined by ASC 842, non-lease components are payments tied to the lease but treated separately in accounting processes. Their disclosure is mandatory, but their treatment as expenses in the period paid sets them apart from lease payments.

  By familiarizing yourself with non-lease components, you can navigate the world of lease accounting more confidently.  If you’re looking to streamline lease management, ensure compliance with accounting standards, and gain full visibility into your lease portfolio, check out VL’s Lease Accounting platform.

  The post Demystifying Non-Lease Components in ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/how-to-calculate-a-lease-amortization-schedule-a-comprehensive-guide/ Thu, 07 Sep 2023 13:00:58 +0000 https://visuallease.com/?p=8650 When it comes to managing leases and financial obligations, understanding how to calculate a lease amortization schedule is crucial. This schedule not only helps you keep track of payment timing...
  The post How to Calculate a Lease Amortization Schedule: A Comprehensive Guide first appeared on Visual Lease.]]> When it comes to managing leases and financial obligations, understanding how to calculate a lease amortization schedule is crucial. This schedule not only helps you keep track of payment timing but also ensures accurate financial reporting and compliance. In this guide, we’ll walk you through the process of creating a lease amortization schedule step by step, using Excel as a powerful tool. Whether you’re a business owner, accountant, or financial analyst, mastering this skill can greatly enhance your financial management capabilities.

  Understanding Lease Amortization Schedule

  A lease amortization schedule is designed to outline the timing of lease payments and allocate them between principal and interest components. This schedule reflects the gradual reduction of the lease liability balance over time. The fundamental idea is to break down the net present value of all future lease payments into manageable installments. By doing so, you gain clarity into the distribution of costs and can make informed financial decisions.

  Creating a Lease Amortization Schedule

  To begin, let’s explore how to construct a lease amortization schedule:

  1. Gather Information: Collect essential lease details, including the number of payments, payment amounts, lease term, and discount rate.
  2. Choose Payment Timing: Determine whether payments are made at the beginning or end of each period. This choice will influence your calculation methodology.
  3. Calculate Beginning Liability Balance: Calculate the net present value of all remaining future payments. This value serves as your beginning liability balance.
  4. Set Up Amortization Schedule: Create a table with columns for Period, Beginning Balance, Interest Expense, Principal Payment, Cash Payment, and Ending Balance.
  5. Fill in Period Numbers: Start with period 1 and proceed to the lease term’s final period.
  6. Calculate Interest Expense: Based on your chosen payment timing, calculate the interest expense for each period. For beginning-of-period payments, apply the interest rate to the previous period’s ending balance. For end-of-period payments, apply the interest rate to the beginning balance.
  7. Calculate Principal Payment: Subtract the interest expense from the cash payment to determine the principal payment.
  8. Calculate Ending Balance: Deduct the principal payment from the beginning balance to get the ending balance for the current period.
  9. Repeat the Process: Continue these calculations for each period until the lease term is complete.
  10. Visualize the Data: Create a line chart to visualize the gradual reduction of the lease liability balance over time.

  Benefits of Using a Lease Amortization Schedule

  Creating a lease amortization schedule offers several benefits for businesses and individuals alike:

  • Financial Planning: The schedule provides a clear overview of payment distribution, helping you plan your finances effectively.
  • Accurate Reporting: An accurate schedule aids in preparing financial statements and adhering to accounting standards such as ASC 842 and IFRS 16.
  • Compliance: For businesses, compliance with lease accounting standards is essential. A well-constructed schedule ensures you stay compliant with regulations.
  • Informed Decisions: By understanding how payments are allocated between interest and principal, you can make informed decisions about leasing arrangements.

  Using Lease Amortization Schedule Calculators and Templates

  For those looking to simplify the process, various online lease amortization schedule calculators are available. These tools allow you to input lease details and receive a ready-made schedule.

  In conclusion, understanding how to calculate a lease amortization schedule is a valuable skill that enhances financial management and decision-making. By leveraging tools, you can create accurate schedules that provide insights into lease payment timing and distribution. Whether you’re a business professional or an individual managing personal leases, this knowledge empowers you to take control of your financial obligations.

  Remember, consistency in methodology is key, regardless of whether you choose beginning-of-period or end-of-period calculations. By mastering lease amortization schedules, you’ll be well-equipped to navigate the complexities of lease accounting and financial management.

  Looking for a tool to manage your lease accounting needs? Easily manage every modification and maintain compliance as your leases – and the regulatory requirements – evolve with VL’s Lease Accounting platform.

  The post How to Calculate a Lease Amortization Schedule: A Comprehensive Guide first appeared on Visual Lease.]]> https://visuallease.com/unveiling-the-net-advantage-to-leasing-understanding-the-lease-vs-buy-analysis/ Tue, 05 Sep 2023 13:00:41 +0000 https://visuallease.com/?p=8649 In the realm of business decisions, the choice between leasing and buying assets has significant financial implications. To help evaluate these options, the concept of “Net Advantage to Leasing” comes...
  The post Unveiling the Net Advantage to Leasing: Understanding the Lease vs. Buy Analysis first appeared on Visual Lease.]]> In the realm of business decisions, the choice between leasing and buying assets has significant financial implications. To help evaluate these options, the concept of “Net Advantage to Leasing” comes into play. In this article, we’ll delve into what the net advantage to leasing entails, how to calculate it, and why it’s an integral part of informed decision-making.

  Defining Net Advantage to Leasing

  The term “Net Advantage to Leasing” might seem like a mouthful, but it essentially encapsulates the financial evaluation of the advantages associated with leasing as opposed to buying an asset outright. While the terminology leans towards leasing, the concept is often referred to as a “lease vs. buy analysis.” This analysis seeks to determine whether leasing or purchasing is the more financially advantageous option based on various factors.

  The Complexity of Lease vs. Buy Analysis

  A universal formula for a lease vs. buy analysis doesn’t exist due to the diverse factors that come into play. The analysis involves weighing the cumulative payments required for leasing an asset against the total expenses involved in purchasing and owning it. The result of this analysis provides insight into which option aligns better with a company’s financial goals.

  Calculating the Net Advantage to Leasing

  To calculate the net advantage to leasing, consider the following steps:

  1. Identify Costs: Sum up all the payments expected for leasing an asset, including any maintenance or operating expenses. Similarly, calculate the costs associated with purchasing and owning the asset, such as the purchase price, maintenance, and disposal costs.
  2. Time Value of Money: Recognize the importance of the time value of money. Money available today holds more value than the same amount in the future. This means that upfront costs have a different impact compared to future costs.
  3. Duration Matters: Consider the duration for which you’re analyzing the lease vs. buy decision. The financial picture can change significantly depending on the period you’re evaluating.
  4. Present Value: Apply the concept of present value to both leasing and buying costs. This involves discounting future cash flows back to their present value to account for the time value of money.
  5. Compare: Compare the present value of total expenses for leasing and buying. This analysis helps you understand the financial advantages or disadvantages of each option.

  Grasping the Concept Through an Example

  Let’s consider an example involving a vehicle. If you’re looking to acquire a car, the lease option might appear attractive due to lower upfront costs and the absence of a significant down payment. However, the lease might come with a lump sum payment at the end. Analyzing the total expenditures and applying the time value of money clarifies the financial implications of both options.

  The net advantage to leasing, or the lease vs. buy analysis, is an indispensable tool for making informed financial decisions. While there’s no one-size-fits-all formula, understanding the components involved—total expenses, time value of money, and present value—can guide you toward choosing the option that aligns best with your company’s financial strategy.

  If you’re looking for a platform that can aid your organization in finding insights across your leases, check out VL’s Lease Accounting solution.

  The post Unveiling the Net Advantage to Leasing: Understanding the Lease vs. Buy Analysis first appeared on Visual Lease.]]> https://visuallease.com/lessee-vs-tenant-demystifying-the-difference/ Thu, 31 Aug 2023 13:00:10 +0000 https://visuallease.com/?p=8648 When it comes to real estate and leasing agreements, terms can sometimes get a bit muddled. One such pair of terms that often find themselves used interchangeably are “lessee” and...
  The post Lessee vs. Tenant: Demystifying the Difference first appeared on Visual Lease.]]> When it comes to real estate and leasing agreements, terms can sometimes get a bit muddled. One such pair of terms that often find themselves used interchangeably are “lessee” and “tenant.” However, there’s a subtle distinction between the two, and understanding this difference can help clarify legal and financial matters. In this article, we’ll break down the nuances of lessee vs. tenant and shed light on their implications.

  Defining Lessee vs. Tenant

  At first glance, “lessee” and “tenant” might seem like synonyms, and in many cases, they are used that way. But when we dig deeper, a distinction becomes evident.

  • Lessee: A lessee is a term that refers to an individual or entity that has entered into a formal lease agreement. This agreement outlines the terms and conditions under which the lessee gains the right to use and occupy a property. The lessee pays a specified amount of money at predetermined intervals for the privilege of utilizing the premises.
  • Tenant: A tenant, on the other hand, is someone who occupies a property, regardless of whether there is a formal lease agreement in place. This occupancy can be under various arrangements, such as month-to-month agreements or even informal arrangements. While a tenant might have a lease, they can also be occupying the space without a legally binding lease.

  Understanding the Role of Lease Agreements

  The crux of the difference between a lessee and a tenant lies in the presence of a lease agreement. A lease agreement is a legal document that outlines the terms, rights, and obligations of both parties—the lessor (property owner) and the lessee. The agreement specifies the duration of the lease, rent payment details, and any additional clauses that govern the arrangement.

  In contrast, a tenant might occupy a property without a formal lease agreement. This could be due to a short-term arrangement, an informal understanding, or even a month-to-month occupancy.

  Accounting and Business Perspective

  From an accounting standpoint, the distinction between a lessee and a tenant might not carry as much weight. The financial responsibilities and considerations for both parties, especially in a business context, can be quite similar. The primary difference in treatment often depends on the presence or absence of a formal lease agreement.

  Interchangeability in Everyday Language

  In everyday conversations, “lessee” and “tenant” are often used interchangeably, and in many scenarios, this casual usage is perfectly acceptable. However, when it comes to legal and financial matters, understanding the precise terms can help prevent misunderstandings and ensure that the proper legal protections are in place.

  In the world of real estate and leasing, language matters. While “lessee” and “tenant” might be used interchangeably in everyday language, they carry subtle distinctions in the legal and financial realms. A lessee is someone who enters into a formal lease agreement, while a tenant refers to someone occupying a property, regardless of the presence of a lease. By grasping these nuances, you can navigate lease-related matters with confidence and clarity.

  Are you ready to simplify your lease management and ensure accurate documentation of lease agreements? Explore Visual Lease’s comprehensive platform that empowers businesses to streamline lease tracking, stay compliant, and make informed financial decisions. Request a demo today.

  The post Lessee vs. Tenant: Demystifying the Difference first appeared on Visual Lease.]]> https://visuallease.com/understanding-lease-purchase-accounting-and-implications/ Thu, 24 Aug 2023 13:00:07 +0000 https://visuallease.com/?p=8572 Leasing is a common practice in business, allowing companies to acquire assets without a hefty upfront cost. However, situations arise where a lessee wants to transition from leasing to outright...
  The post Understanding Lease Purchase: Accounting and Implications first appeared on Visual Lease.]]> Leasing is a common practice in business, allowing companies to acquire assets without a hefty upfront cost. However, situations arise where a lessee wants to transition from leasing to outright ownership, leading to a “lease purchase” scenario. 

  In this blog post, we’ll delve into what a lease purchase option entails, its accounting nuances, and the tax implications that come with it.

  What is a Lease Purchase Option?

  Before diving into the accounting and tax considerations, let’s clarify what a lease purchase option is. A lease purchase option gives a lessee the right, but not the obligation, to buy the leased asset from the lessor. This option can be exercised at a predetermined price, often referred to as the “purchase option price,” which could be a nominal amount or a percentage of the asset’s market value.

  Accounting for Lease Purchase:

  1. Lease Purchase Out of a Lease: If a lessee decides to purchase an asset they were previously leasing, and the lessor agrees, it’s a straightforward transition. There’s no need for advanced accounting; the asset shifts from being a leased asset to a fixed asset on the books. The accumulated amortization shifts to fixed asset depreciation, and any associated taxes are factored in. Essentially, it’s treated like any other purchase.
  2. Lease Purchase Option: When the lessee holds a purchase option, the accounting approach hinges on their intent to exercise it. If the lessee doesn’t anticipate exercising the option, the lease is accounted for as a regular lease. However, if the lessee intends to exercise the option, a different accounting schedule is crafted based on that impending purchase.

  Lease Classification Test:

  For the lease classification test, the timing of asset ownership transfer becomes vital. If it’s likely that ownership will transfer at the option’s exercise, the underlying asset isn’t amortized over the lease term but over the asset’s useful life.

  Lease Purchase Tax Implications:

  The tax implications can be substantial when considering a lease purchase option. If you account for the asset as likely to be purchased at the lease term’s midpoint or end, you amortize the asset value over its useful life. For example, if the leased asset is a vehicle with an 8-year useful life, your amortization occurs over 8 years, impacting expense profiles.

  Bargain Purchase Option:

  A “bargain purchase option” presents another dimension. This means there’s a compelling economic incentive to exercise the option due to a nominal or low purchase price. Even if the lessee initially doesn’t intend to exercise the option, accounting assumes that they will due to the economic incentive.

  Changing Intent and Remeasuring:

  If intent changes—say, from planning to exercise the option to not exercising it—the lease is remeasured. This might change the lease classification, switching from finance to operating lease treatment.

  In conclusion, a lease purchase option introduces complexities to accounting and tax implications. Your approach depends on your intent to exercise the option, the asset’s useful life, and potential bargain purchase incentives. Consulting with accounting professionals can provide clarity and ensure compliance with accounting standards and tax regulations. Understanding the intricacies of lease purchase options empowers businesses to make informed decisions about their assets and financial strategy.

  The post Understanding Lease Purchase: Accounting and Implications first appeared on Visual Lease.]]> https://visuallease.com/preparing-for-lease-accounting-audits-your-comprehensive-checklist/ Wed, 23 Aug 2023 13:00:06 +0000 https://visuallease.com/?p=8571 As a company navigating the intricacies of lease accounting, you’re no stranger to the importance of maintaining accuracy and compliance. Part of this process involves undergoing lease audits, a task...
  The post Preparing for Lease Accounting Audits: Your Comprehensive Checklist first appeared on Visual Lease.]]> As a company navigating the intricacies of lease accounting, you’re no stranger to the importance of maintaining accuracy and compliance. Part of this process involves undergoing lease audits, a task that might seem daunting but is an integral part of your financial health. In this blog post, we’ll guide you through preparing for a lease accounting audit using a detailed checklist to streamline the process and ensure a smooth audit experience.

  Understanding the Significance of Lease Audits:

  Before diving into the checklist, let’s briefly discuss why lease audits are crucial. A lease audit is not just about verifying numerical accuracy; it’s a comprehensive evaluation of your lease agreements, expenditures, controls, and compliance measures. Auditors assess whether your financial transactions align with the terms of your leases and identify any potential risks of fraud or mismanagement.

  Lease Audit Checklist:

  1. Set Clear Boundaries: Determine which leases are subject to the audit. This ensures that your audit scope is defined and complete.
  2. Gather Complete Information: Compile all relevant information, including lease abstracts and underlying lease documents. Auditors need to verify that you’re adhering to lease terms and performing as required.
  3. Ensure Up-to-Date Lease Data: Leases evolve over time, so ensure your data is current. Auditors will review your most recent lease information to verify accuracy.
  4. Review Payment Processes and Controls: Examine your payment processes and controls. This involves ensuring that your payment methods align with lease terms and that you’re accurately disbursing funds.
  5. Document Expenditures: Document and maintain supporting documentation for all expenditures. This documentation might include lease schedules, invoices, and any variable payment calculations.
  6. Validate CAM Charges: If you’re responsible for common area maintenance (CAM) charges, ensure that these charges are reconciled against actual expenses. Validate supporting documentation to prevent overcharges.
  7. Track Capital Expenditures: Properly depreciate capital expenditures as per lease requirements. Ensure that these expenditures are accounted for accurately.
  8. Verify CPI Increases: If your lease involves Consumer Price Index (CPI) increases, verify that these calculations are accurate and performed at the appropriate times.
  9. Check Percentage-Based Payments: If your payments are based on a percentage of sales, validate reported sales numbers, exclusions, and calculations.
  10. Ensure Compliance for Financial Statements: Review your compliance procedures for submitting financial statements and any contingent obligations outlined in your lease. Ensure all documentation aligns.
  11. Review Contingent Payments: Scrutinize any contingent payments mentioned in the lease agreement. Verify that these contingencies are appropriately met before payments are made.
  12. Validate Controls: Assess your internal controls for their effectiveness in preventing fraud and ensuring accurate financial reporting.
  13. Audit the Full Scope: Remember that an audit goes beyond mathematical accuracy. It involves validating documentation, controls, and compliance measures.

  Benefits of Lease Accounting Audit Preparation:

  A well-prepared audit expedites the process and instills confidence in auditors and stakeholders. Properly documenting your lease transactions, ensuring compliance, and validating payments demonstrate your commitment to transparency and accuracy.

  While lease audits might seem like a complex ordeal, proper preparation simplifies the process. Use our comprehensive lease audit checklist as a guide to ensure that your lease accounting audit is efficient, effective, and successful. By proactively addressing potential issues and maintaining impeccable records, you’re well on your way to navigating lease audits with confidence and ease.

  The post Preparing for Lease Accounting Audits: Your Comprehensive Checklist first appeared on Visual Lease.]]> https://visuallease.com/navigating-commercial-lease-lifecycles-a-holistic-perspective/ Mon, 21 Aug 2023 13:00:40 +0000 https://visuallease.com/?p=8570 The realm of commercial leases encompasses a complex lifecycle that spans far beyond the mere agreement itself. While it’s a subject that often invites surface-level discussions, grasping the full scope...
  The post Navigating Commercial Lease Lifecycles: A Holistic Perspective first appeared on Visual Lease.]]> The realm of commercial leases encompasses a complex lifecycle that spans far beyond the mere agreement itself. While it’s a subject that often invites surface-level discussions, grasping the full scope of a commercial lease lifecycle is essential for businesses and professionals to make informed decisions. In this article, we’ll unveil the multifaceted stages of a commercial lease lifecycle, debunking myths and providing valuable insights.

  Seeing the Whole Elephant: A Holistic Approach to Commercial Lease Lifecycles

  The tale of the blind men describing an elephant aptly mirrors the way various stakeholders perceive commercial leases. Administrators, accountants, brokers, and tenants all interact with leases from their vantage points, often missing the broader picture. To truly understand the commercial lease lifecycle, we need to step back and observe its phases cohesively.

  1. Acquisition Phase: Finding the Right Fit The lifecycle commences with the acquisition phase. This is where the organization identifies the need for a leased asset. Whether it’s real estate or equipment, the acquisition phase involves sourcing the asset, potentially through brokers or procurement departments. The asset is brought into the organization, setting the stage for the next phase.
  2. Preparation Phase: Ready for Action Once the asset is acquired, the preparation phase begins. In the context of real estate leases, this phase includes tenant improvements and fitting out the premises for operational use. Accounting teams get involved to set up proper accounting structures and recognize tenant improvement work. Preparing the asset is essential before actual occupancy.
  3. Operational Phase: Utilizing the Asset As operations commence, the lease enters the operational phase. The asset is used for business activities, with facilities management teams handling maintenance and upkeep. The accounting team oversees accurate expense recognition, aligning with lease terms. Periodic reviews ensure the asset’s continued value to the organization.
  4. Transition Phase: Assessing the Need Transitioning towards the end of the lease term, companies reassess the asset’s value and necessity. This phase isn’t solely reserved for lease-end. Companies may review their asset needs at various points throughout the lease term, deciding whether to continue or relocate.
  5. Disposition Phase: Wrapping Up As the lease term nears its end, the disposition phase comes into play. Operations wind down, equipment is relocated, and furniture is dismantled. If required, restoration work is performed on the premises before returning them to the lessor. Ultimately, the keys are handed back, concluding the operational phase.

  Accounting for the Complete Picture

  Throughout the entire lifecycle, accounting plays a crucial role. From setting up proper accounting structures for leases and tenant improvement expenses to tracking operating expenses and reconciling financials, the accounting team ensures accurate financial reporting.

  Why Understanding the Lifecycle Matters

  Understanding the comprehensive lifecycle of commercial leases empowers businesses to make strategic decisions. Whether it’s renewing a lease, reevaluating the asset’s value, or orchestrating a smooth transition, each phase informs a company’s trajectory.

  Conclusion: Embracing the Full Journey

  Beyond the lease agreement lies a dynamic and multifaceted lifecycle. Embracing the entire journey ensures that businesses operate efficiently, accounting accurately reflects transactions, and decision-making remains informed. By understanding the stages from acquisition to disposition, professionals can navigate commercial lease lifecycles with a holistic perspective, reaping the benefits of well-informed choices and optimal financial management.

  The post Navigating Commercial Lease Lifecycles: A Holistic Perspective first appeared on Visual Lease.]]> https://visuallease.com/asset-capitalization-in-lease-accounting-what-you-need-to-know/ Thu, 17 Aug 2023 13:00:20 +0000 https://visuallease.com/?p=8569 Navigating the world of lease accounting can sometimes feel like deciphering a complex code. The terms, regulations, and methodologies can leave even the savviest professionals scratching their heads. One such...
  The post Asset Capitalization in Lease Accounting: What You Need to Know first appeared on Visual Lease.]]> Navigating the world of lease accounting can sometimes feel like deciphering a complex code. The terms, regulations, and methodologies can leave even the savviest professionals scratching their heads. One such topic that often raises questions is asset capitalization in leases. In this article, we’ll delve into the intricacies of this concept, clarifying what it means to capitalize an asset, and shedding light on the impact it has on your balance sheet.

  The Evolution of Lease Accounting

  Before we dive into the details of asset capitalization, let’s address an important shift in lease accounting. The term “capital lease” under the old ASC 840 standard has become a relic of the past. With the advent of ASC 842 guidelines, leases are now classified into two categories: operating leases and finance leases. While the term “capital lease” has been retired, the concept of capitalizing assets remains a fundamental aspect of lease accounting.

  What Does It Mean to Capitalize an Asset?

  To capitalize an asset means to recognize it on your balance sheet as both an asset and a corresponding liability. In the context of lease accounting, this occurs when a lease, whether an operating or finance lease, is brought onto the balance sheet. The asset value represents the right to use the leased asset over the lease term, while the liability reflects the future payment obligations associated with the lease.

  Capitalized Assets Based on the Lease Classification

  Regardless of lease type, all leased assets are capitalized under ASC 842 guidelines. However, the treatment of these capitalized assets varies based on the lease classification.

  1. Operating Leases: In an operating lease, the expense recognition is characterized by straight-line rent expense. This means that the total lease payments are divided equally over the lease term. The amortization of the right-of-use asset is calculated based on an interest component derived from the remaining liability balance.
  2. Finance Leases: Finance leases, on the other hand, are recognized with a front-loaded expense recognition. The amortization of the right-of-use asset follows a straight-line method, while the interest component varies as the liability balance decreases over time.

  Calculating Asset Capitalization

  As the intricacies of calculating asset capitalization and amortization become evident, it’s clear that the assistance of specialized software is invaluable. Solutions like Visual Lease offer the functionality to streamline these calculations, ensuring accuracy and compliance. With pre-set formulas and automation capabilities, lease management software simplifies the process, allowing you to focus on strategic decision-making rather than complex calculations.

  A Clearer Path to Lease Accounting Clarity

  While the terminology of lease accounting may have evolved, the concept of asset capitalization remains at its core. Recognizing leased assets on the balance sheet, along with the corresponding liabilities, is a critical step in achieving accurate financial reporting and compliance. Whether dealing with operating or finance leases, understanding the nuances of asset capitalization ensures that your organization remains on the path of accurate and transparent lease accounting practices. And with the support of advanced lease management software, you can navigate these complexities with confidence and clarity.

  The post Asset Capitalization in Lease Accounting: What You Need to Know first appeared on Visual Lease.]]> https://visuallease.com/financial-restatements-the-impact-to-newly-public-companies/ Tue, 15 Aug 2023 13:00:43 +0000 https://visuallease.com/?p=8562 Navigating the Transition: Understanding Challenges Faced by Newly Public Companies and Strategies for Success In the dynamic landscape of public offerings, the surge in initial public offerings (IPOs) during 2020...
  The post ​​Financial Restatements: The Impact to Newly Public Companies first appeared on Visual Lease.]]> Navigating the Transition: Understanding Challenges Faced by Newly Public Companies and Strategies for Success

  In the dynamic landscape of public offerings, the surge in initial public offerings (IPOs) during 2020 and 2021 led to a record number of companies going public through traditional IPOs or SPAC mergers. However, the parallel rise in IPOs and accounting restatements offers a significant insight into the challenges new public companies face. These companies, while transitioning to public status, are often still fine-tuning their internal controls, accounting policies, team structure, and technology integration. This leaves them susceptible to internal control weaknesses, restatements, and the need for remediations.

  What Is a Restatement?

  A restatement is the rectification of previously released financial statements, prompted by errors or misinterpretations. This commonly happens during the transition of newly public firms. Such revisions entail correcting mistakes, including significant inaccuracies, stemming from sources like accounting errors, noncompliance with GAAP, fraud, or clerical blunders. Accountants assess materiality, and if flawed data could result in misleading interpretations, restatements become obligatory under FASB rules. 

  A Deeper Dive into Restatements

  A survey conducted in 2022 by Deloitte highlighted that approximately 59.1% of public companies revised or remediated their financial processes within the past 12 months, with 51.6% anticipating the same within the next year. Delving deeper into newly public companies that encountered restatements, Deloitte’s discussions with CFOs revealed three recurring themes contributing to these events:

  • Complex Accounting Standards: The transition to newly applicable accounting standards often requires more judgment and estimates. These intricate standards can challenge companies, leading to restatements.
  • Manual Processes and Controls: The process of refining internal controls, often through manual processes and multiple spreadsheets, can create an environment prone to errors.
  • Lack of Specialized Skills: New public companies might lack staff with deep technical expertise in these evolving standards, increasing the likelihood of misinterpretations and errors.

  Areas of Common Restatements

  Based on Securities and Exchange Commission (SEC) filings, one of the most common areas for restatements in newly public companies since is leases (ASC 842). The nuances and complexities within ASC 842 often require technical accounting expertise and pose challenges for newly public entities.

  Responding to Restatements

  Responding to restatements requires a methodical approach:

  1. Create a Plan: Establish a project management office (PMO) with clear protocols, resources, and communication channels to address the issue.
  2. Assess Resources: Enlist resources with deep technical knowledge to address the complexities causing restatements.
  3. Evaluate Misstatements: Investigate the cause of the misstatement and adjust financials accordingly.
  4. Identify Control Failures: Understand the root cause of internal control deficiencies and prepare a remediation plan.
  5. Communication: Keep stakeholders informed, including auditors, board of directors, investors, regulators, and banks.
  6. Complete Reporting: Prepare restated financials and disclosures to explain the misstatement’s cause and impact.
  7. Repair and Improve: Use the lessons learned to enhance controls and processes, minimizing the risk of future restatements.

  Preventing Future Restatements

  Preventing future restatements involves building a resilient accounting organization:

  • Continuous Controls Assessment: Regularly assess internal controls to adapt to changing business conditions and technology.
  • Stay Current: Monitor regulatory changes that might affect accounting and financial reporting.
  • Leverage External Advisers: Engage accounting and reporting advisers with specialized skills to analyze complex issues and offer solutions.

  With the intricate landscape of accounting standards and the unique challenges that newly public companies face, establishing a knowledgeable team, strong controls framework, and proactive remediation strategy can significantly reduce the risk of restatements and ensure a smooth transition into the public market. 

  The post ​​Financial Restatements: The Impact to Newly Public Companies first appeared on Visual Lease.]]> https://visuallease.com/comments-on-the-exposure-draft-ifrs-s2-climate-related-disclosures-by-the-issb-of-the-ifrs-foundation/ Tue, 01 Aug 2023 13:00:58 +0000 https://visuallease.com/?p=8399 Visual Lease, LLC (hereinafter “VL,” “we,” “our,” and “us”) appreciates being given an opportunity to comment on the Exposure Drafts published by the International Sustainability Standards Board (hereinafter the “ISSB”)...
  The post Comments on the Exposure Draft IFRS S2 Climate Related Disclosures by the ISSB of the IFRS Foundation first appeared on Visual Lease.]]> Visual Lease, LLC (hereinafter “VL,” “we,” “our,” and “us”) appreciates being given an opportunity to comment on the Exposure Drafts published by the International Sustainability Standards Board (hereinafter the “ISSB”) in March 2022. VL supports the direction of developing consistent climate related disclosures, as consistency in standards is necessary to permit users to analyze and understand entity disclosures. In the United States and globally, more entities have responded to the growing information needs of investors by implementing disclosure practices for non-financial information. This information has been inconsistently presented, however, and is therefore of limited usefulness. We hope that the IFRS Foundation’s work on setting out sustainability reporting standards will help create a high-quality and consistent corporate reporting system, which when used in combination with existing financial reporting, presents meaningful and useful information to the public. We welcome the publication of the ISSB’s two Exposure Drafts of standards for the disclosure of sustainability-related financial information.

  Questions for Respondents

  

  Visual Lease Response

  VL agrees with the objective of the exposure draft.

  

  Visual Lease Response

  VL agrees with the need for users to understand governance process, controls, and procedures used to monitor and manage climate-related risks and opportunities. However, we find two areas of concern in the guidance as written.
  First, we view Exposure Draft S1 and Exposure Draft S2 as complimentary, working hand in hand with each other. Neither will be taken independently of the other. In that vein, the Governance disclosures of S1 can be merely referenced into S2. While they are aligned today, seperately stating them can permit the versions to diverge in the future, which we do not believe to be the intent.

  Second, we believe that some of the more detailed disclosure requirements unique to S2 do not add value to users as they do not reflect the structure and workings of governance structures. We find it common for entities to establish governance structures and processes on an integrated basis, not on an individual sustainability theme basis. Therefore, the responsibility to address such sustainability-related risks and opportunities is more often integrated throughout the governance structure, not isolated. Investors, who are users of information, also expect such integrated governance structures to be established and to work effectively. Disclosures should be designed to correspond to such actual practices and information needs.

  

  Visual Lease Response

  VL understands that while climate-related risk is a global phenomenon, the unique nature of operations will mean every entity will have a unique exposure to risk. Various industries will have risks and opportunities that are both common and unique, so we find the approach outlined in Exhibit B to be appropriate. Ensuring these unique factors are consistently applied across all entities in an industry will ensure users have directly comparable data points.

  

  Visual Lease Response

  VL agrees that enviornmental-related risks may impact an entity’s business model by an impact on the value chain and not merely on the entity’s direct operations. We support the inclusion of the value chain in disclosure reporting.

  Given the additional degrees of separation, however, we agree that disclosing concentration of significant climate-related risks and opportunities in the value chain should be qualitative rather than quantitative. To make such disclosure quantitative would require estimation of the impact on the entities which comprise the value chain. We do not believe the reporting entity would have sufficient data to make those quantitative estimations. The reporting entity would then further have to estimate the share of the supply chain impact borne by them, and then estimate the subsequent impact on their operations. The margin of error in any such estimations makes their value dubious.

  
  

  Visual Lease Response

  We support the proposed disclosure requirements for transition plans. Transition plans will have more impact on short-term performance than any other disclosure area and is the activity most directly under the control of the entity. Therefore, we believe the resulting disclosure will be of great benefit to users.

  VL is also in favor of enhanced disclosure requirements for carbon offsets. The wide range of activities considered to be carbon offsets and the tremendous variation in price per ton of offset raise questions about the validity of certain schemes. We support enhanced disclosure so that the marketplace of users can evaluate their validity.

  
  

  Visual Lease Response

  VL generally supports the proposal that entities disclose quantitiative information on effects of climate-related risks. However, as discussed in our response to Question #4, some of the impacts of climate-related risks may not be estimated with a reasonable degree of certainty. Some may not be quantifiable. We believe that a range of quantitative disclosure, with appropriate qualitative supporting data, is the most beneficial package of information for users.

  We have further observed that other respondents raise the issue of the impact of baseline year selection on reported data. We have no particular perference on the selection of a baseline year when establishing objectives, goals and transition plans. We would just advise that the baseline year be disclosed, and probably the reason for selecting that particular baseline year (if appropriate).

  When disclosing the current and anticipated effects of risks, however, we believe that either the current year or the most recent full year presented to be the most appropriate baseline. Reporting the impact of a hypothetical future event in terms of impact on financial results from 10 years ago is an unnecessary burden on users and will hamper their ability to understand the impact of the risk.

  
  
  

  Visual Lease Response

  VL is in agreement with each of the components of this question. The wide variety of approaches mentioned in this question indicates that while the issue is not new, there continues to be significant development of knowledge in the field. To best understand the entity- or industry-specific risks, we support the ability to utilize alternative techniques so long as they are adequately disclosed. We have confidence that allowing their use will enhance further development of the technology, and allow the marketplace of users to evaluate their reliability.

  

  We agree that risk management should be expanded to include both risks and opportunities. In our experience, it is accurate that risks and opportunities can relate to or result from the same source of uncertainty.

  We believe that this area is a significant overlap with the Draft S1 requirements: therefore, we suggest affirming alignment between the two standards.

  
  
  

  Visual Lease Response

  1. We agree in general, with some reservations. As regards disclosure of GHG emissions, we fully support the disclosure of Scope 1 and 2 emissions. Given their nature, Scope 3 emissions cannot be estimated with the same level of certainty. We believe that the additional provisions attaching to Scope 3 reporting are beneficial, but would support additional refinement to ensure emissions are not overreported or underreported. While we see clear benefits to identifying risk assessments and opportunities, and the associated capital deployment, we do not see the same clarity of purpose to disclosing internal carbon costs and remuneration data. While we believe it may help understand the throught process behind the capital deployment, the actual amounts deployed are the more meaningful data.
  2. We do not see any additional cross-industry metrics which should be added.
  3. VL believes the GHG protocol represents the most comprehensive, widely accepted measurement standard for emissions. That said, there is a need for the data to be continuously reviewed and updated. The further one moves from direct measurement of emissions, the greater the potential for error. Scope 3 in particular is often two to three times removed from direct measurement, and subject to local variations. We recommend the process of the GHG protocal be utilized, but the local values should be substituted is more current and/or more relevant.
  4. We support the disclosure of Scope 1 and Scope 2 emissions in all cases. Given the uncertainty involved with Scope 3 emissions, and the additional cost inherent with gathering data, we believe it may be appropriate to phase in Scope 3 reporting requirements. We do support the inclusion of Scope 3 emissions if these are included in other reporting under this standard. We have no clear preference for reporting disaggregated emissions versus a single CO2e value.
  5. We agree with the requirement to report Scope 1 and Scope 2 emissions for the consolidated entity distinct from associations, joint ventures, etc. The consolidated entry reporting would be relatively straightforward. The GHG protocol addresses the issue with joint ventures, etc. in their principle of equity share, financial control or operational control. We support the IFRS decision to align with these principles.
  6. If Scope 3 emissions are to be included in reporting, we support their inclusion as an absolute gross amount. We further support the application of materiality to disclosure of Scope 3 emissions.

  

  Visual Lease Response

  VL agrees that the definition of “latest international agreement on climate change” is sufficiently clear. With that understanding, we agree with the proposed disclosure about climate-related targets. We believe that users compare the company-specific targets versus the agreement targets to assess the sufficiency of the target, then compare actual results against the target to assess performance.

  
  
  

  Visual Lease Response

  Regarding items (a) through (c), we agree with the approach to revising the SASB standards to enhance their international applicablity. We are indifferent to the three revision approaches; in fact we believe the facts associated with each standard may mean that different approaches are best suited to different standards. We only suggest that the revisions are perfomed with an eye to keeping the standard as constant as possible, so that an entity that has used the relevant SASB Standards in prior periods may continue to provide information consistent with the equivalent disclosures in prior periods.

  As regards iems (d) through (i), VL is not sufficiently knowledgeable about the proposed revisions to the existing SASB Standards address emerging consensus on the measurement and disclosure of financed or facilitated emissions in the financial sector to offer an opinion on the matter. We can only comment that the concept of “financed emissions” and “facilitated emissions” seems markedly different that the Scope 3 emissions associated with other industries.

  As regards the industry-based disclosure, requirements items (j) through (l), we fully support the approach of standards which reflect the unique attributes of different industries. Beyond that, we have no comments on any specific industry requirements.

  

  Visual Lease Response

  As a developer of a software solution for the various updated lease accounting standards globally adopted, we do not have direct insight into the expected costs of complying with the proposed environmental disclosure proposals. However, we believe the complexity of the proposed standards is an important parallel to the lease accounting standards. The rules are complex and pervasive, which will require entities to dedicate significant resources to compliance. Excel spreadsheets will be difficult to manage and will create opportunities for error to occur. Development of software to aid in tracking and disclosure will be an important condition for ensuring timely and accurate data presentation to users.

  

  Visual Lease Response

  Due to the breadth and variety of data encompassed by these standards, we feel it best to approach the issue of verifiability based on the nature of the data.

  Reporting Scope 1 and Scope 2 emissions are relatively straightforward and as such can be stringently verified. While greenhouse gas emissions are not directly measured, the source of the emissions can be directly measured, and the relationship to emissions is well established.

  Scope 3 emissions are indirectly measured. The relationship between the input measure and output emissions estimates can be validated, but validation of the input measure is a greater challenge.

  Other items in the standard move even further from direct measure. Estimating the financial impact to the entity of a hypothetical event impacting the entity’s value chain constitutes several degrees of separation. It becomes difficult to validate anything other than the internal mathematics of the modeling. In this instance, the standard would have to be reasonableness instead of accuracy. We believe that more detail about verification and enforcability is necessary.

  

  Visual Lease Response

  Visual Lease recognizes that adoption is a complex issue with no simple answer. We can look to our experience of adapting software for the new Lease Accounting requirements (IFRS 16, ASC 842) for some guidance. The changes to lease
  accounting were mere adjustments compared to the scope of Draft S1, and approximately three years passed between adoption and the effective date.

  On the other hand, we also recognize the rush in many jurisdictions to pass some sort of standard. We support the ISSB taking a leadership role in this issue, and so we do not suggest taking a longer approach. However, a phased implementation may be preferable. For instance, capturing and reporting Scope 1 and Scope 2 Greenhouse Gas Emissions is a relatively straightforward exercise and could be implemented sooner. Understanding the proper horizon for Scope 3 issues is a challenge of its own, much less estimating those emissions. The effective date should be later. Estimating the financial statement impact of hyppothetical environmental events requires extensive modeling, and therefore might best be phased in over time. In any event, we would certainly support a provision to permit early adoption of the standards.

  We would encourage the ISSB to leave open the possibility for individual jurisdictions to use an adoption waterfall, where the largest entities would adopt first, followed by successively smaller entites. By this method, the entities with the most resources to apply to the efforts can model and test the standards. The lessons learned from their implementation would then lessen the expense on smaller enterprises who are less able to bear the cost.

  We further support proposed relief from disclosing comparatives in the first year of application. We are concerned that entities might or delay adoption until at least two years of reliable information is available. We support adoption in the first year reliable information is available. However, if an entity has made prior disclosures we support using that information as comparative. If the prior disclosures do not comply with the new standards, we believe the comparison would still benefit users if the different methodologies are adequately explained.

  

  Visual Lease Response

  We only suggest the approach to digital reporting be consistent with the current approach to financial reporting.

  

  Visual Lease Response

  Visual Lease supports initiatives to establish globally consistent sustainability information disclosures. Environmental issues are truly global issues, and require a consistent application across all borders.

  As stated in our response to Question 13, we believe timing is probably the most important consideration that could limit the ability of Draft S1 to be used as a global baseline. The last standard to the playing field cannot become the baseline. For that reason we support a quick but measured path to an effective date.

  VL believes a building block approach is best suited to achieving this global baseline standard. First make effective those parts of the standard which are easiest to implement. Add the levels of complexity as we go along. We contend that this accretive approach is the most effective way to make this standard the global baseline.

  

  Visual Lease Response

  Visual Lease has no further comments.
  Respectfully Submitted,

  Joseph Fitzgerald
  Senior Vice President, Lease Market Strategy

  Visual Lease
  William Harter
  Principal Solutions Advisor
  Visual Lease

  The post Comments on the Exposure Draft IFRS S2 Climate Related Disclosures by the ISSB of the IFRS Foundation first appeared on Visual Lease.]]> https://visuallease.com/comments-on-the-exposure-draft-ifrs-s1-general-requirements-for-disclosure-of-sustainability-related-financial-information-by-the-issb-of-the-ifrs-foundation/ Tue, 01 Aug 2023 13:00:14 +0000 https://visuallease.com/?p=8380 Visual Lease, LLC (hereinafter “VL,” “we,” “our,” and “us”) appreciates being given an opportunity to comment on the Exposure Drafts published by the International Sustainability Standards Board (hereinafter the “ISSB”)...
  The post Comments on the Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information by the ISSB of the IFRS Foundation first appeared on Visual Lease.]]> Visual Lease, LLC (hereinafter “VL,” “we,” “our,” and “us”) appreciates being given an opportunity to comment on the Exposure Drafts published by the International Sustainability Standards Board (hereinafter the “ISSB”) in March 2022. VL supports the direction of developing consistent sustainability reporting standards, as consistency in standards is necessary to permit users to analyze and understand entity disclosures. In the United States and globally, more entities have responded to the growing information needs of stakeholders by implementing disclosure practices for non-financial information. This information has been inconsistently presented, however, and is therefore of limited usefulness. We hope that the IFRS Foundation’s work on setting out sustainability reporting standards will help create a high-quality and consistent corporate reporting system, which when used in combination with existing financial reporting, presents meaningful and useful information to the public. We welcome the publication of the ISSB’s two Exposure Drafts of standards for the disclosure of sustainability-related financial information, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate Related Disclosures.

  

  Visual Lease Response

  Overall, VL believes this Exposure Draft to be clear, understandable, and capable of meeting its objectives. Our overarching concern is that standards be developed which will enable auditors, regulators, and other stakeholders to not only assess a single entity’s environmental impact on its enterprise value, but to make relevant comparisons among entities. The standards must be consistently applied globally. While variations may be necessary based on industry or the types of activities measured, political boundaries should not be a consideration. This Exposure Draft meets those standards and clearly states that an entity would be required to identify and disclose material information about all of the sustainability-related risks and opportunities to which the entity is exposed.
  There are some minor issues we address in response to specific questions, but overall we consider this standard well developed.

  

  Visual Lease Response

  Overall, Visual Lease finds the objective to be clearly stated. The broad objective of Paragraph 1 is supported and explained well by most subsequent paragraphs, although the contents of Paragraph 6 (c) and (d) are more vague than we would like. A statement such as, “its relationships with people, the planet and the
  economy, and its impacts and dependencies on them,” does not provide clear prescriptive direction to entities. We would instead desire to see the standard address the relationship between the IFRS Sustainability Disclosure Standards as a global standard and country- or region-specific standards. We find the definitions used in the Objectives section to be clear.

  

  Visual Lease Response

  Visual Lease supports the application of the standards across any jurisdiction’s Generally Accepted Accounting Principles (GAAP). By its very nature, environmental issues apply globally and do not respect any political (or geographic) boundaries. While we recognize that the nature of different business enterprises may require differences in approach, as is contemplated here by the recognition of modifying some disclosure items for not-for-profit entities, the overall objectives must remain consistent.

  

  Visual Lease Response

  We find the objectives to be clear and appropriately defined. While individual metrics and targets may well evolve over time, the objectives give a clear and consistent framework. Establishing very detailed industry-specific metrics would be inconsistent with the objectives of the standard: to be able to provide the users of information a sufficient basis to assess the implications of sustainability-related risks and opportunities on the entity’s enterprise value. Overall, we believe that the ISSB has struck an appropriate balance between goals and specific requirements that enable primary users to assess enterprise value.

  Visual Lease supports the flexibility to report metrics either as an absolute measure or in relation to other metrics. This will allow information to be analyzed and understood by users in industry- or company-specific ways, enhancing the usefulness of the data.

  

  Visual Lease Response

  Environmental disclosures should be provided for the same reporting entity as for the related financial statements. While we generally support the provisions about sustainability-related risks and opportunities related to activities, interactions, and relationships, we believe the reference to “investments it controls” in paragraph 40(c) leaves unanswered questions. We generally support the use of the GHG Protocol approaches (equity share, financial control, operational control) and agree with its use here, but we believe some additional clarification may be required. Further, we believe that the “use of resources along its value chain” makes sense
  and adds some clarity to the economics, but also may have unanswered questions in practice.

  

  Visual Lease Response

  The requirement on the need for connectivity between various sustainability-related risks and opportunities is clear. The presentation of environmental risks and opportunities requires a complex set of estimation and analysis. Visual Lease believes that identifying and explaining these connections will aid users in understanding of the data presented. Without this additional explanation, transparancy could be reduced instead of enhanced, which is contrary to the objectives. Visual Lease expects that implementation guidance will be required after release of official guidance, but that timely release of the guidance is imperative.

  

  Visual Lease Response

  Visual Lease believes that by starting with the application of the IFRS Sustainability Disclosure Standards entities will have a clear reference point for disclosure. The ability to provide additional disclosures to supplement the standards will provide value to users. The principles outlined in Paragraphs 48 and 49 are paramount to creating useful disclosure. We believe the guidance in Paragraphs 50 through 55 to be reasonably complete, with the provision that it should not be considered exhaustive. The ability to present information which is relevant and useful, as outlined in Paragraphs 46 and 47, must be maintained.

  

  Visual Lease Response

  VL believes that while the definition of materiality is generally clear, there is potentially too much lattitude given to entities to apply judgement in determining thresholds. While we trust that most entities will apply the standard faithfully and consistently with the objectives of the standard, an unscrupulous entity could use materiality to obfuscate pertinent data.

  When information could be presented for multiple reporting entities,VL believes the standard established in Paragraph 37 should apply to materiality. If the sustainability-related financial disclosures should be for the same reporting entity as the related general purpose financial statements then the same materiality thresholds should apply to both.

  VL does agree with the proposal to relieve an entity from disclosing information
  otherwise required by the Exposure Draft if local laws or regulations prohibit
  the entity from disclosing that information as a general principle. We do not have sufficient information as to the potential application of this rule to make further comments.

  

  Visual Lease Response

  We agree with the proposal that the sustainability-related financial disclosures would be required to be provided at the same time as the financial statements to which they relate. We specifically wish to affirm our support of Paragraph 70, relating to interim reporting.

  

  Visual Lease Response

  Visual Lease agrees with the proposals about the location of sustainability-related
  financial disclosures. The approach of deliberately avoiding a requirement to provide the information in a particular location within the general purpose financial reporting is acceptable when combined with the requirement to ensure that the sustainability-related financial disclosures are clearly identifiable and not obscured by that additional information. This further extends to the proposal that information required by IFRS Sustainability Disclosure Standards can be included by cross-reference provided that the information is available to users of general purpose financial reporting on the same terms and at the same time as the information to which it is crossreferenced.

  

  Visual Lease Response

  VL is concerned that users be able to apply data consistently across periods in order to draw meaningful conclusions. The provisions of Paragraph 64 quantify the difference and explain the reason for the difference, and should be sufficient in
  most cases to protect the interests of the users. It is our belief that data be as accurate as possible: so, any time a better measure of a previously reported metric is available we support its use and proper disclosure.

  Overall, we support alignment of sustainability-related disclosures with financial disclosures.

  

  Visual Lease Response

  VL agrees with this proposal. The requirements for any statement of compliance should be equivalent between financial statements and sustainability disclosure statements.

  

  Visual Lease Response

  Visual Lease recognizes that adoption is a complex issue with no simple answer. We can look to our experience of adopting software for the new Lease Accounting requirements (IFRS 16, ASC 842) for some guidance. The changes to lease accounting were less extensive compared to the scope of Draft S1, and approximately three years passed between adoption and the effective date.

  On the other hand, we also recognize the imperative in many jurisdictions to pass some sort of standard quickly. We support the ISSB taking a leadership role in this issue, and so we do not suggest taking a longer approach. However, a phased implementation may be preferable. For instance, capturing and reporting Scope 1 and Scope 2 Greenhouse Gas Emissions is a relatively straightforward exercise and could be implemented sooner. Understanding the proper horizon for Scope 3 issues is more challengeing, much less estimating those emissions: the effective date may take longer. Estimating the financial statement impact of hyppothetical environmental events requires extensive modeling, and therefore might best be phased in over time.

  In any event, VL supports a provision to permit and encourage early adoption of the standards. We would encourage the ISSB to leave open the possibility for individual jurisdictions to use an adoption waterfall, where the largest entities would adopt first, followed by successively smaller entites. By this method, the entities with the most resources to apply to the efforts can model and test the standards. The lessons learned from their implementation would then lessen the expense on smaller enterprises who are less able to bear the cost.

  We further support proposed relief from disclosing comparatives in the first year of application. We are concerned that entities might delay adoption until at least two years of reliable information are available. We support adoption in the first year reliable information is available. However, if an entity has made prior disclosures, we support using that information as comparative. If the prior disclosures do not comply with the new standards, we believe the comparison would still benefit users if the different methodologies are adequately explained.

  

  Visual Lease Response

  Visual Lease supports initiatives to establish globally consistent sustainability information disclosures. Environmental issues are truly global issues, and require a consistent application across all borders.

  As stated in our response to Question 13, we believe timing is probably the most important consideration that could limit the ability of Draft S1 to be used as a global baseline. The last standard to the playing field cannot become the baseline. For that reason we support a quick but measured path to an effective date.

  VL believes a building block approach is best suited to achieving this global baseline standard. First make effective those parts of the standard which are easiest to implement. Add the levels of complexity as the standards evolve. We contend that this accretive approach is the most effective way to make this standard the global baseline.

  

  Visual Lease Response

  We only suggest the approach to digital reporting be consistent with the current approach to financial reporting.

  

  Visual Lease Response

  Given the breadth and extent of the disclosures proposed, we can safely say that the costs of compliance will be high. We have seen estimates of 1,300 person hours per year to meet compliance requirements.1 We cannot speak to the accuracy of that number, but our experience with the adoption of Lease Accounting policy changes (IFRS 16, etc.) is illustrative.

  There is a significant cost initially to gather the required information and to set up the processes to meet the requirements. In the United States, the effort was so significantly higher than estimated that implementation for Private Business Entities was deferred a year to permit sufficient time.

  Entities who initially tried to capture the required information in Excel spreadsheets found the workload to be extremely high, and the risk of errors very high as well. Costs went down and accuracy increased as compliance software became available.

  

  Visual Lease Response

  Visual Lease has no further comments.

  Respectfully Submitted,

  Joseph Fitzgerald
  Senior Vice President, Lease Market Strategy
  Visual Lease

  William Harter
  Principal Solutions Advisor
  Visual Lease

  1. Jill Klindt, “ESG reporting requires the right people and processes”, Accounting Today, July 20, 2022

  The post Comments on the Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information by the ISSB of the IFRS Foundation first appeared on Visual Lease.]]> https://visuallease.com/streamline-your-finances-six-reasons-why-small-and-mid-sized-businesses-need-accounting-software/ Thu, 27 Jul 2023 13:00:01 +0000 https://visuallease.com/?p=8116 In today’s fast-paced business landscape, small and mid-sized businesses (SMBs) face numerous challenges in managing their financial operations efficiently. As a business owner, you may be wondering “Do I need...
  The post Streamline Your Finances: Six Reasons Why Small and Mid-Sized Businesses Need Accounting Software first appeared on Visual Lease.]]> In today’s fast-paced business landscape, small and mid-sized businesses (SMBs) face numerous challenges in managing their financial operations efficiently. As a business owner, you may be wondering “Do I need accounting software for my small business?” The answer is a resounding yes. Accounting software offers numerous benefits that can significantly impact the success and efficiency of your small business. 

  Here are six compelling reasons why accounting software is essential for your small or medium-sized business:

  1. Enhanced Financial Organization:

     Accounting software provides a comprehensive platform for organizing and managing financial data. By automating repetitive tasks like data entry, invoicing, and expense tracking, SMBs can streamline their financial processes, saving time and reducing the likelihood of errors. With a centralized system, businesses can easily access and retrieve critical financial information, facilitating accurate and timely decision-making.

  2. Simplified Bookkeeping:

     Manual bookkeeping can be time-consuming and error-prone, especially for SMBs with limited resources. Accounting software automates essential bookkeeping tasks, such as recording transactions, reconciling accounts, and generating financial statements. By eliminating manual entry and calculations, the software minimizes the risk of human error and ensures accurate financial records.

  3. Efficient Invoicing and Payment Management:

     For SMBs, maintaining a healthy cash flow is vital. Accounting software enables businesses to generate professional invoices, track payment statuses, and send reminders for overdue payments. With automated payment processing capabilities, businesses can expedite cash inflows, reducing the time spent on chasing payments and improving overall cash flow management.

  4. Financial Analysis and Reporting:

     Understanding the financial health of your business is crucial for making informed decisions and setting strategic goals. Accounting software provides robust reporting tools that generate real-time financial statements, profit and loss reports, balance sheets, and cash flow statements. These insights help SMBs identify trends, pinpoint areas of improvement, and make data-driven decisions to drive growth.

  5. Compliance with Accounting Standards:

     Adhering to accounting standards is essential for accurate financial reporting and maintaining regulatory compliance. Accounting software is designed to stay up-to-date with the latest accounting regulations, ensuring that your business meets the necessary standards. For instance, lease accounting software specifically caters to the complexities of lease accounting, helping SMBs comply with ASC 842 or IFRS 16 guidelines.

  6. Time and Cost Savings:

     By automating financial tasks and reducing manual effort, accounting software saves SMBs valuable time and resources. This allows business owners and finance teams to focus on core operations, customer relationships, and strategic planning. Additionally, minimizing errors and improving financial efficiency can result in cost savings and contribute to overall business profitability.

  In today’s digital era, small and mid-sized businesses can significantly benefit from utilizing accounting software. With features tailored to their unique needs, such software enhances financial organization, simplifies bookkeeping, streamlines invoicing and payment management, provides valuable financial insights, ensures compliance, and ultimately saves time and costs. Whether you require general small business accounting software or specialized lease accounting software, investing in the right solution will empower your business to thrive and make informed financial decisions that drive growth and success.

  The post Streamline Your Finances: Six Reasons Why Small and Mid-Sized Businesses Need Accounting Software first appeared on Visual Lease.]]> https://visuallease.com/understanding-the-meaning-of-your-lease-commencement-date/ Fri, 21 Jul 2023 13:12:13 +0000 https://visuallease.com/?p=8109 In the world of leasing agreements, there can be some confusion when it comes to the terminology used by attorneys and accountants. One such term is the “lease commencement date.”...
  The post Understanding the Meaning of Your Lease Commencement Date first appeared on Visual Lease.]]> In the world of leasing agreements, there can be some confusion when it comes to the terminology used by attorneys and accountants. One such term is the “lease commencement date.” While attorneys may interpret it as a specified date within the contract, accountants view it differently. In this blog post, we will explore the disparity in meaning between the lease commencement date for attorneys and accountants. Additionally, we will discuss the distinction between the lease start date and the move-in date, as well as the significance of the lease accounting effective date.

  What Is a Lease Commencement Date? 

  A lease commencement date is the specific date on which a lease agreement becomes effective, and the tenant takes possession of the leased property. It marks the beginning of the lease term during which the tenant has the right to occupy and use the property, while the landlord is obligated to provide possession of the premises as agreed upon in the lease.

  Lease Commencement Date Definitions

  • Lease Term: The period during which the tenant has the right to occupy the leased property. It starts on the lease commencement date and ends on the lease expiration date.
  • Lease Commencement Date: The specific date on which the lease agreement becomes effective, and the tenant takes possession of the leased property.
  • Rent Commencement Date: The date from which the tenant becomes liable to pay rent to the landlord. It is typically the same as the lease commencement date, but there may be situations where the rent commencement date differs from the lease commencement date.
  • Occupancy Date: It refers to the date when the tenant physically occupies the leased property. It is often the same as the lease commencement date, but it can sometimes be earlier or later, depending on the terms of the lease agreement.
  • Effective Date: The date on which the lease agreement is signed by both parties and becomes legally binding. It may or may not be the same as the lease commencement date.
  • Commencement Certificate: A document issued by the landlord or an authorized representative confirming the lease commencement date and the tenant’s possession of the premises.
  • Rent Abatement: A provision in the lease agreement that allows for a temporary reduction or suspension of rent payments during specific circumstances, such as when the premises are undergoing renovations or repairs before the tenant moves in.
  • Holdover Period: A period that occurs when a tenant continues to occupy the leased premises after the lease term has expired without signing a new lease or terminating the tenancy. The terms regarding the holdover period are usually outlined in the original lease agreement.

  How Do You Determine A Lease Commencement Date? 

  Attorney’s Perspective on Lease Commencement Date

  For attorneys, the lease commencement date is a date defined within the leasing contract. It could be the date on which the contract was signed, or some other predetermined effective date specified in the agreement. This date holds legal significance and serves as a reference point for various contractual obligations and rights.

  Accountants’ Perspective on Lease Commencement Date

  In contrast, accountants perceive the lease commencement date as the point at which the lessee gains possession and control of the leased asset. This date could be when the lessee moves into the property or when they receive access to initiate specific construction work. Essentially, it is the actual start date of the lease from an accounting standpoint.

  Can the lease commencement date vary depending on the circumstances?

  The commencement date from an accounting perspective can vary depending on the circumstances. It might coincide with the lease start date, the move-in date, or even the date when the keys are delivered. Whichever event occurs first will be considered the lease commencement date for accounting purposes.

  Importance of Lease Commencement Date for Accounting

  Understanding the lease commencement date is crucial for accurate lease accounting. It determines when the lessee should begin recording the leased asset and the associated liability. It also marks the starting point for expensing the lease. In the case of an operating lease, the expense is typically recognized on a straight-line basis. Conversely, for a finance lease, the amortization of the asset is straight-lined. Regardless, both the asset recording and expense recognition commence from the accounting commencement date, rather than the date of the first rent payment or the effective date specified in the contract.

  Although the lease commencement date may seem straightforward, its interpretation differs between attorneys and accountants. Attorneys focus on the contractual definition, while accountants emphasize the actual possession and control of the leased asset. Understanding this discrepancy is vital for accurate lease accounting, as it determines when to record the asset, liability, and associated expenses. By clarifying the distinction between the lease start date, move-in date, and the lease accounting effective date, both lessors and lessees can ensure compliance with accounting standards and avoid any potential misunderstandings in lease agreements.

  Lease Commencement Date FAQ’s

  What is the difference between the lease commencement date and the effective date?

  The lease commencement date and the effective date are related but distinct terms in the context of a lease agreement. Here’s how they differ:

  •  Lease Commencement Date: The lease commencement date refers to the specific date when the lease term begins, and the tenant takes possession of the leased property. It marks the start of the tenant’s occupancy and the landlord’s obligation to provide possession. On this date, the tenant assumes responsibility for paying rent and adhering to the terms and conditions outlined in the lease.
  •  Effective Date: The effective date, on the other hand, refers to the date when the lease agreement becomes legally binding and enforceable. It is the date when the lease contract is signed by both the landlord and the tenant, indicating their agreement to the terms and conditions of the lease. The effective date may or may not be the same as the lease commencement date.

   In some cases, the effective date and the lease commencement date coincide, meaning the lease becomes effective and the tenant takes possession of the property on the same day. However, there can be instances where the effective date precedes the lease commencement date. For example, if a lease agreement is signed in advance but the tenant’s occupancy doesn’t begin until a later date, the effective date remains the date of signing while the lease commencement date is the actual start of tenancy.

  What is the difference between the lease commencement date and the inception date?

  The lease commencement date and the inception date are related to the start of a lease agreement, but they have slightly different meanings. While the Lease Commencement date refers to the specific date when the lease term begins, and the tenant takes possession of the leased property, the inception date, generally refers to the date when the lease agreement is formed or comes into existence. It is the date when the initial terms and conditions of the lease are agreed upon and documented in the lease agreement, regardless of when the tenant actually takes possession of the property. The inception date is essentially the starting point of the contractual relationship between the landlord and the tenant.

  In simpler terms, the lease commencement date is the date when the tenant begins occupying the premises and the lease term starts, whereas the inception date is the date when the lease agreement itself is formed.

  Is the lease commencement date the same as the date of the first rent payment or the effective date specified in the contract?

  The lease commencement date may or may not be the same as the date of the first rent payment or the effective date specified in the contract.

  In some cases, the lease commencement date, the date of the first rent payment, and the effective date may all align, meaning they occur on the same day. However, it’s also common for these dates to be different, depending on the specific terms negotiated between the landlord and the tenant.

  To determine the relationship between these dates, it is necessary to refer to the lease agreement itself, as it will explicitly state when the lease commencement date, the first rent payment, and the effective date occur in the specific context of that agreement.

  How does understanding the lease commencement date prevent misunderstandings in lease agreements?

  Understanding the lease commencement date is crucial in lease agreements to prevent misunderstandings and ensure clarity between the parties involved. Here are 6 ways it helps:

  1. Clear start of occupancy: The lease commencement date specifies the exact date when the tenant can legally occupy the leased property. This clarity prevents any confusion or disputes about when the tenant can take possession of the premises.
  2. Rent calculation: Lease agreements typically outline the rent payment terms, which often include a monthly or annual basis. The lease commencement date allows both parties to determine the accurate start date for calculating the rental amount, avoiding disagreements over when the rent obligation begins.
  3. Term of the lease: The lease commencement date establishes the duration of the lease agreement. It defines the start and end points of the lease term, ensuring that both parties are aware of the specific time period covered by the agreement. This prevents misunderstandings about the lease’s duration and avoids premature termination or extensions.
  4. Maintenance and repairs: The lease commencement date serves as a reference point for maintenance and repairs. It establishes when the tenant becomes responsible for the upkeep of the property, and any pre-existing damages or repairs needed before the tenant’s occupancy can be determined. This clarity minimizes disputes over maintenance responsibilities and the condition of the property at the start of the lease.
  5. Legal obligations: Certain legal obligations, such as providing notice to terminate the lease, may be tied to the lease commencement date. Understanding this date ensures that both parties comply with their respective legal obligations and prevents misunderstandings or violations of the lease agreement.
  6. Timeline for negotiations: The lease commencement date provides a timeline for negotiations and preparations between the landlord and tenant. It allows both parties to plan and coordinate activities related to move-in logistics, such as inspections, renovations, or obtaining permits. Clarity regarding the lease commencement date facilitates effective communication and minimizes misunderstandings during the preparation phase.

  Overall, understanding the lease commencement date in lease agreements promotes transparency, reduces disputes, and provides a common reference point for both parties involved. It ensures that the terms, obligations, and responsibilities within the lease agreement are clearly defined, preventing misunderstandings that can lead to conflicts or legal issues.

  What are the implications of not accurately determining the lease commencement date?

  Failing to accurately determine the lease commencement date can have several implications and consequences for both the landlord and the tenant. Here are 6 potential issues that may arise:

  1. Ambiguity and disputes: Without a clear lease commencement date, there is room for ambiguity and confusion about when the tenant’s occupancy rights and rent obligations begin. This can lead to disputes between the parties, as each may have a different understanding of when the lease officially starts.
  2. Rent calculation discrepancies: The lease commencement date is crucial for calculating rent amounts accurately. If the date is not properly determined, it can result in disagreements about the rental amount and the duration for which it applies. This can lead to financial disputes and potential financial losses for both parties.
  3. Legal compliance issues: The lease commencement date often has legal implications tied to it, such as notice periods for termination or other legal obligations. Failing to determine the date accurately can result in non-compliance with these legal requirements, which may have legal consequences or negatively impact the rights and responsibilities of both parties.
  4. Delayed occupancy or premature termination: Inaccurately determining the lease commencement date can cause delays in the tenant’s occupancy, particularly if the date is later than expected. Conversely, if the date is earlier, it may result in premature termination of the previous tenant’s lease or inadequate time for necessary preparations. These situations can disrupt the tenant’s plans and lead to financial losses or legal complications.
  5. Inadequate time for preparations: The lease commencement date is an essential reference point for various activities such as property inspections, repairs, renovations, and obtaining necessary permits. If the date is not accurately determined, it can lead to insufficient time for these preparations, affecting the condition of the property or the tenant’s ability to move in smoothly.
  6. Misalignment with other agreements: In some cases, the lease commencement date may need to align with other agreements or contracts, such as utility connections, insurance coverage, or leasehold improvements. Failing to accurately determine the date can result in a mismatch between these agreements, leading to logistical complications or contractual breaches.

  It is important for both landlords and tenants to ensure that the lease commencement date is accurately determined and clearly documented in the lease agreement. Doing so minimizes the potential for misunderstandings, disputes, and legal complications, promoting a smooth and mutually beneficial leasing experience for all parties involved.

  The post Understanding the Meaning of Your Lease Commencement Date first appeared on Visual Lease.]]> https://visuallease.com/unlocking-efficiency-and-sustainability-exploring-contract-management-systems/ Thu, 20 Jul 2023 13:00:44 +0000 https://visuallease.com/?p=8428 Contract management plays a crucial role in modern business operations, ensuring effective collaboration, risk mitigation, and regulatory compliance. With the growing importance of environmental, social, and governance (ESG) considerations, contract...
  The post Unlocking Efficiency and Sustainability: Exploring Contract Management Systems first appeared on Visual Lease.]]> Contract management plays a crucial role in modern business operations, ensuring effective collaboration, risk mitigation, and regulatory compliance. With the growing importance of environmental, social, and governance (ESG) considerations, contract management systems have evolved to encompass sustainability factors. In this blog post, we delve into the world of contract management, highlighting its key functions the integration of ESG elements. By understanding the fundamentals of contract management and its alignment with ESG requirements, businesses can enhance efficiency and sustainability across their value chains.

  What is Contract Management System?

  A contract management system refers to the structured approach and technology utilized to oversee the complete lifecycle of contracts. It goes beyond simply accounting for legal terms and conditions and extends to managing relationships, obligations, and performance throughout the contract’s duration. A contract management system streamlines processes, centralizes information, and provides organizations with the tools to effectively create, negotiate, execute, and monitor contracts.

  Contract Management Functions:

  Contract management systems encompass several key functions that contribute to effective contract administration and performance:

  • Document Management: Efficiently store, organize, and retrieve contract documents, including agreements, amendments, and related correspondence.
  • Workflow Automation: Streamline contract-related processes, automate notifications, approvals, and tasks, ensuring timely execution and adherence to deadlines.
  • Compliance and Risk Management: Monitor contractual compliance, identify potential risks, and implement risk mitigation strategies to safeguard the organization’s interests.
  • Performance Tracking: Monitor and measure contract performance against established metrics, enabling proactive management and facilitating data-driven decision-making.
  • Reporting and Analytics: Generate reports and analytics to gain insights into contract performance, identify trends, and support strategic decision-making.

  Integration of ESG Considerations:

  In the era of ESG awareness, contract management systems have expanded their scope to incorporate sustainability factors. This includes tracking and reporting on carbon emissions across the value chain, considering the environmental impact of contracted goods and services, and ensuring compliance with ESG goals. Organizations are increasingly leveraging contract management systems to capture ESG data, monitor supplier sustainability practices, and align contract terms with sustainability objectives.

  Contract management systems have become essential tools for organizations seeking operational efficiency, risk mitigation, and ESG integration. By implementing robust contract management systems, businesses can optimize contract lifecycle management, foster transparency, and align contractual relationships with sustainability goals. Embracing the phases of contract management and leveraging technology-driven solutions, organizations can navigate the complexities of contract administration while addressing ESG considerations, fostering responsible business practices, and driving sustainable value creation.

  The post Unlocking Efficiency and Sustainability: Exploring Contract Management Systems first appeared on Visual Lease.]]> https://visuallease.com/esg-reporting-simplified-your-top-questions-answered/ Mon, 17 Jul 2023 14:00:51 +0000 https://visuallease.com/?p=8488 VL experts break down the recently announced sustainability reporting standards from the International Sustainability Standards Board (ISSB) The first-ever set of standards recently unveiled by the International Sustainability Standards Board...
  The post ESG Reporting Simplified: Your Top Questions Answered first appeared on Visual Lease.]]> VL experts break down the recently announced sustainability reporting standards from the International Sustainability Standards Board (ISSB)

  The first-ever set of standards recently unveiled by the International Sustainability Standards Board (ISSB) are a big step forward for global ESG and sustainability reporting standards. These new standards, S1 and S2, will have long-standing implications for sustainability regulation, data collection and reporting. Visual Lease has helped clients adapt to new regulations and track complicated metrics for nearly three decades, and recently launched the VL ESG Steward in anticipation of ESG reporting becoming the next great challenge for finance and real estate teams.

  Today, we’re answered the top questions our ESG clients have about how to best prepare for these new regulations. 

  What are the S1 and S2 standards announced by the ISSB?

  The S1 and S2 standards are the ISSB’s new guidelines for sustainability disclosure. The S1 standard (titled “General Requirements for Disclosure of Sustainability-related Financial Information) aims to identify sustainability risks and opportunities, then assess their impact on the value of the enterprise. The S1 standard considers all sustainability risks and opportunities.

  The S2 standard is focused specifically on climate-related issues, including the disclosure of greenhouse gas emissions along with other industry-specific topics.

  When are these standards expected to go into effect?

  The ISSB published the S1 and S2 standards in late June. The standards will be effective with corporate fiscal years starting January 1, 2024. 

  What do these standards mean for U.S. organizations?

  Though the ISSB develops sustainability disclosure standards, it does not have regulatory authority. This means the implication on U.S. organizations will depend on the discretion of authorities in different jurisdictions.

  U.S. organizations may be required to report under ISSB guidelines directly, under guidelines like those adopted for the European Union by the European Financial Reporting Advisory Group (EFRAG). 

  Although no nation has yet adopted the ISSB standards, many have indicated their intent to do so. It’s reasonable to assume that if a U.S. organization must report accounting under the International Financial Reporting Standards (IFRS), it is likely ISSB reporting will also require ESG accounting.

  What are some of the anticipated benefits of these standards to organizations? What are the risks of not meeting them?

  Apart from environmental benefits, maintaining a positive relationship with your customers is perhaps the most significant benefit, particularly in the B2B world. Organizations that must report for regulatory reasons require this information and are likely to cut ties with companies that don’t meet their ESG goals. 

  The same goes for direct-to-consumer businesses. A recent statistic from PwC noted that 76% of consumers say they will stop buying from companies that treat the environment, employees, or the community in which they operate poorly.

  Access to capital can also suffer from poor or non-existent ESG reporting. Moody’s Investor Services reports one of five organizations suffered a credit rating setback after an assessment of their adherence to ESG best practices. 

  Robust ESG reporting can even make an organization more efficient, eliminating or reducing unnecessary travel, and reducing excessive waste — there are countless potential benefits. 

  What data should organizations start tracking to prepare for this new level of reporting?

  The ISSB understands the enormous scope of sustainability reporting. To address this, in April 2023, the board decided to introduce a transition relief in IFRS S1 that allows an entity to report on only climate-related risks and opportunities. These can be broken down into three pillars: energy consumption and greenhouse gas emissions, water usage, waste generation, and biodiversity. 

  How else can organizations set themselves up for ESG reporting success?

  At Visual Lease, we define ESG reporting success as generating reports that clearly present understandable and verifiable metrics. 

  We recommend three steps to make this possible. First, establish a task force responsible for handling everything ESG requires. Next, you’ll want to establish your inventory. ISSB is prioritizing energy and greenhouse gas emissions, but these are also the most complex to track. Any fuel expenditure should be tracked. Gas-fired HVAC and water heaters, diesel-powered emergency generators and propane-powered forklifts are all sources of energy and emissions. Lastly, establish controls around the data flow and ensure an audit trail is available for the necessary attestation.  

  Keep in mind that the goal is not to grasp as much data as possible. We recommend capturing what is consistently obtainable with controls to ensure the data is accurate. This will serve as a baseline to complete additional ESG requirements as they are phased in.  

  Where should organizations look for the latest news on ESG regulations?

  Going directly to the source for information is the best way to get news on ESG regulations, but the reports from the ISSB, SEC, and EFRAG can be very difficult to follow and understand. Regulators are required to speak and write in very precise, technical language, which is often too complex for non-experts to follow. Even non-regulatory bodies often use very technical language or push agendas to promote certain outcomes.

  At Visual Lease, we believe a mix of advisory firms is the best way to stay on top of the latest ESG developments. Given the ISSB requirements, all of the large accounting firms are developing a strong ESG advisory practice. Most are supporting regular webcasts, publications, and continuing education on the topic. These resources do an excellent job of aggregating the technical information and presenting it in a manner that is easy to understand.

  The post ESG Reporting Simplified: Your Top Questions Answered first appeared on Visual Lease.]]> https://visuallease.com/understanding-lease-incentives-why-theyre-important-and-accounting-considerations-under-asc-842/ Thu, 13 Jul 2023 13:00:39 +0000 https://visuallease.com/?p=8111 Lease incentives play a crucial role in lease agreements, representing payments made by the lessor either to the lessee or on behalf of the lessee. These incentives are an integral...
  The post Understanding Lease Incentives: Why They’re Important and Accounting Considerations under ASC 842 first appeared on Visual Lease.]]> Lease incentives play a crucial role in lease agreements, representing payments made by the lessor either to the lessee or on behalf of the lessee. These incentives are an integral part of the total consideration of the lease contract, and it is essential to account for them along with other payment streams in the associated cash flows. In this blog post, we will explore lease incentives in more detail, their importance, and how they impact the financial aspects of a lease, specifically under ASC 842.

  Lease Incentives: Importance and Purpose

  Lease incentives hold significant importance in lease agreements for several reasons. Firstly, they enable lessees to make improvements to a property, customizing it to meet their specific needs. This flexibility is particularly valuable when lessees require modifications or alterations to align the space with their business operations. By offering financial support, lessors encourage lessees to lease their properties and foster long-term relationships.

  Accounting Considerations under ASC 842

  ASC 842, the Financial Accounting Standards Board’s lease accounting standard, provides guidelines for the recognition, measurement, and presentation of lease incentives. It mandates that lease incentives should be accounted for in a manner that accurately reflects the economic substance of the lease transaction.

  When applying ASC 842, companies must carefully evaluate their approach to lease incentives. The standard requires the proper identification and classification of lease incentives within the lease agreement. Lease incentives should be measured and recognized separately from other components of the lease, ensuring transparency and compliance with the accounting standard.

  Lease Incentive Programs

  Some lessors may implement lease incentive programs to attract and retain lessees. These programs offer various incentives, such as rent abatements, tenant improvement allowances, or rent holidays. Lease incentive programs can be structured differently, and their accounting treatment may vary based on the specific terms and conditions outlined in the lease agreement.

  By participating in a lease incentive program, lessees can benefit from reduced costs associated with leasehold improvements, making the space more suitable for their operations. However, it is essential for lessees to understand the implications of these incentives, including potential obligations or adjustments to lease terms in exchange for the offered benefits.

  Lease incentives are integral components of lease agreements, serving to facilitate lessees’ ability to customize properties and meet their specific requirements. Proper accounting for lease incentives, in accordance with ASC 842, is essential for accurate financial reporting and compliance. By recognizing the importance of lease incentives and adhering to the guidelines set forth in accounting standards, companies can ensure transparency, enhance decision-making processes, and establish a solid foundation for lease transactions.

  The post Understanding Lease Incentives: Why They’re Important and Accounting Considerations under ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/esg-accounting-integrating-sustainability-into-financial-reporting/ Wed, 12 Jul 2023 13:00:40 +0000 https://visuallease.com/?p=8427 As businesses increasingly recognize the importance of environmental, social, and governance (ESG) factors, the concept of ESG accounting has gained prominence. This blog post aims to shed light on ESG...
  The post ESG Accounting: Integrating Sustainability into Financial Reporting first appeared on Visual Lease.]]> As businesses increasingly recognize the importance of environmental, social, and governance (ESG) factors, the concept of ESG accounting has gained prominence. This blog post aims to shed light on ESG accounting and its role in financial reporting. From carbon accounting to capturing the financial impact of environmental events, ESG accounting encompasses a wide range of considerations that companies must address. 

  What is ESG Accounting?

  ESG accounting is the incorporation of ESG factors into financial reporting processes. It goes beyond traditional financial metrics by considering the environmental, social, and governance aspects of a company’s operations. The recently released ISSB standards, including the S1 and S2 standards, underscore the significance of ESG accounting by requiring companies to report on climate-related disclosures and their financial implications. This comprehensive approach ensures that companies transparently disclose their environmental impact and address the repercussions on financial statements.

  Carbon Accounting and Climate Disclosures:

  A crucial component of ESG accounting is carbon accounting. With the growing concern over climate change, companies are now required to report on their actual or projected emissions of greenhouse gases and carbon, along with other environmental impacts. This information allows stakeholders to gain a comprehensive understanding of a company’s carbon footprint. By quantifying and disclosing carbon-related data, businesses can demonstrate their commitment to mitigating climate risks and reducing their environmental impact.

  Financial Impact of Environmental Events:

  ESG accounting goes beyond carbon accounting and encompasses the financial impact of environmental events. As climate-related incidents become more prevalent, businesses must recognize and report on the effects of such events on their financial statements. For instance, if a company experiences a decline in attendance or cancels outdoor events due to poor air quality resulting from natural disasters or wildfires, these climate-related impacts must be isolated and reported as changes to the financial position. This level of reporting ensures that stakeholders have a holistic view of the financial implications associated with environmental events.

  ESG Reporting and FASB:

  The Financial Accounting Standards Board (FASB), while not directly involved in ESG standard setting, acknowledges the growing relevance of ESG factors in financial reporting. FASB encourages companies to consider the impact of ESG matters on their financial statements, emphasizing the need for transparent and accurate reporting. While the ISSB standards do not have the legal authority of FASB, they serve as a globally applicable framework for ESG reporting, with nations adopting and aligning their reporting practices accordingly.

  Non-Financial Reporting Directive (NFRD): 

  The Non-Financial Reporting Directive (NFRD) is a European Union (EU) directive that sets out requirements for certain large companies to disclose non-financial information, including environmental, social, and governance (ESG) factors. The directive aims to improve transparency and accountability in corporate reporting, ensuring that companies provide relevant and consistent information about their ESG performance. Under the NFRD, companies that meet specific criteria, such as being listed on EU regulated markets and having more than 500 employees, are required to include non-financial information in their management reports. The information should cover environmental, social, and employee matters, human rights, anti-corruption, and diversity.

  ESG accounting represents a paradigm shift in financial reporting, enabling companies to demonstrate their commitment to sustainable practices and long-term value creation. By integrating ESG factors into financial statements, businesses provide stakeholders with a comprehensive view of their environmental impact and the financial implications associated with it. Carbon accounting and reporting on the financial impact of environmental events are crucial elements of ESG accounting, ensuring transparent disclosures and informed decision-making. As ESG reporting gains momentum, businesses must embrace the evolving landscape and seize the opportunity to become catalysts for positive change.

  The post ESG Accounting: Integrating Sustainability into Financial Reporting first appeared on Visual Lease.]]> https://visuallease.com/introducing-the-new-issb-standards-a-game-changer-for-sustainability-reporting/ Tue, 11 Jul 2023 13:00:26 +0000 https://visuallease.com/?p=8426 In recent times, the importance of sustainability in financial reporting has gained significant traction. To address this growing need, the newly formed International Sustainability Standards Board (ISSB) has released two...
  The post Introducing the New ISSB Standards: A Game-Changer for Sustainability Reporting first appeared on Visual Lease.]]> In recent times, the importance of sustainability in financial reporting has gained significant traction. To address this growing need, the newly formed International Sustainability Standards Board (ISSB) has released two exposure drafts of sustainability standards called S1 and S2. After careful consideration of user feedback and extensive internal deliberations, the ISSB has recently unveiled the finalized S1 and S2 standards. This blog post delves into the key aspects of these standards and their impact on the future of sustainability reporting.

  A Closer Look at the ISSB Standards:

  The S1 standard, titled “General Requirements for Disclosure of Sustainability-related Financial Information,” encompasses broad-based sustainability reporting. It covers a wide range of aspects related to environmental, social, and governance (ESG) pillars. On the other hand, the S2 standard is specifically focused on climate-related disclosures, highlighting the increasing importance of addressing climate change within financial reporting.

  Phased Implementation Approach:

  Recognizing the significant undertaking required for companies to comply with these new standards, the ISSB recommends a phased implementation approach. The initial focus will be on reporting climate-related disclosures, given their paramount importance. This allows companies to gradually acclimate themselves to the requirements before incorporating additional ESG topics outlined in the S1 standard. It is worth noting that both standards become active simultaneously, with climate issues taking center stage.

  Effective Date and Global Adoption:

  The ISSB has set the effective date for the S1 and S2 standards as the beginning of 2024. However, it is crucial to understand that the ISSB, being an arm of the International Accounting Standards Board (IASB), does not possess legal authority in any specific country. Instead, the ISSB develops globally applicable standards, and individual nations have the choice to adopt them. Similar to accounting rules governed by the IASB, which have been largely adopted worldwide, the ISSB standards are expected to follow a similar path of implementation, albeit with some possible fine-tuning.

  Several nations have already expressed their intention to adopt the ISSB standards, emphasizing their commitment to transparent and comprehensive sustainability reporting. While the exact details of implementation may vary slightly, the overall goal remains aligned – to foster consistent and reliable reporting of sustainability-related financial information. The first reports adhering to the new standards are expected to surface in 2025, marking a significant milestone in the evolution of sustainability reporting.

  The ISSB’s release of the S1 and S2 standards represents a major step forward in enhancing sustainability reporting practices worldwide. These standards provide a structured framework for companies to disclose sustainability-related financial information, with a particular emphasis on climate-related disclosures. As organizations gear up for the phased implementation, it is imperative to embrace these new standards as an opportunity to promote transparency, accountability, and responsible business practices. By adhering to the ISSB standards, companies can proactively contribute to a more sustainable future and gain the trust and confidence of stakeholders across the globe.

  The post Introducing the New ISSB Standards: A Game-Changer for Sustainability Reporting first appeared on Visual Lease.]]> https://visuallease.com/carbon-accounting/ Fri, 07 Jul 2023 16:09:51 +0000 https://visuallease.com/?p=8300 In today’s world, where environmental sustainability is a top priority, understanding carbon accounting has become crucial for businesses. But what exactly is carbon accounting? This article dives deep into the...
  The post Carbon Accounting first appeared on Visual Lease.]]> In today’s world, where environmental sustainability is a top priority, understanding carbon accounting has become crucial for businesses. But what exactly is carbon accounting? This article dives deep into the subject, exploring its significance, the methodology behind it, the challenges involved, the accuracy and reliability of data, as well as the emerging opportunities in carbon accounting software. Additionally, we’ll touch on the evolving carbon accounting standards that organizations need to be aware of.

  What is Carbon Accounting?

  Carbon accounting is the process of measuring and quantifying greenhouse gas emissions, particularly carbon dioxide (CO2), produced by an organization, product, or activity. It provides a systematic approach to tracking and reporting these emissions, allowing businesses to understand and manage their carbon footprint. In simple terms, carbon accounting is the practice of calculating and monitoring the amount of CO2 and other greenhouse gases released into the atmosphere because of human activities.

  The Importance of Carbon Accounting

  Carbon accounting is instrumental in driving environmental stewardship, meeting investor expectations, complying with regulations, and gaining a competitive advantage. It is a vital tool for organizations seeking to address climate change, reduce their environmental impact, and contribute to a sustainable future. Here are 5 key reasons why it holds significant importance:

  1. Investor and Stakeholder Expectations: Investors and stakeholders increasingly expect organizations to disclose their carbon emissions and demonstrate a commitment to environmental sustainability. Carbon accounting and ESG reporting have become crucial in building trust, attracting investments, and maintaining positive relationships with stakeholders who prioritize sustainable and responsible practices.
  2. Regulatory Compliance: Governments worldwide are introducing carbon-related regulations and reporting requirements. Carbon accounting ensures organizations stay compliant with these regulations, avoiding potential penalties and reputational risks associated with non-compliance.
  3. Reputation and Competitive Advantage: Embracing carbon accounting demonstrates an organization’s commitment to environmental responsibility and sustainability. It enhances brand reputation, attracts environmentally conscious customers, and provides a competitive edge in a market increasingly focused on sustainable practices.
  4. Environmental Impact: Carbon accounting enables organizations to understand and measure their greenhouse gas emissions, which directly contribute to climate change. By quantifying these emissions, businesses can identify areas of high impact and implement strategies to reduce their carbon footprint, thus mitigating environmental harm.
  5. Climate Change Mitigation: Carbon accounting is essential for effective climate change mitigation strategies. It provides a basis for setting emission reduction targets, implementing energy-efficient practices, transitioning to renewable energy sources, and adopting sustainable business practices. It empowers organizations to take proactive measures to combat climate change.

  Carbon Accounting Methodology

  Carbon accounting methodology encompasses various processes that enable accurate measurement, reporting, and management of carbon emissions. Here’s an overview of the key components:

  • Data Collection: The first step involves gathering relevant data on energy consumption, fuel usage, transportation, waste management, and other activities that generate carbon emissions. This data is collected from internal records, utility bills, supplier data, and emission factors specific to each emission source.
  • Measurement and Calculation: Once the data is collected, emissions are calculated using established emission factors and conversion formulas. These factors consider the carbon intensity of energy sources, such as electricity grids or specific fuels. The calculated emissions are often measured in metric tons of carbon dioxide equivalents (CO2e).
  • Scopes of Carbon Emissions: Carbon emissions are categorized into three scopes:
    • Scope 1: Direct emissions from sources owned or controlled by the organization, such as on-site combustion of fossil fuels or company-owned vehicles.
    • Scope 2: Indirect emissions associated with purchased electricity, heating, or cooling consumed by the organization.
    • Scope 3: Indirect emissions resulting from activities outside the organization’s control, such as supply chain emissions, employee commuting, business travel, or waste disposal.
  • Accuracy and Reliability: Accurate data collection is crucial for reliable carbon accounting. Organizations should ensure data integrity, establish quality control processes, and use standardized calculation methods. Independent verification by third parties further enhances the credibility of reported emissions.

  VL’s ESG Steward streamlines data collection automates calculations and provides comprehensive sustainability reporting capabilities. With intuitive data entry interfaces and integration capabilities, Visual Lease simplifies the process of capturing emissions data from various sources, ensuring accuracy and consistency.

  With ESG Steward, organizations can enhance their environmental reporting, monitor emission trends, set reduction targets, and make informed decisions to drive sustainability initiatives effectively.

  Carbon Accounting Challenges

  Carbon accounting presents several challenges that organizations need to navigate to ensure accurate reporting and disclosure of greenhouse gas (GHG) emissions. Common challenges include:

  • Data Complexity: Gathering comprehensive and reliable data across diverse operational areas can be challenging. Organizations often face difficulties in collecting data from multiple sources, ensuring its accuracy, and managing data consistency over time.
  • Scope 3 Emissions: Accounting for scope 3 emissions, which encompass indirect emissions from the value chain, can be particularly complex. This involves collecting data from suppliers, calculating emissions from activities like transportation and waste management, and addressing data gaps and inconsistencies.
  • Calculation Methodologies: Choosing appropriate calculation methodologies and emission factors for different emission sources is complex. These methodologies evolve, and organizations must stay updated with the latest guidelines and standards to ensure accuracy in emission calculations.
  • Reporting and Disclosure: Reporting GHG emissions requires adherence to various frameworks and standards, such as the Greenhouse Gas Protocol, CDP (formerly Carbon Disclosure Project), and industry-specific guidelines. Ensuring compliance with these frameworks while providing transparent and accurate disclosures can be challenging.

  Manual processes and spreadsheets may not be sufficient to handle the complexities of carbon accounting. Specialized software tools are essential for streamlining data collection, calculation, and reporting. These tools provide automated workflows, data validation, and real-time reporting capabilities, enabling organizations to effectively manage the carbon accounting process.

  Ensuring the Accuracy and Reliability of Carbon Accounting Data

  Accurate and reliable carbon accounting data is essential for organizations to demonstrate their commitment to environmental sustainability. Accurate data instills trust, enhances reputation, and establishes credibility, making it an essential aspect of demonstrating a genuine dedication to sustainability practices.

  Investors and stakeholders increasingly prioritize environmental sustainability when making decisions and assessing the long-term viability of organizations. Accurate carbon accounting data serves as evidence of an organization’s commitment to managing its environmental impact. Investors seek reliable data to evaluate the risks and opportunities associated with climate change and to make informed investment decisions aligned with their sustainability goals. Likewise, stakeholders, including customers, employees, and regulatory bodies, expect transparency and credible information to assess an organization’s environmental performance and hold them accountable for their actions.

  With VL’s ESG Steward, organizations gain peace of mind with data validation checks, ensuring the accuracy and integrity of the collected data. By leveraging VL’s analytical capabilities, organizations have gained valuable insights; identifying emission hotspots, tracking trends, and making data-driven decisions.

  Designed to align with reporting frameworks and standards such as the Greenhouse Gas Protocol, CDP, and industry-specific guidelines, ESG Steward ensures that organizations not only collect accurate data but also report in accordance with established frameworks, further enhancing the credibility of their sustainability reporting.

  Carbon Accounting Software

  Carbon accounting software offers a range of features and functionalities that streamline the process of collecting, analyzing, and reporting carbon emissions data. Here are key aspects of effective carbon accounting software:

  • Calculation and Reporting: The software provides calculation tools based on recognized emission factors and methodologies, enabling accurate measurement of carbon emissions. It generates comprehensive reports, customizable dashboards, and visualizations that facilitate data analysis and disclosure.
  • Compliance and Standards: Carbon accounting software aligns with established reporting frameworks and standards, such as the Greenhouse Gas Protocol and CDP. It ensures compliance with regulatory requirements and industry-specific guidelines, providing organizations with confidence in their reporting accuracy and integrity.
  • Data Collection and Integration: Carbon accounting software simplifies data collection by integrating with various data sources, such as utility bills, financial systems, and supplier information. It automates the data capture process, reducing manual errors and ensuring data consistency.
  • Goal Setting: Advanced carbon accounting software allows organizations to set emission reduction targets. It enables them to assess the impact of different strategies, evaluate the feasibility of targets, and track progress over time.

  By utilizing a comprehensive platform for carbon accounting and ESG reporting, organizations can benefit in various ways:

  • Enhanced Efficiency: Integrated software streamlines data collection, calculation, and reporting processes, saving time and reducing manual errors associated with manual data entry and spreadsheet-based approaches.
  • Improved Accuracy and Reliability: Carbon accounting software incorporates data validation checks and standardized calculation methodologies, ensuring accurate and reliable reporting. It minimizes the risk of data inconsistencies and enhances the credibility of reported emissions.
  • Stakeholder Engagement: Utilizing sophisticated software showcases an organization’s commitment to environmental responsibility, attracting environmentally conscious investors, customers, and employees. It improves stakeholder engagement and enhances an organization’s reputation as a sustainability leader.

  Visual Lease’s ESG Steward is an example of a comprehensive software solution that streamlines the data collection process, provides accurate calculations, and offers robust reporting tools. By leveraging VL’s ESG Steward, organizations can simplify their carbon accounting and ESG reporting efforts, gain insights into their sustainability performance, and meet the expectations of investors and stakeholders.

  The Opportunities of Carbon Accounting

  Implementing carbon accounting practices presents organizations with numerous opportunities and benefits that extend beyond environmental responsibility. Here are some key advantages:

  • Operational Efficiency: Carbon accounting provides insights into an organization’s energy consumption and emissions profile. By identifying energy-intensive processes or areas with high emissions, businesses can implement efficiency measures and optimize their operations. This can lead to reduced energy usage, streamlined processes, and cost savings.
  • Cost Savings: Carbon accounting helps identify inefficiencies and wasteful practices that contribute to higher energy consumption and emissions. By implementing energy-saving measures, organizations can reduce their carbon footprint and realize significant cost savings in energy bills. Energy efficiency measures often pay for themselves over time and contribute to long-term financial sustainability.
  • Improved Sustainability Performance: Carbon accounting allows organizations to set measurable sustainability targets and track their progress. By actively managing and reducing their carbon emissions, businesses can demonstrate their commitment to environmental stewardship and sustainability. This, in turn, can enhance their reputation, attract environmentally conscious customers and investors, and create a competitive advantage.
  • Regulatory Compliance: As governments worldwide strengthen environmental regulations, carbon accounting helps organizations stay ahead of compliance requirements. By accurately measuring and reporting emissions, businesses can ensure compliance with environmental standards and avoid penalties or reputational risks associated with non-compliance.
  • Risk Management: Carbon accounting helps organizations identify and manage climate-related risks. By assessing the potential impact of climate change on their operations and supply chains, businesses can develop strategies to mitigate risks, build resilience, and adapt to a changing business landscape.
  • Stakeholder Engagement: Carbon accounting practices demonstrate an organization’s commitment to sustainability and environmental transparency. This can enhance stakeholder engagement and relationships with investors, customers, employees, and communities. Investors increasingly consider environmental factors when making investment decisions, and customers prefer businesses with strong sustainability practices.

  Carbon Accounting Standards

  When it comes to carbon accounting, adherence to industry standards and frameworks is essential for ensuring consistency, comparability, and credibility of reported data. Here are some prominent standards and frameworks that govern carbon accounting practices:

  Greenhouse Gas Protocol (GHG Protocol): Developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), the GHG Protocol is widely recognized as the global standard for measuring and managing greenhouse gas (GHG) emissions. It provides comprehensive guidelines for organizations to quantify and report emissions from various sources, including direct and indirect emissions (Scope 1, 2, and 3).

  CDP (formerly Carbon Disclosure Project): CDP is a global disclosure platform that helps companies and cities measure, manage, and disclose environmental data, including carbon emissions. CDP’s climate change questionnaire is widely used by investors and stakeholders to evaluate an organization’s environmental performance and risks associated with climate change.

  International Sustainability Standards Board (ISSB): The ISSB is an independent standard-setting body under the International Financial Reporting Standards (IFRS) Foundation. It was established in response to the growing demand for globally recognized sustainability reporting standards. The ISSB’s primary objective is to develop a comprehensive set of sustainability reporting standards that provide consistent, comparable, and reliable information on organizations’ environmental, social, and governance (ESG) performance.

  European Financial Reporting Advisory Group (EFRAG): EFRAG is an organization based in Europe that provides technical expertise and advice to the European Commission on financial reporting matters. In recent years, EFRAG has been actively involved in advancing sustainability reporting within the European Union. The European sustainability reporting standards developed by EFRAG will complement existing financial reporting requirements and contribute to the EU’s goal of a sustainable and resilient economy. EFRAG aims to ensure that these standards align with global developments, including the work of the ISSB, to promote international consistency in sustainability reporting.

  • With VL’s ESG Steward, customers benefit from transparent calculations, comprehensive controls, and complete audit trails for compliance with GRI, EFRAG, ISSB, TCFD, Greenhouse Gas Protocol, and other disclosures required by regulators and stakeholders.

  Carbon Accounting with Visual Lease

  In conclusion, carbon accounting and sustainability reporting have become integral components of corporate responsibility and transparency. Adhering to industry standards, such as the GHG Protocol are crucial for accurate and reliable carbon accounting. The emergence of organizations like the ISSB and EFRAG further underscores the global push for standardized sustainability reporting.

  VL’s ESG Steward stands out as the ideal choice for businesses navigating the complexities of carbon accounting and ESG reporting. Our carbon accounting software encompasses key features required for efficient data collection, accurate calculations, and comprehensive reporting. By utilizing Visual Lease’s solution, organizations can streamline their carbon accounting practices, meet industry standards, and enhance the credibility of their reporting.

  To take advantage of ESG Steward and unlock the benefits of accurate and reliable carbon accounting, schedule a demo, today.

  The post Carbon Accounting first appeared on Visual Lease.]]> https://visuallease.com/understanding-different-types-of-commercial-leases-exploring-triple-net-and-pass-through-leases/ Fri, 07 Jul 2023 13:28:03 +0000 https://visuallease.com/?p=8108 When it comes to commercial leases, there are various types and terms that can be confusing for both lessors and lessees. Among these terms are “triple net leases,” “pass-through leases,”...
  The post Understanding Different Types of Commercial Leases: Exploring Triple Net and Pass-Through Leases first appeared on Visual Lease.]]> When it comes to commercial leases, there are various types and terms that can be confusing for both lessors and lessees. Among these terms are “triple net leases,” “pass-through leases,” and “bondable leases,” which may vary in naming conventions depending on the region. Understanding the different commercial lease types is essential for both parties involved. In this blog post, we will delve into the meaning of triple net leases and explore various types of commercial leases to shed light on their characteristics and implications.

  Types of Commercial Leases

  In broad terms, commercial leases can be categorized based on what is being paid for and how it is paid. Unlike residential leases, commercial leases typically involve more than just a base rent. Let’s explore the primary lease types:

  1. Gross Lease: A gross lease is similar to renting an apartment for personal use. In this type of lease, the lessor includes all expenses, such as snow removal, lawn maintenance, and hallway lighting, in the rent payment. This is the simplest form of a commercial lease, but it is relatively uncommon in the commercial real estate market.
  2. Triple Net Lease: Triple net leases (NNN leases) are frequently seen in retail leases. In this type of lease, the lessee assumes responsibility for additional expenses beyond the base rent. These expenses typically include common area maintenance (CAM), property taxes, and property insurance. The lessee pays the base rent “net” of these three expense categories. Hence, it is called a triple net lease.
  3. Pass-Through Lease: Pass-through leases, also known as bondable leases, differ slightly from triple net leases. In a pass-through lease, the tenant directly assumes the costs of expenses such as snow removal, landscaping, and property taxes. The tenant reimburses the landlord for these expenses separately from the rent payment. This type of lease is commonly found in freestanding buildings like banks or fast-food restaurants.
  4. Modified Gross Lease: A modified gross lease is often seen in office buildings, combining elements of both gross and net leases. Under this type of lease, operating expenses, property taxes, and insurance are typically included in the initial base year rent. However, any increases in these expenses over the base year are charged to the tenant based on their pro-rata share. The exact terms may vary, specifying either the actual expenses or an increase over a base amount.

  Implications for Lease Accounting

  Understanding the nature of the commercial lease type is essential for proper lease accounting, as it affects how expenses are treated under accounting standards such as FASB, ASC 842, and IFRS 16. While the lease payment represents the amount paid for asset usage, common area maintenance expenses are typically considered variable expenses, separate from the lease component. Taxes are treated similarly, and considered excluded from the lease expense. Lessors should carefully allocate these expenses based on the lease type to accurately report their assets and liabilities.

  Navigating the world of commercial leases involves understanding the various lease types available. Triple net leases, pass-through leases, gross leases, and modified gross leases each have distinct characteristics and implications for both lessors and lessees. Familiarity with these lease types is crucial for making informed decisions and ensuring accurate lease accounting. By grasping the meaning of triple net leases and comprehending the differences between commercial lease types, individuals and businesses can navigate lease agreements more effectively and mitigate potential challenges.

  The post Understanding Different Types of Commercial Leases: Exploring Triple Net and Pass-Through Leases first appeared on Visual Lease.]]> https://visuallease.com/understanding-capital-budgeting-decisions-and-audited-financial-statements/ Wed, 05 Jul 2023 13:20:17 +0000 https://visuallease.com/?p=8107 In the realm of financial management, companies are faced with critical decisions regarding capital budgeting. These decisions involve allocating funds to various investment opportunities.  Additionally, companies often seek the assurance...
  The post Understanding Capital Budgeting Decisions and Audited Financial Statements first appeared on Visual Lease.]]> In the realm of financial management, companies are faced with critical decisions regarding capital budgeting. These decisions involve allocating funds to various investment opportunities. 

  Additionally, companies often seek the assurance of accurate financial information through audited financial statements. In this blog post, we will explore the concept of capital budgeting decisions using accounting software and delve into the significance of audited financial statements.

  Capital Budgeting Decisions and Accounting Software:

  Capital budgeting decisions refer to the process companies undertake to determine where to invest their capital. These decisions involve evaluating the financial implications, both short-term and long-term, of investing in different assets. One common choice is the lease versus buy decision, where companies analyze the total cost of owning or leasing an asset over its life.

  To make informed decisions, companies can leverage accounting software to model and analyze capital budgeting examples. By incorporating various variables and comparing the costs of different options, companies can identify the most suitable investment opportunities. Accounting software enables companies to consider factors such as cash expenditures, loan interest, sales tax, and the impact of leases on the balance sheet and profit-loss statements.

  Audited Financial Statements:

  Financial statements serve as essential tools for communicating a company’s financial performance. While companies can choose to present any form of financial statement, the highest level of confidence comes from audited financial statements. Audited financial statements undergo a thorough review by Certified Public Accountants (CPAs) who assess the accuracy and completeness of the financial information.

  Audits involve not only examining the financial numbers but also evaluating the company’s internal processes and controls. CPAs verify that appropriate steps are taken to prevent errors, fraud, and theft. Through testing and analysis, auditors ensure that finances flow accurately within the company and that the financial reports present a true and fair view of the company’s financial position.

  The Importance of Audited Financial Statements:

  Audited financial statements carry immense significance, particularly for publicly traded companies and larger private enterprises. They provide stakeholders, including investors, creditors, and regulators, with a higher level of assurance regarding the reliability and accuracy of the financial information presented. Audited financial statements include an opinion letter from the CPA firm, which states that, in the opinion of the CPA, the information is properly prepared and presented.

  Capital budgeting decisions and audited financial statements play crucial roles in financial management. Accounting software assists companies in making informed capital budgeting decisions by analyzing costs, modeling scenarios, and comparing alternatives. 

  On the other hand, audited financial statements instill confidence in the accuracy and reliability of a company’s financial information. By subjecting financial statements to rigorous scrutiny, companies demonstrate their commitment to transparency and sound financial management.

  The post Understanding Capital Budgeting Decisions and Audited Financial Statements first appeared on Visual Lease.]]> https://visuallease.com/lease-purchase-options-transforming-leases-into-fixed-assets/ Mon, 03 Jul 2023 13:00:38 +0000 https://visuallease.com/?p=8102 Lease purchase options provide companies with the opportunity to convert a lease into a fixed asset. These options allow lessees to exercise their right to purchase the leased asset during...
  The post Lease Purchase Options: Transforming Leases into Fixed Assets first appeared on Visual Lease.]]> Lease purchase options provide companies with the opportunity to convert a lease into a fixed asset. These options allow lessees to exercise their right to purchase the leased asset during or at the end of the lease term. In this blog post, we will explore how lease purchase options work and the accounting implications they entail, specifically under ASC 842 regulations. Understanding these options is essential for businesses seeking to effectively manage their lease agreements and financial statements.

  The Mechanics of Lease Purchase Options:

  When a company leases an asset, it gains the right to utilize the asset for a specified period. However, there may come a point when the lessee decides to acquire ownership of the asset. While this can be achieved through negotiation with the lessor, many lease agreements incorporate a lease purchase option. This embedded option allows the lessee to purchase the underlying asset under predetermined conditions.

  How Does a Lease Purchase Option Work?

  The lessee can exercise a lease purchase option by notifying the lessor. Typically, the lease agreement specifies a purchase price and a specific time frame during which the option becomes available. While the details may vary from lease to lease, the fundamental principle remains constant—the decision to exercise the option lies solely with the lessee. This option to purchase introduces specific accounting considerations under ASC 842.

  Lease Purchase Options Accounting Implications under ASC 842:

  When a lease includes a purchase option, it must be properly recognized and accounted for according to ASC 842 guidelines. The accounting treatment depends on whether the lessee is likely or not likely to exercise the option. The threshold for “likely to exercise” is relatively high, requiring more than just a higher probability. If deemed likely to exercise, the asset is amortized over its useful life instead of the lease term, which is typically a longer period.

  Bargain Purchase Options:

  A special case of a lease purchase option is a bargain purchase option. This option is structured to give the lessee a strong economic incentive to purchase the asset. Often referred to as a “dollar purchase option,” it allows the lessee to buy the asset for a nominal price at the end of the lease term. However, a bargain purchase option is not limited to a dollar value. If the purchase price is significantly below the asset’s fair value, it is classified as a bargain purchase.

  In the case of a bargain purchase option, accounting rules dictate that it must be accounted for as if the lessee will exercise the option. Regardless of the likelihood of exercise, the asset is amortized over its useful life rather than just the lease term. This accounting treatment ensures that failing to exercise a bargain purchase option would be against the lessee’s economic interests.

  Purchase Election without a Purchase Option:

  In situations where a lease does not have a purchase option, but the lessee elects to purchase the asset at a later stage through an agreement with the lessor, there is a methodology for exercising the purchase price. This includes adjusting the value of the consideration paid and automatically updating the fixed asset register by replacing the intangible right-of-use asset with the value of the asset and accumulated depreciation.

  Lease purchase options offer companies the flexibility to convert leases into fixed assets by exercising their right to purchase the leased asset. Understanding the intricacies of lease purchase options and their accounting implications under ASC 842 is crucial for accurate financial reporting. By effectively managing lease agreements and accounting for lease purchase options, businesses can streamline their lease administration and maintain compliance with accounting standards while making informed decisions regarding asset acquisition.

  The post Lease Purchase Options: Transforming Leases into Fixed Assets first appeared on Visual Lease.]]> https://visuallease.com/guide-to-right-of-use-assets-and-lease-liabilities-under-asc-842/ Thu, 29 Jun 2023 16:30:43 +0000 https://visuallease.com/?p=2988
  

  Table of Contents

  • How do you determine lease liability?
  • What is a right-of-use asset?
  • Right-of-use asset under ASC 842
  • What is Included in a Right of Use Asset?
  • How to calculate right-of-use assets under ASC 842
  • Where Does a Right-of-Use Asset Go on the Balance Sheet?
  • What is an initial direct cost?
  • What are a lease incentive and a lease prepayment?
  • Calculating a right-of-use asset: an example
  • Simplify Your ROU & Lease Liability Calculations

  The old lease standard, ASC 840, did not require all kinds of leases to be recorded on the balance sheet, which in turn provided the opportunity for many to use off-balance-sheet financing. This all changed with the release of the new lease standard, ASC 842, requiring all leases to be reflected on the balance sheet.

  The change raises different questions such as the amount to be recorded as a lease liability and lease asset. Different factors affect the amount of liability and discount rate. There are also various factors such as prepayment, initial direct costs, and prepayments that impact the right-of-use cash flow statement.

  Below are the concepts you need to better understand right-of-use asset rules under ASC 842. (This is especially critical for private companies that are new to ASC 842 and must transition to the standard by their organization’s effective date as of December 15, 2021)

  How do you determine lease liability?

  Recording the lease liability on a company’s balance sheet requires you to determine the lease term and lease payment. You must also know the rate to be used in discounting the lease liability.

  The lease liability pertains to the obligation to make the rental payments using the present value of the future rental payment. Once the company has determined all the information needed such as the lease payment, lease term, and discount rate, then the liability can be discounted over the lease period using the discount rate.

  The resulting amount becomes the lease liability and is recorded on the balance sheet. Now, the company has to proceed with recording the leased asset.

  What is a right-of-use asset?

  The right-of-use asset pertains to the lessee’s right to occupy, operate, or hold a leased asset during the rental period. In the old lease standard, an asset – for example, a cargo truck – would be recorded straight to the balance sheet.

  Right-of-use asset under ASC 842

  ASC 842 Lease Accounting Standard requires the recording of the actual right-to-use of the asset (such as the cargo truck) rather than the actual asset. This means that the right-of-use asset is an intangible asset.

  What is Included in a Right of Use Asset?

  A right-of-use asset, also known as an ROU asset, is a key component of lease accounting under accounting standards such as ASC 842 and IFRS 16. It represents the lessee’s right to use a leased asset over the lease term. The right-of-use asset encompasses several components, including:

  • Lease Liability: The lease liability represents the present value of the lessee’s future lease payments. It is recognized on the balance sheet as a liability associated with the lease agreement.
  • Initial Direct Costs: Initial direct costs incurred by the lessee in obtaining a lease are included in the right-of-use asset. These costs may include fees for legal services, commissions, and other directly attributable costs incurred to secure the lease.
  • Lease Payments: The right-of-use asset incorporates the total lease payments over the lease term, including fixed payments, variable payments based on an index or rate, and any residual value guarantees.
  • Lease Modifications: If there are any modifications to the lease agreement, such as changes in lease terms or lease extensions, the right-of-use asset is adjusted accordingly to reflect the revised lease terms.
  • Impairment Losses: If there is an indication that the right of use asset is impaired, such as a decline in the asset’s value or changes in the expected lease term, impairment losses may be recognized to adjust the carrying amount of the asset.

  How to calculate right-of-use assets under ASC 842

  Calculating right-of-use assets under ASC 842 involves several steps. Here’s a general overview of the process:

  1. Identify Lease Contracts: Determine which lease contracts fall under the scope of ASC 842. Leases with a term of 12 months or less and leases of low-value assets may have specific exemptions.
  2. Record Lease Liability: Calculate the present value of future lease payments and record the lease liability on the balance sheet. This requires determining the lease term, discount rate, and lease payments (including any variable payments, residual value guarantees, and lease term options).
  3. Determine the Initial Right-of-Use Asset: The initial right-of-use asset is typically equal to the lease liability, adjusted for any lease payments made before or at the lease commencement date, initial direct costs, and any lease incentives received.
  4. Account for Lease Payments: Recognize and allocate lease payments between reducing the lease liability and accounting for interest expense. This involves applying the effective interest method to calculate interest expense over the lease term.
  5. Adjust for Lease Modifications: If there are any modifications to the lease contract during its term, such as lease extensions or changes in lease terms, reassess the lease liability and right-of-use asset based on the updated terms.
  6. Assess Impairment: Periodically review the right-of-use asset for impairment, considering factors such as changes in the expected lease term, the occurrence of triggering events, or a decline in the asset’s value.

  It’s important to note that the specific calculations and considerations may vary depending on the complexity of lease agreements and individual circumstances.

  Right-of-Use Asset & Lease Liability on the Balance Sheet
  Calculating the right-of-use amortization requires examining three items closely:
  • The incurred initial direct cost by the lessee
  • The lease incentives received by the lessee
  • The lease payment made by the lessee
  What is an initial direct cost?
  Initial direct cost is defined as the “incremental costs of a lease that would not have been incurred had the lease not been obtained.”
  For example, a broker’s commission paid by the business would be an initial direct cost since this payment was only made because the lease has been obtained. Similarly, a payment made to the current tenant as an incentive to end the present lease contract would likely be classified as an initial direct cost because this cost was incurred since the new lease contract was signed.
  On the other hand, payment for a lawyer’s fees for obtaining legal or tax advice may not be considered as an initial direct cost because the services of the lawyer were not the result of having obtained the lease.
  What is a Lease Incentive & Lease Prepayment?
  A lease incentive is an incentive provided by the lessor to attract the tenant to secure a lease contract. This incentive may be provided in different forms such as payment of the lessee’s costs, an up-front cash payment, or the assumption of the lessee’s current lease.
  A lease prepayment, as its name suggests, is a payment given in advance.
  Calculating a Right-of-Use Asset Example
  Following the explanation above, here’s a right-of-use asset calculation example. The assumption are as follows:
  • Six-year rental period without renewal options
  • $40,000 lease payment required at the end of each year
  • The right-of-use asset is increased by 9% (the incremental borrowing rate)
  • Initial direct cost is at $2,000
  To get the lease liability:
  • The lease liability is equal to the present value of the six payments that are discounted at 9%.
  • The resulting amount will be $179,437.
  To get the right-of-use asset:
  • The right of use asset will be equal and recorded as the initial direct cost plus lease liability plus prepayments less any lease incentives provided by the lessor.
  • Thus, the right-of-use asset is the sum of the lease liability of $179,437 + lease incentives of $2,000, which is $181,437. There were no lease incentives or prepayments in our example, so there’s nothing to subtract.
  Therefore, the journal entry would be as follows:
  • Right of use asset: $181,437
  • Lease liability: $179,437
  • Cash: $1,000
  Simplify Your ROU & Lease Liability Calculations

  In the end, computing for the lease liability and the right-of-use asset isn’t that complicated, but one has to deal with the tricky task of gathering data.

  Thus, businesses must ensure that they obtain reliable data to ensure the correct figures of the lease payments, lease term, and discount rate. It also helps to have reliable lease accounting software for proper accounting and record entry of right-of-use assets. Contact Visual Lease today for a simplified lease accounting process.

  Form more information on how Visual Lease can help your business evaluate your leases, reach out to us today
  Learn More
  
  The post Guide to right-of-use assets (ROU) and lease liabilities under ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/fixed-asset-accounting-managing-assets-and-leasehold-improvements/ Wed, 28 Jun 2023 13:00:34 +0000 https://visuallease.com/?p=8100 In the realm of financial accounting, fixed asset accounting holds significant importance for companies. It involves the meticulous tracking and management of owned assets, ensuring their existence, location, and allocation...
  The post Fixed Asset Accounting: Managing Assets and Leasehold Improvements first appeared on Visual Lease.]]> In the realm of financial accounting, fixed asset accounting holds significant importance for companies. It involves the meticulous tracking and management of owned assets, ensuring their existence, location, and allocation within the organization. Additionally, fixed asset accounting intersects with lease accounting, particularly concerning leasehold improvements. This blog post delves into the intricacies of fixed asset accounting, highlighting its role in lease administration and the need for distinct yet integrated systems.

  What is Fixed Asset Accounting?

  Fixed asset accounting revolves around the systematic recording and monitoring of a company’s tangible assets, such as buildings, machinery, equipment, and vehicles. These assets often represent substantial investments and have long-term value for the organization. To efficiently handle fixed asset accounting, companies employ a fixed asset register—a solution that works in tandem with accounting platforms like Visual Lease.

  What are Leasehold Improvements?

  One aspect where fixed asset accounting and lease administration intersect is leasehold improvements. When companies lease premises, they may need to undertake custom work to adapt the space to their specific requirements. These leasehold improvements can range from structural modifications to interior design alterations. The costs incurred in making these improvements, both reimbursed and self-funded, must be accounted for accurately.

  Accounting for Fixed Assets:

  The accurate handling of leasehold improvements becomes crucial when adhering to lease accounting standards such as ASC 842 or IFRS 16. These standards outline the guidelines for recognizing, measuring, and disclosing leases and lease-related expenses. To ensure compliance, the expenses related to leasehold improvements must be appropriately categorized within the lease accounting framework.

  The Role of the Fixed Asset Register:

  Within the fixed asset register, companies need to account for the materials and labor costs associated with leasehold improvements. This allows them to maintain a comprehensive overview of their fixed assets and their respective values. The fixed asset register serves as a repository for recording the financial impact of leasehold improvements, ensuring accurate reporting and compliance with accounting regulations.

  Fixed asset accounting plays a vital role in accurately tracking, managing, and reporting a company’s tangible assets. When combined with lease administration, it becomes even more crucial to accurately account for leasehold improvements and comply with relevant lease accounting standards. By leveraging dedicated fixed asset registers and integrating them with lease accounting platforms, companies can effectively manage their assets, ensure compliance, and streamline financial reporting processes.

  The post Fixed Asset Accounting: Managing Assets and Leasehold Improvements first appeared on Visual Lease.]]> https://visuallease.com/understanding-prepaid-rent-for-asc-842-what-you-need-to-know/ Mon, 26 Jun 2023 13:00:30 +0000 https://visuallease.com/?p=8098 What is Prepaid Rent?  Prepaid rent refers to lease payments made in advance for a future period. It represents an asset on the company’s balance sheet, as the prepayment can...
  The post Understanding Prepaid Rent for ASC 842: What You Need to Know first appeared on Visual Lease.]]> What is Prepaid Rent? 

  Prepaid rent refers to lease payments made in advance for a future period. It represents an asset on the company’s balance sheet, as the prepayment can be utilized to offset rent expenses in the future when it is incurred. By recording prepaid rent, companies ensure accurate accounting of their lease obligations and optimize the allocation of expenses over time.

  Is prepaid rent an asset? 

  Yes, prepaid rent is considered an asset in accounting. When a company pays rent in advance for a future period, it has a prepaid rent amount that represents the right to use the leased property in the future. This prepaid amount is recorded as an asset on the balance sheet. As time passes and the rent expense is incurred, the prepaid rent is gradually recognized as an expense, resulting in a reduction of the prepaid rent asset over time.

  Prepaid Rent under ASC 842

  When it comes to accounting for leases under ASC 842, one area that can be confusing is prepaid rent. Under the previous accounting standard, ASC 840, prepaid rent was recognized as an asset on the balance sheet and expensed over time. However, under ASC 842, there are some key differences to keep in mind.

  1. Prepaid rent is not recognized as such under ASC 842. While you can prepay rent ahead of time, the only time this will be recognized is prior to the commencement of the lease term. In other words, if you prepay rent for a future period, that amount will not be recognized as a prepaid asset on the balance sheet under ASC 842.
  2. Under ASC 842, you will have a right-of-use asset and a lease liability on the balance sheet. The lease liability reflects all of the future payments that you owe under the lease agreement, and the right of use asset represents the right to use the leased asset over the term of the lease. 
  3. If you have prepaid rent under ASC 842, the amount of that prepayment will not be included in the lease liability. However, it will be reflected in the right-of-use asset side. This is because the prepayment has already been made and is considered a reduction of the future lease payments owed.

  Straight-Line Rent Calculations Under ASC 842

  It is important to note that prepaid rent will not impact the straight-line rent calculation. Straight-line rent is an even amount that is applied to every single month, regardless of whether a cash rent payment is made or not. Therefore, when the prepaid rent is applied, there will be no reduction in the lease liability for that month. However, the right-of-use asset will be amortized, which will be recognized as an expense on the income statement.

  It is essential to understand the differences related to prepaid rent under ASC 842 for accurate lease accounting. Properly recognizing prepaid rent can help ensure that your financial statements comply with the new standard and provide an accurate depiction of your company’s financial position. 

  The post Understanding Prepaid Rent for ASC 842: What You Need to Know first appeared on Visual Lease.]]> https://visuallease.com/lease-purchasing-options-and-fixed-assets-understanding-lease-to-own-accounting/ Fri, 23 Jun 2023 13:00:32 +0000 https://visuallease.com/?p=8099 Leasing an asset with the intention to eventually purchase it is a common practice among businesses. Whether it’s an optional purchase at the end of the lease or a bargain...
  The post Lease Purchasing Options and Fixed Assets: Understanding Lease-to-Own Accounting first appeared on Visual Lease.]]> Leasing an asset with the intention to eventually purchase it is a common practice among businesses. Whether it’s an optional purchase at the end of the lease or a bargain purchase price, companies often utilize lease purchasing options to acquire fixed assets. However, understanding the accounting treatment for these lease-to-own scenarios is crucial. In this blog post, we will explore the concept of lease-to-own accounting, highlighting the considerations and implications of fixed asset lease accounting.

  What are the key considerations for lease purchasing options and fixed assets?

  1. Economic Incentives and Intent

  When a lessee intends to exercise an optional purchase or there is a bargain purchase price, it creates an economic incentive for acquiring ownership. Referred to as lease-to-own accounting, this approach assumes eventual ownership at the end of the lease term.

  2. Finance Lease Treatment

  In cases where the lessee intends to exercise an option or there is a bargain purchase price, the lease must be treated as a finance lease. This classification affects the accounting treatment and financial reporting.

  3. Amortization and Useful Life

  Instead of amortizing the right-of-use assets solely over the lease term, lease-to-own accounting involves amortizing the asset’s value over its useful life. The expectation of ownership at the end of the lease justifies a longer amortization period.

  4. Operating Lease Possibility

  If there is an option to purchase, but it is deemed unlikely to be exercised, the lease may still qualify as an operating lease based on specific circumstances. This determination depends on various factors and should be carefully assessed.

  5. Remeasurement and Finance Lease Conversion

  Once the lessee decides to exercise or intends to exercise the purchase option, the lease requires remeasurement. This results in the lease being reclassified as a finance lease, with a longer amortization period.

  6. Fixed Asset Accounting

  After the lease is purchased, the right-of-use asset and any accumulated amortization are reversed from the books. The asset is then transferred to the fixed asset register and accounted for in accordance with established fixed asset accounting practices.

  Make Informed Decisions with Lease-to-Own Accounting

  Understanding lease purchasing options and the associated lease-to-own accounting is vital for businesses considering acquiring fixed assets through leasing arrangements. By correctly accounting for these transactions, companies can ensure accurate financial reporting and align their accounting practices with regulatory requirements. 

  The post Lease Purchasing Options and Fixed Assets: Understanding Lease-to-Own Accounting first appeared on Visual Lease.]]> https://visuallease.com/how-to-prepare-for-esg-reporting-requirements/ Thu, 22 Jun 2023 13:15:50 +0000 https://visuallease.com/?p=8106 Update: On June 26, 2023, The International Sustainability Standards Board (ISSB) announced their first two global sustainability-related disclosure standards in response to widespread demand for better transparency, consistency and reliability...
  The post How to Prepare for ESG Disclosure Requirements: Getting Ready for ISSB, EFRAG, SASB, and SEC Standards first appeared on Visual Lease.]]>

  Update: On June 26, 2023, The International Sustainability Standards Board (ISSB) announced their first two global sustainability-related disclosure standards in response to widespread demand for better transparency, consistency and reliability into sustainability plans and performance. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 establishes the specific requirements for climate-related disclosures.

  While the Standards will ensure that organizations are reporting on robust sustainability data that is both verifiable and comparable, many companies are not yet prepared for the required effort. This blog post details three steps organizations can take to establish a baseline for reporting.

   

  ESG reporting requirements are standards for how a company tracks and reports its Environmental, Social and Governance behavior. Although U.S. requirements have not yet been finalized, it is clear that these requirements will have a significant impact on organizations with the potential to mitigate environmental risk and improve sales through positive brand recognition. 

  Socially conscious investors are the best-known driving force behind an organization’s adoption of ESG reporting, but the practice has been gaining more momentum among regulators in recent years. Recently, The International Sustainability Standards Board (ISSB), a branch of IFRS, announced that businesses should start prioritizing climate-related disclosures. Further ESG regulations from the ISSB, SASB and SEC are also expected to go into effect. Even though Europe is further along on the ESG journey than the U.S. is, many U.S.-based companies are likely already impacted by EU regulations, and there are widespread efforts to implement global regulations.

  However, many organizations are not yet prepared for what’s ahead as it relates to ESG reporting and goal setting. In fact, only 5% of Senior Real Estate executives said their company’s ESG program is fully established. By waiting for regulations to be fully finalized, organizations are placing themselves at a disadvantage. One of the main factors holding companies back is not knowing what their current environmental impact is and how they can make the changes required to get on track. However, finance teams are in a unique position to be able to help their organizations proactively get a handle on their owned and leased assets, providing them with a strong understanding of their environmental impact. 

  This blog post will highlight three ways to get ahead of ESG reporting requirements: 

  Three Ways Finance Teams Can Prepare for ESG Reporting Requirements 

  1. Create an ESG task force

  In order to effectively manage owned and leased assets throughout their entire lifecycle, it is essential for organizations to establish a task force dedicated to Environmental, Social, and Governance (ESG) initiatives. This task force will involve multiple stakeholders, such as finance, real estate, procurement, accounts payable, legal, and others. By clearly defining roles and responsibilities within the task force, organizations can streamline decision-making processes and ensure that the right individuals are involved at each stage.

  One crucial responsibility of the ESG task force is to stay informed about ESG reporting guidance, emerging regulations, and relevant laws. It is important to designate at least one member of the task force to monitor additional updates from regulatory bodies like the Securities and Exchange Commission (SEC) and the ISSB. This individual should possess a comprehensive understanding of key concepts, such as differentiating between scope 1 and 2 emissions. By staying up to date with evolving requirements, the task force can proactively address any necessary changes and maintain compliance.

  Establishing an ESG task force will ensure that your company has a dedicated team focused on tracking, reporting, and fulfilling ESG requirements. This team will play a crucial role in gathering and analyzing data, monitoring progress, and making informed decisions regarding ESG initiatives. By centralizing these efforts, your organization can effectively engage stakeholders and demonstrate its commitment to sustainability and responsible business practices.

  2. Decide how to track and report data long-term

  Implementing a centralized system of record not only empowers organizations to gain insights into their portfolio of owned and leased assets and optimize financial expenditures but also, enables them to track and assess the environmental impact of these assets. By leveraging such a system, organizations can make informed decisions based on real-time data and begin taking steps to mitigate their carbon footprint related to their real estate and equipment leases, as well as owned properties.

  For instance, as a company’s lease approaches its end, they can use the centralized system to compare the carbon emissions of their current leased office space with alternative options. This analysis can help them determine if relocating to a different space could lead to a significant reduction in their carbon footprint. By identifying and selecting environmentally friendly alternatives, organizations can align their operational practices with their sustainability goals and contribute to a more eco-friendly future.

  3. Establish a strong lease controls framework 

  To empower the cross-departmental collaboration required to effectively manage, track, report and analyze owned and leased asset data, organizations must implement dedicated technology. A solution that provides a strong lease controls framework will mitigate the risk of reporting errors, ensure that the right people have the right access to the right information at the right time, and also, provide access to meaningful insights. 

  Virtual Lease recently launched VL ESG Steward to do all this and more. It is the first solution to push real estate, procurement, facilities and finance teams to go beyond portfolio optimization, accounting and compliance to focus on the environmental impact of their assets, projects and processes. 

  ESG Steward is built in accordance with GRI, CSRD, and the Greenhouse Gas Protocol – the global gold standard for ESG and Emissions reporting guidance, ensuring accuracy, consistency and compliance with regulations and enabling organizations to tie hard data to their environmental disclosures with supporting evidence to substantiate claims of progress with confidence.

  For more information on how Visual Lease can help your business get ahead of ESG regulation requirements, schedule time with our team. 

  The post How to Prepare for ESG Disclosure Requirements: Getting Ready for ISSB, EFRAG, SASB, and SEC Standards first appeared on Visual Lease.]]> https://visuallease.com/finance-leases-vs-operating-leases-understanding-the-differences-and-asc-842/ Tue, 20 Jun 2023 13:00:00 +0000 https://visuallease.com/?p=8097 Table of contents: What is a finance lease? What is an operating lease? Key Characteristics of an Operating Lease Finance Leases vs. Operating Leases Understanding finance leases and operating leases...
  The post Finance Leases vs. Operating Leases: Understanding the Differences and ASC 842 first appeared on Visual Lease.]]> Table of contents:
  • What is a finance lease?
  • What is an operating lease?
  • Key Characteristics of an Operating Lease
  • Finance Leases vs. Operating Leases
  • Understanding finance leases and operating leases
  • How does ASC 842 impact lease classification?
  • What is the Expense Profile for Operating vs. Finance Leases?

  Finance leases and operating leases are two common types of lease arrangements that businesses encounter. With the introduction of the ASC 842 accounting standard, the classification and treatment of leases have evolved. In this blog post, we will delve into the distinctions between finance leases and operating leases and discuss how ASC 842 impacts the accounting for these lease types.

  What is a finance lease?

  A finance lease, also known as a capital lease, is a type of lease agreement in which one party, typically a lessor, allows another party, the lessee, to use and control a specific asset for an extended period of time in exchange for lease payments. A finance lease is structured so that the lessee essentially assumes many of the economic benefits and risks associated with owning the leased asset.

  Key Characteristics of a Finance Lease

  1. Ownership Transfer: Finance leases often include an option for the lessee to purchase the asset at the end of the lease term for a nominal amount, commonly referred to as the “bargain purchase option.”
  2. Long-Term Commitment: : Finance leases are generally long-term agreements, often spanning a substantial portion of the asset’s useful life. They are typically structured to match the asset’s economic life.
  3. Risk and Rewards: In a finance lease, the lessee usually takes on the risks and rewards associated with the leased asset. This includes responsibilities like maintenance, insurance, and any potential residual value.
  4. Accounting Treatment: In financial accounting, finance leases are recorded on the lessee’s balance sheet as both an asset and a liability. This is because the lessee is considered to have acquired a significant portion of the economic ownership of the asset.

  Finance Leases vs. Operating Leases

  Finance leases and operating leases differ significantly in their characteristics and accounting treatment. In a finance lease, the lessee often has the option to purchase the asset at the end of the lease term through a “bargain purchase option,” and they take on the risks and rewards of ownership. These leases are typically long-term and are recorded on the lessee’s balance sheet as both assets and liabilities. On the other hand, operating leases are short-term, with the lessor retaining ownership of the asset throughout the lease term. Lease payments for operating leases are generally treated as operating expenses and do not appear on the lessee’s balance sheet. The choice between these two lease types can have a significant impact on a company’s financial statements and decision-making processes.

  Defining Operating Leases

  An operating lease is a type of lease agreement in which one party, known as the lessor (the owner of the asset), allows another party, the lessee, to use and control a specific asset for a defined period of time without transferring ownership of the asset. Operating leases are often used for short-term or non-core assets and typically have more flexibility compared to finance leases.

  What is an operating lease?

  Short-Term: Operating leases are generally short-term agreements, covering a fraction of the asset’s total economic life. They do not typically extend for the entire useful life of the asset.

  Ownership Retained: In an operating lease, the lessor retains ownership of the leased asset throughout the lease term. The lessee does not usually have the option to purchase the asset at the end of the lease period.

  Maintenance and Risk: The lessor is typically responsible for maintaining the asset and bearing the risks associated with ownership, such as changes in the asset’s value.

  Accounting Treatment: From an accounting perspective, operating leases are generally not recognized as assets and liabilities on the lessee’s balance sheet. Instead, lease payments are typically recorded as operating expenses.

  Finance Leases vs. Operating Leases

  Finance leases and operating leases differ significantly in their characteristics and accounting treatment. In a finance lease, the lessee often has the option to purchase the asset at the end of the lease term through a “bargain purchase option,” and they take on the risks and rewards of ownership. These leases are typically long-term and are recorded on the lessee’s balance sheet as both assets and liabilities. On the other hand, operating leases are short-term, with the lessor retaining ownership of the asset throughout the lease term. Lease payments for operating leases are generally treated as operating expenses and do not appear on the lessee’s balance sheet. The choice between these two lease types can have a significant impact on a company’s financial statements and decision-making processes.

  Understanding finance leases and operating leases.

  Under the previous ASC 840 standard, capital leases were categorized as financing arrangements and were recorded on the balance sheet, while operating leases were treated as a right to use the asset and remained off-balance sheet. However, this off-balance sheet accounting approach led to concerns, prompting the transition to the ASC 842 standard.

  How does ASC 842 impact lease classification?

  ASC 842 mandates that both finance leases and operating leases be recognized on the balance sheet. This change ensures greater transparency in lease accounting.

  • In ASC 842, finance leases are now considered right-of-use assets, categorized as intangible assets. Instead of being expensed, these assets are amortized over their useful life. Finance leases also entail the recognition of separate interest expenses, which decline over time as the lease liability decreases.
  • Similar to finance leases, operating leases under ASC 842 involve the recognition of right-of-use assets as intangible assets. However, the key distinction lies in expense recognition. Operating leases are expensed using a straight-line method, where lease payments are evenly distributed over the lease term. This results in a consistent lease expense throughout the lease duration.

  What is the Expense Profile for Operating vs. Finance Leases?

  The expense profile for finance leases differs from that of operating leases. Finance leases have higher expenses in the initial months and progressively decrease as the lease term progresses. On the other hand, operating leases maintain a constant expense level throughout the lease duration.

  Understanding the differences between finance leases and operating leases is essential for businesses navigating lease accounting under ASC 842. With both types of leases now recognized on the balance sheet, organizations can provide more transparent financial reporting. By grasping the nuances of these lease classifications and their respective expense profiles, businesses can comply with accounting standards and make informed decisions regarding lease arrangements.

  The post Finance Leases vs. Operating Leases: Understanding the Differences and ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/unraveling-off-balance-sheet-financing-understanding-its-impact-and-asc-842/ Fri, 16 Jun 2023 13:56:34 +0000 https://visuallease.com/?p=8096 Table of Contents What is Off-Balance Sheet Financing? ASC 842 Impact on Reporting Leases Importance of On-Balance Sheet Reporting Legal Regulations: The SEC’s Strict Stance Off-balance sheet financing refers to...
  The post Unraveling Off-Balance Sheet Financing: Understanding Its Impact and ASC 842 first appeared on Visual Lease.]]> Table of Contents
  • What is Off-Balance Sheet Financing?
  • ASC 842 Impact on Reporting Leases
  • Importance of On-Balance Sheet Reporting
  • Legal Regulations: The SEC’s Strict Stance

  Off-balance sheet financing refers to financial arrangements that are not reflected on a company’s balance sheet. Historically, operating leases were a prime example of off-balance sheet financing, where lease obligations were footnoted rather than recorded as liabilities. However, due to concerns surrounding transparency and misleading financial reporting, regulatory bodies like the FASB and the SEC have introduced measures to bring off-balance sheet items onto the balance sheet. In this blog post, we will explore the concept of off-balance sheet financing, its implications, and the influence of ASC 842 on lease accounting.

  What is Off-Balance Sheet Financing?

  Off-balance sheet financing encompasses financing arrangements that do not appear as liabilities or assets on a company’s balance sheet. This practice can create challenges in accurately assessing a company’s financial health and obligations. While some companies used off-balance sheet financing to manage their debt coverage ratios or ease their reporting workload, prominent cases of abuse and fraud, such as Enron, prompted regulatory actions to address these concerns.

  ASC 842 and On-Balance Sheet Leases.

  Under ASC 842, both operating leases and finance leases are now required to be recorded on the balance sheet, with limited exceptions for leases. The goal is to enhance transparency and provide investors with a comprehensive view of a company’s financial obligations. Companies are expected to comply with Generally Accepted Accounting Principles (GAAP) and disclose any non-GAAP financing, even if it is not reflected on the balance sheet.

  Importance of On-Balance Sheet Reporting.

  Bringing leases onto the balance sheet enables stakeholders to assess a company’s financial position more accurately. It eliminates potential distortions caused by off-balance sheet financing, allowing investors, creditors, and analysts to make informed decisions based on reliable financial information. The increased disclosure requirements ensure that companies are transparent about their financial commitments and avoid misleading practices.

  Legal Regulations: The SEC’s Strict Stance.

  The SEC has taken a stringent approach to off-balance sheet financing. Recent comments on company financial statements indicate a heightened focus on non-GAAP transactions. Companies are advised to exercise caution and maintain compliance with accounting standards to avoid repercussions and maintain investor trust. Non-compliance may lead to increased scrutiny and potential legal consequences.

  Off-balance sheet financing, once prevalent in operating leases, has undergone significant changes with the introduction of ASC 842. By requiring companies to include lease obligations on the balance sheet, transparency and accuracy in financial reporting have improved. While there are limited exceptions for short-term leases, the overall trend is toward greater disclosure and accountability. Companies should adhere to GAAP guidelines, disclose non-GAAP transactions, and stay updated with regulatory requirements to foster trust and provide stakeholders with a comprehensive understanding of their financial position.

  Ready to Streamline Your Lease Accounting under ASC 842?

  The transition from off-balance sheet financing to on-balance sheet reporting under ASC 842 represents a significant shift in lease accounting. Companies should prioritize adherence to Generally Accepted Accounting Principles (GAAP) and stay vigilant about regulatory requirements to avoid legal consequences and maintain investor confidence. With tools like Visual Lease, you can simplify the process and ensure that your lease data is managed efficiently and accurately.

  The post Unraveling Off-Balance Sheet Financing: Understanding Its Impact and ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/lease-controls-for-business-success/ Thu, 15 Jun 2023 15:08:41 +0000 https://visuallease.com/?p=8093 From Compliance to Optimization: Harnessing Lease Controls for Business Success Lease accounting standards implemented over the last few years (ASC 842, IFRS 16, GASB 87) require all organizations, whether they...
  The post Lease Controls for Business Success | Visual Lease first appeared on Visual Lease.]]> From Compliance to Optimization: Harnessing Lease Controls for Business Success

  Lease accounting standards implemented over the last few years (ASC 842, IFRS 16, GASB 87) require all organizations, whether they be private, public or government entities, to account for their leases on the balance sheet. This paradigm shift has ushered in a more comprehensive reporting process, demanding greater attention to detail from finance teams across industries.

  While for many, the path toward achieving lease accounting compliance was a challenging one, it has also put organizations in a position to take advantage of their lease management practices and implement a strong lease controls framework. In doing so, they will recognize substantial business benefits, including:

  Maximized Value and Reduced Costs

  Real estate leases are an expensive portfolio of holdings for any business. On average, retailers spend about 11% of their annual gross sales on rent, according to data from NewMark Merrill, and office users can spend up to 20% of their business revenue on rent. Rent fees are just part of the cost structure of a lease. Most businesses will spend $2.14 per square foot on energy consumption, $2.15 per square foot on maintenance and $1.68 on cleaning – as real estate costs increase, business operating costs increase in step. 

  Although real estate equates to significant cost expenditures, businesses rarely know the true extent. Research from the Visual Lease Data Institute (VLDI) found that 71% of organizations are not confident they know the full cost of their leases. Technology-backed lease controls – defined as policies and procedures designed to prevent or detect unauthorized acquisition, use or disposition of these assets – can change that. 

  When organizations have proper systems and processes designed to safeguard and manage their leases, they will gain insight into the full value and cost of each lease, allowing them to be proactive in responding to lease obligations, like maintenance responsibilities, rate increases and CAM charges, as well as understanding termination rights if a lease isn’t working for or benefiting the business. In addition, proper lease control systems can help businesses save money. Data from Accenture shows that proper real estate optimization, which can only be achieved with strong lease controls in place, results in annual real estate operating expense reductions in the 12 – 20% range.

  Streamlined Processes and Reallocated Resources

  Sustained lease accounting compliance takes an enormous effort for finance and compliance teams as they attempt to keep track of all the moving parts and pieces of their organization’s lease portfolio. By implementing dedicated lease management technology that provides a customizable lease controls framework, organizations will greatly simplify their lease management and reporting processes.  

  In fact, a 2022 VLDI survey shows private companies save an average of 600 hours when utilizing lease accounting software to manage lease controls. This is particularly valuable in light of the severe shortage of accounting professionals. 

  A 2021 report from The American Institute of Certified Public Accountants found that fewer people are entering the accounting field with bachelor’s degree candidates down 2.8% and master’s degree candidates down 8.4%. Still, three-quarters of companies plan to continue to hire new graduates at the same rate each year. Implementing technology that facilitates strong lease controls can lessen the time spent on manual tasks and empower accounting and finance teams to tackle more strategic work, helping businesses address the talent shortage by better utilizing their existing resources.

  Increased Focus on Business Objectives and Growth

  The Visual Lease Data Institute found that 45% of companies have overpaid rent or expenses due to inadequate lease controls, meaning they’re not properly managing, tracking and analyzing these agreements. In many cases, this cavalier approach can compromise an organizations’ ability to grow in what are already challenging economic times. 

  Businesses with technology that supports proper lease controls can better respond to market real estate availability, create a real estate strategy that reflects their needs and gain an upper hand in negotiations without the pressure of time constraints. With a functional and targeted real estate strategy, companies and government entities will improve operations, minimize capital expenditures and realize organizational growth. 

  The post Lease Controls for Business Success | Visual Lease first appeared on Visual Lease.]]> https://visuallease.com/fixed-asset-accoutning-leasehold-improvements/ Tue, 30 May 2023 15:48:17 +0000 https://visuallease.com/?p=8057 Fixed Asset Accounting: Managing Assets and Leasehold Improvements In the realm of financial accounting, fixed asset accounting holds significant importance for companies. It involves the meticulous tracking and management of...
  The post Fixed Asset Accounting: Leasehold Improvements first appeared on Visual Lease.]]>

  Fixed Asset Accounting: Managing Assets and Leasehold Improvements

  In the realm of financial accounting, fixed asset accounting holds significant importance for companies. It involves the meticulous tracking and management of owned assets, ensuring their existence, location, and allocation within the organization. Additionally, fixed asset accounting intersects with lease accounting, particularly concerning leasehold improvements. This blog post delves into the intricacies of fixed asset accounting, highlighting its role in lease administration and the need for distinct yet integrated systems.

  What is Fixed Asset Accounting?

  Fixed asset accounting revolves around the systematic recording and monitoring of a company’s tangible assets, such as buildings, machinery, equipment, and vehicles. These assets often represent substantial investments and have long-term value for the organization. To efficiently handle fixed asset accounting, companies employ a fixed asset register—a solution that works in tandem with accounting platforms like Visual Lease.

  What are Leasehold Improvements?

  One aspect where fixed asset accounting and lease administration intersect is leasehold improvements. When companies lease premises, they may need to undertake custom work to adapt the space to their specific requirements. These leasehold improvements can range from structural modifications to interior design alterations. The costs incurred in making these improvements, both reimbursed and self-funded, must be accounted for accurately.

  Accounting for Fixed Assets:

  The accurate handling of leasehold improvements becomes crucial when adhering to lease accounting standards such as ASC 842 or IFRS 16. These standards outline the guidelines for recognizing, measuring, and disclosing leases and lease-related expenses. To ensure compliance, the expenses related to leasehold improvements must be appropriately categorized within the lease accounting framework.

  The Role of the Fixed Asset Register:

  Within the fixed asset register, companies need to account for the materials and labor costs associated with leasehold improvements. This allows them to maintain a comprehensive overview of their fixed assets and their respective values. The fixed asset register serves as a repository for recording the financial impact of leasehold improvements, ensuring accurate reporting and compliance with accounting regulations.

  Fixed asset accounting plays a vital role in accurately tracking, managing, and reporting a company’s tangible assets. When combined with lease administration, it becomes even more crucial to accurately account for leasehold improvements and comply with relevant lease accounting standards. By leveraging dedicated fixed asset registers and integrating them with lease accounting platforms, companies can effectively manage their assets, ensure compliance, and streamline financial reporting processes.

  The post Fixed Asset Accounting: Leasehold Improvements first appeared on Visual Lease.]]> https://visuallease.com/esg-in-real-estate-and-industry-changes/ Mon, 15 May 2023 13:13:31 +0000 https://visuallease.com/?p=8026 ESG and the Future of Real Estate: How Sustainability is Changing the Industry The real estate industry is undergoing a significant transformation as sustainability becomes a top priority for investors...
  The post ESG in Real Estate & Industry Changes first appeared on Visual Lease.]]>

  ESG and the Future of Real Estate: How Sustainability is Changing the Industry

  The real estate industry is undergoing a significant transformation as sustainability becomes a top priority for investors and stakeholders. Environmental, social, and governance (ESG) factors are now being considered in real estate valuation, and investors are using ESG data to make informed decisions about asset performance. In this blog post, we will explore how sustainability is changing the real estate industry and what investors need to know about ESG.

  What ESG Factors are being considered in real estate valuation?

  ESG is gaining importance among capital providers, and investors are using ESG data to evaluate the sustainability of real estate assets. ESG factors such as energy efficiency, water conservation, and waste reduction are now being considered in real estate valuation, and buildings that meet sustainability standards are more attractive to investors.

  1. Energy efficiency: Investors are looking for energy-efficient buildings with low carbon footprints. This includes buildings with efficient HVAC systems, LED lighting, and renewable energy sources.
  2. Water conservation: Investors are also looking for buildings that conserve water and have efficient water management systems. This includes buildings with low-flow fixtures, rainwater harvesting systems, and water-efficient landscaping.
  3. Waste reduction: Investors are looking for buildings that have effective waste management systems and reduce waste through recycling and composting.
  4. Social impact: Investors are looking for buildings that have a positive social impact on the community. This includes buildings that provide affordable housing, support local businesses, and promote diversity and inclusion.
  5. Governance: Investors are looking for buildings that have strong governance structures and ethical leadership. This includes buildings that have transparent reporting, strong risk management, and effective stakeholder engagement.

  ESG is becoming a material risk and opportunity for real estate investors and other stakeholders. As climate change and other sustainability issues become more pressing, investors are looking for ways to future-proof their assets against shocks and disruptions. This means that real estate managers must take a proactive approach to sustainability and change their assets to meet ESG standards.

  How is ESG driving innovation in the real estate industry?

  Developers and investors are exploring new technologies and strategies to reduce the environmental impact of buildings and improve their sustainability. Here are the top 5 ESG-related technologies becoming more common in new real estate developments.

  1. Solar panels: Solar panels are a popular way to generate renewable energy and reduce a building’s carbon footprint. They can be installed on rooftops or as standalone structures and can provide a significant portion of a building’s energy needs.
  2. Efficient lighting: LED lighting is becoming more common in real estate developments as it is more energy-efficient than traditional lighting. Smart lighting systems can also be used to optimize energy use and reduce waste.
  3. Insulation: Proper insulation is essential for reducing energy consumption and improving a building’s energy efficiency. Insulation materials such as spray foam, cellulose, and fiberglass can be used to reduce heat loss and improve indoor air quality.
  4. Smart technology: Smart technology can be used to optimize energy use and reduce waste. For example, smart thermostats can be used to regulate heating and cooling systems, while smart sensors can be used to monitor energy use and identify areas for improvement.
  5. Tankless water heaters: Tankless water heaters are becoming more common in real estate developments as they are more energy-efficient than traditional water heaters. They can provide hot water on demand and reduce energy consumption by up to 30%.

  What are the benefits of embracing ESG in real estate? 

  According to the US Green Building Council, green buildings cost 2% more to build on average, but they save 14% to 19% in operational expenditures. This means that while the upfront costs of green technology may be higher, the lifetime savings can be significant.

  Energy-efficient systems can help reduce utility bills, while sustainable features can increase a building’s resale value. In fact, building owners are seeing a 10% or greater increase in property value after investing in green buildings. Additionally, sustainable real estate investments have been shown to outperform traditional real estate investments in terms of risk-adjusted returns.

  If you’re looking for a solution to track ESG reporting across your real estate portfolio, check out VL’s ESG Steward.

   

  The post ESG in Real Estate & Industry Changes first appeared on Visual Lease.]]> https://visuallease.com/related-party-leases-under-asc842/ Wed, 10 May 2023 12:42:44 +0000 https://visuallease.com/?p=7981 Related Party Leases under ASC 842 Recently, the Financial Accounting Standards Board (FASB) introduced new rules and clarifications regarding the treatment of related party leases under ASC 842. Although these...
  The post Related Party Leases under ASC 842 first appeared on Visual Lease.]]>

  Related Party Leases under ASC 842

  Recently, the Financial Accounting Standards Board (FASB) introduced new rules and clarifications regarding the treatment of related party leases under ASC 842. Although these rules apply to all related party leases, their impact is most significant for private business entities. This blog post aims to provide an overview of these developments and highlight the key considerations for companies navigating related party leases under ASC 842.

  Related Party Leases: Key Considerations

  1. Putting Agreements in Writing: FASB has introduced a crucial change requiring companies to document related party leases explicitly. Previously, private businesses often treated these leases informally to cut costs. The original rule required examining legally enforceable terms, leading to expensive attorney opinion letters. FASB’s amendment allows companies to account for related party leases based on the terms written in a simple agreement, simplifying compliance.
  2. Accounting for Leasehold Improvements: Under ASC 842, related party leases involving leasehold improvements face important considerations. Previously, if the improvements had a longer lifespan than the lease term, it could result in accelerated write-offs and unusual expenses. The current standard allows companies to amortize leasehold improvements over their useful life. If the related party lease ends before the improvements’ useful life, adjusting entries are made to align the books properly. This prevents excessive burden on the subleasing company’s financial statements.

  3 Considerations for Related Party Leases Under ASC 842

  When considering related party leases under ASC 842, here are the top three things to keep in mind:

  1. Document the Agreement: Regardless of the complexity or length, it is essential to put related party lease agreements in writing. This documentation should cover the majority of the terms agreed upon by the related parties. By formalizing the lease agreement, companies can ensure compliance with the accounting standards and avoid unnecessary complications.
  2. Accounting for Leasehold Improvements: If the related party lease involves leasehold improvements with a longer lifespan than the lease term, companies should amortize the costs of these improvements over their useful life. This approach prevents accelerated write-offs and unusual expense patterns. In case the lease terminates before the completion of the improvements’ useful life, adjusting entries should be made to align the books accordingly.
  3. Seek Professional Guidance: Given the complexity of accounting standards and the potential impact on financial statements, it is advisable to consult with accounting professionals or experts familiar with ASC 842. They can provide valuable insights and guidance tailored to the specific circumstances of related party leases.

  Implications of Related Party Leases for Private Businesses

  The recent developments introduced by FASB regarding related party leases under ASC 842 have significant implications, particularly for private business entities. By ensuring that related party leases are properly documented and by accounting for leasehold improvements in line with the rules, companies can comply with the standards while maintaining accurate and transparent financial reporting. Seeking professional guidance is crucial to navigating these accounting complexities effectively. By staying informed and adhering to the updated rules, businesses can mitigate risks and make sound financial decisions in the context of related party leases.

  If your organization is struggling with sustainable ASC 842 compliance, you’re not alone.  Join the thousands of companies that have switched to Visual Lease to confidently maintain compliance.

   

  The post Related Party Leases under ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/gaap-vs-tax-accounting-financial-reporting/ Tue, 02 May 2023 20:49:55 +0000 https://visuallease.com/?p=7964 GAAP vs. Tax Accounting: Navigating the Complexities of Financial Reporting With the introduction of ASC 842, some private companies are struggling with the requirement to record the vast majority of...
  The post GAAP vs. Tax Accounting: Financial Reporting first appeared on Visual Lease.]]>

  GAAP vs. Tax Accounting: Navigating the Complexities of Financial Reporting

  With the introduction of ASC 842, some private companies are struggling with the requirement to record the vast majority of their leases to the balance sheet. As a result, some organizations are turning to tax basis to file statements instead of following the new lease accounting rules.

  GAAP (Generally Accepted Accounting Principles) and tax accounting are two different sets of accounting standards that companies are required to follow. While both are used to report financial information, they have different purposes and requirements.

  What is GAAP?

  GAAP is the set of rules and guidelines that publicly traded companies in the United States must follow when preparing financial statements for external stakeholders, such as investors, creditors, and regulators. GAAP principles are designed to ensure that financial statements are accurate, complete, and comparable across companies.

  What is Tax Accounting?

  On the other hand, tax accounting is used to calculate a company’s tax liability to the government. The Internal Revenue Service (IRS) requires companies to report their taxable income based on the tax code and regulations, which can differ significantly from GAAP principles.

  GAAP vs. Tax Accounting

  The main difference between GAAP and tax accounting is their objectives. While GAAP is focused on providing accurate financial information to external stakeholders, tax accounting is focused on complying with tax laws and regulations. This difference in objectives can lead to discrepancies between the two accounting methods, making it difficult to reconcile financial information.

  What are some examples of discrepancies between GAAP and tax accounting?

  • Timing of revenue: GAAP requires revenue to be recognized when it is earned, regardless of when it is received. On the other hand, tax accounting requires revenue to be recognized when it is received, regardless of when it is earned. This can create discrepancies in revenue recognition between the two methods, leading to different reported profits.
  • Treatment of depreciation: GAAP allows for different depreciation methods, such as straight-line or accelerated depreciation, based on the useful life of the asset. Tax accounting, however, requires companies to use specific depreciation methods, such as the Modified Accelerated Cost Recovery System (MACRS), which can differ from GAAP methods.

  These differences between GAAP and tax accounting can create challenges for companies when reconciling financial information. Companies must ensure that their financial statements are accurate and complete, while also complying with tax laws and regulations. This can require significant resources and expertise, as well as the use of specialized software and tools to manage the complexity of the reconciliation process.

  Additionally, tax basis financial statements may not be accepted by all users, such as lenders and investors, who may require GAAP financial statements. Private companies that use tax basis financial statements may need to provide additional disclosures to explain the differences between tax basis and GAAP financial statements.

  Finding The Right Technology:  GAAP Accounting Software

  The biggest challenge in accounting, regardless of whether it is GAAP vs. tax accounting, is tracking down data, managing changes, and maintaining controls.  Managing leases, for example, can be a challenging and complex process, regardless of the accounting basis used.

  • For example, if a company is using GAAP accounting, they need a lease management system that can track and manage lease data in accordance with GAAP principles.
  • Similarly, if a company is using tax accounting, they need a system that can handle the specific tax regulations and requirements related to lease transactions.

  Companies must have strong controls and processes in place to ensure that their lease accounting and management data is accurate and up to date. Companies may need to invest in specialized software and tools to manage the complexity of lease accounting and ensure compliance with accounting methods.

   

   

  The post GAAP vs. Tax Accounting: Financial Reporting first appeared on Visual Lease.]]> https://visuallease.com/the-evolution-of-leasing-4-trends-to-expect-in-2023/ Tue, 25 Apr 2023 15:49:42 +0000 https://visuallease.com/?p=7948 The ongoing effects of the pandemic, evolving workplace trends and unique economic circumstances have driven businesses to reconsider how and why they enter into new leases.  But how exactly are...
  The post The Evolution of Leasing: 4 Trends to Expect in 2023 first appeared on Visual Lease.]]>

  The ongoing effects of the pandemic, evolving workplace trends and unique economic circumstances have driven businesses to reconsider how and why they enter into new leases.  But how exactly are companies adapting? Better yet, what are the implications of these new behaviors?

  A recent study from The Visual Lease Data Institute (VLDI) answers all these questions and more:

  1. Organizations are prioritizing lease terms that enable adaptability.

  The pandemic has changed how companies operate, and as a result, many have found themselves locked into leases for space that they no longer require.

  To combat this challenge, nearly 88% of companies report that they are planning for physical space needs only one year or less in advance, which is a 151% increase from 2022. The majority of real estate executives have also reported that their businesses were planning to add space as a part of their 2023 real estate strategy – but more than half (52%) of these companies are planning for some or all of this space to be in the form of new satellite locations.

  What does this all mean? Organizations value the ability to revisit lease agreements, negotiate flexible terms and explore alternative real estate options that align with their evolving business strategies.

  2. Business leaders are focused on new workforce needs.

  Business leaders are also looking for leases that support their ability to accommodate remote or hybrid work arrangements – something that has become a “must-have” for many when considering job opportunities. In fact, a 2022 survey by McKinsey found that the third-most-popular reason employees looked for a new job was to find a flexible working arrangement.

  To remain competitive in the job market, companies are reimagining how they utilize their available space. Forty-six percent of surveyed senior real estate executives say that shared desks or offices that can be booked as needed by workers provide the best office environment for their companies. The ability to sublease, communal building amenities and flexible lease termination were also identified as top priorities for companies, ideally providing business leaders with options when it comes to how and where they occupy physical space.

  By entering into lease agreements that provide these various possibilities, companies are more likely to be able to pivot to appeal to existing and potential employees.

  3. Poor lease management continues to cost companies… big time.

  It’s no secret that mismanaged leases can lead to expensive mistakes. In fact, 45% of senior real estate executives admit that their companies have overpaid rent or expenses due to inadequate lease controls. Further underscoring the need for strong lease management practices is the reality that lease accounting standards (ASC 842, GASB 87 and IFRS 16) require companies to accurately represent their leases on the balance sheet. Without controls in place, businesses open themselves up to the very real risk of regulatory scrutiny and costly fines or audits.

  Despite how high the stakes are, 83% of companies aren’t investing in the technology, people and processes required to properly manage lease-related expenses.

  To stay ahead of costly errors, organizations must prioritize implementing strong controls to safeguard their lease portfolio, which is often their second largest expense just after people-related costs.

  4. Organizations can leverage their leases in their ESG program development and reporting.

  Although 99% of senior real estate executives believe it’s important for their company’s future leases to help reduce its carbon footprint, 95% of companies still don’t have a fully established ESG program in place and 41% report they haven’t begun any ESG initiatives yet.

  But regardless of where organizations stand in their ESG journey, they need to be able to accurately track and record where the bulk of their carbon emissions occur, which is across its lease portfolio. Investing in the right technology that offers carbon measurement and reporting features will give leaders a clear line of sight into their environmental impact, allowing them to meet reporting requirements.

  For more information on how Visual Lease can help your business take control of its leases and take charge of what’s next, schedule time with our team.

   

  The post The Evolution of Leasing: 4 Trends to Expect in 2023 first appeared on Visual Lease.]]> https://visuallease.com/mastering-lease-accounting-internal-controls-part-2-top-7-control-activities-and-how-technology-can-help/ Mon, 24 Apr 2023 12:49:12 +0000 https://visuallease.com/?p=7944 This is part II of our Mastering Lease Accounting Compliance series. If you missed part I, you can read it here. Adopting a lease accounting standard can have a significant...
  The post Mastering Lease Accounting Internal Controls [Part 2]: Top 7 Control Activities and How Technology Can Help first appeared on Visual Lease.]]>

  This is part II of our Mastering Lease Accounting Compliance series. If you missed part I, you can read it here.

  Adopting a lease accounting standard can have a significant impact on your organization’s balance sheet and financial statement footnotes. Moreover, it also expands lease disclosures and comes with the added burden of complying with lease accounting standards. In this post, we’ll share insights on controls and how technology can help organizations meet the challenges of lease accounting compliance.

  What are some of the top lease accounting control activities?

  Today we’re highlighting 7 of the top control activities that can help organizations with lease accounting compliance.

  These activities can be classified into two buckets: control activities and monitoring activities.

  The control activities include standardization of documentation, separation of duties, authorization and approvals, system access controls, and safeguarding of assets. The monitoring activities are audit trail and reconciliation.

  What are the Control Activities?

  • Standardization of Data and Documentation

  Every lease agreement is different, and the concept of standardization helps control both documents as well as the data they contain. Standardization helps control chronology such as original lease, amendments, renewals, etc. Also, completeness of both the document and package as well as any missing data elements and consistency that everything shows up in the same place within the platform. It also provides for ease of auditability through input templates defined, data fields, a contract repository, and the ability to set up fields for clauses, this is truly the concept of a single source of truth.

  • Separation of Duties

  Separation of duties is a critical control activity in lease accounting compliance. Organizations should ensure that folks in accounting should not be allowed to make changes to the system for things that can be operationally critical, such as term dates, and other aspects of the lease that are critical to the operations of that lease. User-defined roles can be set up in a system to ensure that lease admins have a certain level of activity within the system, while lease accountants can perform other activities, but never the two shall meet, so to speak.

  • Authorization and Approvals

  Authorization or approvals is another control activity that intersects with system access controls. Someone who is not in the system daily making changes, updates, etc. should be the one that approves the change log right these changes and reviews the log. They shouldn’t be making it the same way that someone who is inputting data daily is.

  • System Access Controls

  System access controls are vital in ensuring the security and integrity of lease data. Setting up user profiles that grant specific access levels is a good way to restrict access to sensitive data. For example, you can set up different profiles for admins, accountants, supervisors, reviewers, and auditors. Additionally, security features like SSL and two-factor authentication provide extra security not just for internal users but also for external users accessing the system.

  • Safeguarding of Assets

  Lease agreements often involve valuable assets that are critical to a company’s operations. Thus, it’s important to safeguard these assets by ensuring that you have a system in place that alerts you to critical dates and events related to lease agreements. For instance, if a lease agreement is coming to an end, you should be notified in advance, giving you enough time to renew the lease or negotiate favorable rates. Failure to safeguard these assets can result in a loss of critical business locations or unfavorable rates, which could be detrimental to the business.

  What are the Monitoring Activities?

  • Reconciliation

  Reconciliation is a vital process in lease accounting that ensures the accuracy and completeness of lease data. It involves comparing lease data across different periods to identify any discrepancies or errors. However, reconciliation is not 100% satisfied by the system, and compensating user controls are necessary to complete the process properly. Fortunately, lease accounting software provides a variety of role reports that enable the reconciliation of different activities within the lease accounting process.

  • Audit Trail

  Auditing is a critical part of lease accounting that ensures compliance with lease accounting standards and regulations. In addition to compliance, audit trails are also essential in establishing the accuracy and completeness of lease data. In Visual Lease, for example, there’s a quantitative disclosure report that provides a summary of all the information needed to pop into your footnote. The report also allows users to drill down into each of those summary numbers to see how they were built up. This feature provides an audit trail that users can use to establish the detail behind those numbers. Furthermore, the audit trail can be handed off to auditors to test the report and the audit trail that has that drilled-down feature.

  How can I implement better controls?

  Adopting a lease accounting standard can have a significant impact on an organization’s balance sheet and financial statement footnotes. To comply with these standards, organizations need to implement controls around accounting and reporting, which must be audited and continuously monitored. Collaboration between departments is necessary to ensure compliance, and auditors may need to engage with folks outside of accounting to test the controls in place. Fortunately, technology like Visual Lease can help organizations meet the challenges of lease accounting compliance. To learn more about Visual Lease’s Lease Accounting solutions, click here.

   

   

  The post Mastering Lease Accounting Internal Controls [Part 2]: Top 7 Control Activities and How Technology Can Help first appeared on Visual Lease.]]> https://visuallease.com/mastering-lease-accounting-internal-controls-part-1-unveiling-the-key-categories-for-compliance/ Mon, 24 Apr 2023 12:44:59 +0000 https://visuallease.com/?p=7942 This is part I of our Mastering Lease Accounting Compliance series. If you’re looking for part II, you can read it here. Lease accounting standards such as ASC842 and IFRS16...
  The post Mastering Lease Accounting Internal Controls [Part 1]: Unveiling the Key Categories for Compliance first appeared on Visual Lease.]]>

  This is part I of our Mastering Lease Accounting Compliance series. If you’re looking for part II, you can read it here.

  Lease accounting standards such as ASC842 and IFRS16 have significantly changed companies’ financial reporting requirements. These standards require companies to be more diligent in their financial reporting and lease management processes. The implementation of these standards requires a series of controls to ensure accuracy and compliance.

  What are some of the key categories for Lease Accounting Internal Controls?

  Lease accounting internal controls fall into four main categories: Transition-related Controls, Financial Reporting Controls, Activity-related Controls, and IT General Controls.

  1. Transition-related controls are short-term controls that focus on the transition period when implementing the new lease accounting standards. These controls include ensuring accurate lease listings during the transition, appropriate documentation, and other related processes. It is important not to lose track of these controls, as some of them have ongoing relevance even after the transition period. Some of these controls may become relevant again when companies move across the technology maturity spectrum.
  2. Financial Reporting Controls are critical to ensuring that companies comply with the new lease accounting standards. These controls include familiar checklists for disclosure and IFRS16 reporting and existing internal controls for financial reporting. In addition, lease-specific controls such as reconciling lease disclosures with related system reports are essential to ensure accuracy in financial reporting.
  3. Activity-related controls refer to controls around lease management processes such as lease modifications, lease terminations, and lease renewals. These controls include ensuring that there are appropriate approvals in place for these processes and that lease modifications and renewals are reflected accurately in the company’s financial statements. Activity-related controls also include lease classification reviews, which ensure that leases are classified correctly as operating or finance leases. This is important because it affects the way leases are recorded in the company’s financial statements.
  4. IT General Controls are controls that ensure the integrity of the company’s IT systems, data, and processes. These controls include ensuring appropriate access controls, data backups, and data security. IT General Controls are particularly important for lease accounting standards as they involve significant data and calculations.

  To learn more about lease accounting internal controls – including the top seven control activities and how technology can help with lease accounting, check out part II of this blog. If you’re looking for reliable lease controls and audit-ready financial reports, learn more about Visual Lease’s Lease Accounting Solution.

   

   

  The post Mastering Lease Accounting Internal Controls [Part 1]: Unveiling the Key Categories for Compliance first appeared on Visual Lease.]]> https://visuallease.com/esg-101-environmental-social-governance/ Wed, 29 Mar 2023 15:00:06 +0000 https://visuallease.com/?p=7881 With more and more organizations focusing on ESG initiatives, we’ll use this blog to demystify what ESG is, why organizations choose to focus efforts on ESG related initiatives, and how...
  The post ESG 101: An Introduction to Environmental, Social and Governance first appeared on Visual Lease.]]>

  With more and more organizations focusing on ESG initiatives, we’ll use this blog to demystify what ESG is, why organizations choose to focus efforts on ESG related initiatives, and how your organization can get started on ESG reporting.

  What is ESG

  ESG stands for Environmental, Social, and Governance. These three factors are used to evaluate the sustainability and ethical impact of a company’s operations.

  • Environmental: Environmental factors refer to a company’s direct or indirect impact on the environment, and may include carbon emissions, energy consumption, climate change effects, pollution, waste disposal, renewable energy, and resource depletion.
  • Social: Social factors refer to a company’s impact on society including how a company treats its employees, customers, and the communities in which it operates. Social factors include discrimination, diversity, equity and inclusion, human rights, community relations, and animal rights.
  • Governance: Governance factors refer to a company’s internal management and decision-making processes that help ensure that a company’s leadership is accountable to its shareholders, investors and employees; abides by government regulations, and that the business operates with integrity. Governance factors include executive compensation, shareholder rights, takeover defense, staggered boards, independent directors, board elections, and political contributions.

  For the purposes of this blog post, we’ll be focusing on the Environmental factors.

  Why Focus on ESG?

  There are 4 main reasons why an organization may choose to focus on ESG initiatives:

  1. Financial performance: In the past decade, studies have confirmed a link between ESG policy performance and financial performance. One of the largest studies conducted by the Journal of Sustainable Finance & Investment, analyzed over 2,000 empirical datasets, with 90% of them indicating either positive or neutral correlations between ESG factors and financial performance.
  2. Regulatory risks: While ESG reporting in the United States is currently largely voluntary, companies that ignore ESG factors may face regulatory and legal risks in the future. Many state and local governments are implementing ESG-related regulations, with fines and penalties for organizations that do not comply. The European Union (EU) is leading the way in requiring compliance to sustainable business practice; they currently have the world’s most advanced ESG regulations. For example, the ‘European Green New Deal’ is a comprehensive plan that aims to make Europe climate-neutral by 2050 through an array of measures to combat climate change and promote sustainable innovation.
  3. Reputation: Consumers and investors are increasingly looking to do business with companies that prioritize ESG, and companies that don’t prioritize ESG may risk damaging their reputation. According to PwC, 76% of consumers say they will stop buying from companies that treat the environment, employees, or the community in which they operate poorly.
  4. Environmental impact: Companies that prioritize ESG are more likely to operate sustainably, reduce their carbon footprint, and engage in ethical business practices.

  It’s becoming increasingly essential for organizations to determine where the risks and opportunities lie in a company’s ESG profile and whether they will have a material impact on its strategy, messaging, risk assessment, and reporting. This is especially true as companies compete for capital and stakeholders demand more transparency around a company’s environmental impact.

  Where to Get Started?

  While having your organization prioritize ESG initiatives can seem like a daunting task, there are some clear steps you can take to start navigating this complex landscape.

  1. Gather the right team members in the business to discuss your ESG priorities and set goals. Examples of ESG goals may include:
     1. Partnering with non-profits to identify, fund, and scale proven environmental impact solutions
     2. Reducing scope 1, 2, 3 GHG emissions
     3. Reducing energy and using renewable energy sources to become a net zero organization.
     4. You can also look towards standards (i.e. ISSB) or frameworks (CDP) for guidance on relevant goals.
  2. Establish an internal task force. If your organization doesn’t have a head of sustainability or similar role, consider bring together folks from:
     1. C Suite – consider asking your CFO to serve the role as executive sponsor
     2. Reporting & Finance – like your Controller, and/or Director of Reporting
     3. Data Gathering & Execution – like Facilities Manager, Procurement lead, Real Estate executive and/or Supply Chain manager
  3. Develop an understanding of scope 1 and scope 2 emissions and requirements. Keep in mind, requirements for ESG reporting may vary depending on the specific standard being used.:
     1. Scope 1 emissions are a type of greenhouse gas emissions that come directly from the sources owned or controlled by your organization. You can think of this in terms of “I burned it,” Examples include your organization’s facilities and company vehicles.
     2. Scope 2 emissions are also a type of greenhouse gas emissions, but these come from the generation of purchased electricity, steam, heating & cooling of a company. You can think of this in terms of “I paid someone else to burn it.”
  4. Start taking practical steps for gathering your data so you can establish baselines. This may vary depending on where and how information is stored, but energy bills, for example, are a great source of information for gathering energy consumption.
  5. Ensure your team considers best practices in reporting. You’ll likely want to track energy and water consumption, waste and biodiversity activity data, and calculate greenhouse gas emissions based on the Greenhouse Gas Emissions Protocol and EPA Energy grid emissions factors. Alternatively, leverage a tool with automatic and transparent calculations complete with audit trail.

  While the ESG compliance requirements are still evolving, one thing is certain: ESG compliance isn’t a one-and done disclosure, it’s a mindset shift across an organization and an ongoing, iterative journey towards sustainability. For more information on how to begin your journey and to learn about Visual Lease’s carbon accounting tool, visit ESG Steward

  The post ESG 101: An Introduction to Environmental, Social and Governance first appeared on Visual Lease.]]> https://visuallease.com/what-lease-accounting-compliance-can-do-for-your-business-next/ Wed, 08 Feb 2023 13:49:46 +0000 https://visuallease.com/?p=7824 In response to lease accounting standards, your business may have already set in place certain lease accounting systems and technology to achieve compliance. But did you know these solutions can...
  The post What Lease Accounting Compliance Can Do for Your Business Next first appeared on Visual Lease.]]>

  In response to lease accounting standards, your business may have already set in place certain lease accounting systems and technology to achieve compliance. But did you know these solutions can do more than help your company stay audit-ready?

  With today’s shortage of finance workers, higher workloads and increasing compliance regulations, companies need to find more efficient ways to manage their lease portfolios. By implementing the right technology, people and systems, your business can leverage its expensive lease portfolio as a more strategic asset. Here’s a closer look at how lease accounting compliance can help your business improve the financial, legal and operational performance of its leases.

  1. Identify cost-saving opportunities

  Financial leaders can use their technology to implement controls that help identify areas where they can reduce costs. This can be done through visibility into options and exercise windows, using insights into actual costs to guard against inflation and securing earned incentives by tracking requirements and timing.

  2. Reduce legal risk

  Lease mismanagement exposes businesses to serious risks, including legal action and, as a result, damaged credibility. However, business leaders can reduce these risks by firmly establishing control of lease terms. As a result, they can rest easier knowing that:

  • They now have visibility into rights and obligations.
  • They’ve limited their exposure to indemnification and other serious obligations.
  • The business is less likely to default by failing to comply with lease terms.
  • They’ve eliminated confusion and wasted time over repair and maintenance responsibility.

  3. Save employee time

  In the current economic conditions, it’s pertinent that businesses save time wherever they can. A Visual Lease report showed that private companies were able to save an average of 600 hours with lease accounting software.

  With the right technology solution, your business can easily integrate, manage and automate lease data between systems to generate detailed disclosure reports, compliance checks, automatic remeasurements and customized data options.

  This means your employees can focus on tasks that drive your business forward instead of rigorous, time-consuming reporting. Reliable, complete data—along with better cross-departmental collaboration—eliminates time spent on redoing accounting work or lengthy audits, and even increases confidence in year-end reporting.

  4. Support agile business decisions

  Businesses with the systems and technology in place for lease accounting compliance are also now equipped with greater visibility into their leases, which leads to making more informed business decisions.

  This is necessary as many organizations are currently spending less time to make plans for their space needs. According to a , 88% of senior real estate executives say their companies are planning for their physical space needs just one year or less in advance.

  Having the right technology and systems already in place also protects your business’ ability to pivot should any unforeseen circumstances arise. And as we learned from the COVID-19 pandemic, these types of predicaments can happen at any time. Yet your organization can quickly react to changing circumstances by reducing footprints, subleasing where needed or opting for shared workspaces.

  With the right lease controls and management solutions established, your business can move past lease accounting compliance and look forward as you leverage this technology to create even greater financial, legal and operational outcomes for your business.

   

   

  The post What Lease Accounting Compliance Can Do for Your Business Next first appeared on Visual Lease.]]> https://visuallease.com/4-common-risk-areas-found-in-a-lease-portfolio-what-to-know-and-how-to-avoid-them/ Tue, 10 Jan 2023 21:25:45 +0000 https://visuallease.com/?p=7801 Today, many organizations lack control over their leases, which increases the risk of making costly errors, such as overpaying or missing a date for termination or renewal. (90% of senior...
  The post 4 Common Risk Areas Found in a Lease Portfolio: What to Know and How to Avoid Them first appeared on Visual Lease.]]>

  Today, many organizations lack control over their leases, which increases the risk of making costly errors, such as overpaying or missing a date for termination or renewal. (90% of senior Real Estate Executives do not believe they have access to the data they need to make an informed decision about their company’s lease portfolio.)

  With leases usually serving as a business’ second-largest expense, they are far too valuable to overlook and undermanage.

  Here are four common risks areas found in your lease portfolio and how to avoid them.

  1. Inaccurate, unreliable lease data

  Leases contain hundreds of unique terms and options that evolve over time. To remain aware of each liability and option, you’ll need to have visibility into the details within your leases.

  As leases change, it’s important to keep track of every update or modification that has been made to your leases. By doing so, you will ensure that your data – and as a result, your financial reporting – is always accurate.

  To get a firm grasp on your lease data, first identify all lease contracts within your organization and then, centralize your lease data within a reliable lease accounting solution that enables you to view and maintain your leases as they change, and also, know what updates were made and when.

  2. Lease misclassification

  To comply with the lease accounting standards, companies are required to classify leases as operating or finance leases at their inception. The distinction is important since misclassification can impact:

  • The balance sheet
  • Expenses related to operating and finance leases
  • Understanding of credit agreements and covenants that may limit the number of finance leases
  • Company metrics, bonuses or incentive plans due to misclassified “geography” of the respective accounts in the balance sheet

  To ensure accurate classification of leases, it’s important to implement processes that support the criteria for reporting on operating and finance leases. Utilize your lease accounting solution to help your team properly classify leases and record them on the balance sheet.

  3. A lengthy, expensive audit process

  Your audit will likely take more time without a view into the lease accounting calculations and adjustments made to your lease data. To reduce time (and money), provide auditors with a complete view into your lease data, along with a full audit trail of every change – both of which can be accomplished by utilizing a strong lease accounting and administration platform.

  Further, automated calculations backed by a SOC 1 Type 2 certification ensure everything is by the book for a seamless audit process. This added layer of necessary verification ultimately reduces the time auditors spend verifying accuracy and decreases the risk of any miscalculations.

  4. Lease overpayments

  Leases are complex, expensive contracts with many different terms, options and important dates. However, nearly three-quarters (71%) of private companies say they are not confident about the complete cost of their leases.

  This lack of visibility into your leases can put you at risk of making significant overpayments and costly mistakes. Luckily, this can be addressed by implementing technology and processes that make it easy to keep track of your lease terms.

  By keeping close tabs on your leases through technology, you can identify opportunities to save money within your lease portfolio, be aware of options and exercise windows and avoid confusion regarding repair and maintenance costs.

  Protect your business from risks with end-to-end lease administration and lease accounting.

  To avoid the risks associated with not having complete visibility into your lease portfolio, it’s important to maintain automation, lease controls and strong collaboration across all departments that touch the leasing process.

  Choosing software like Visual Lease can help you reduce risk, drive confident and sustained lease accounting compliance and provide the visibility required to make agile business decisions. We can help you implement robust lease controls that support continued compliance with FASB, IFRS and GASB lease accounting standards, while empowering you to maximize the financial and operational performance of your leases.

  The post 4 Common Risk Areas Found in a Lease Portfolio: What to Know and How to Avoid Them first appeared on Visual Lease.]]> https://visuallease.com/how-to-prepare-for-the-perfect-year-end-close/ Wed, 28 Dec 2022 13:59:43 +0000 https://visuallease.com/?p=7750 Accounting teams are often left scrambling to find lease information needed to wrap up the year and prepare for their audit. As businesses approach year-end, how can they ensure an...
  The post How to Prepare for the Perfect Year-End Close first appeared on Visual Lease.]]>

  Accounting teams are often left scrambling to find lease information needed to wrap up the year and prepare for their audit.

  As businesses approach year-end, how can they ensure an easier closing of the books? It starts by having visibility and control of lease information, maintaining strong lease accounting procedures and open communication between accounting and real estate teams throughout the year. Let’s take a closer look at these strategies.

  The role lease accounting plays in a year-end close

  Closing the books for the year is an annual process that most companies have to perform. Although this process can be tedious and time consuming, it’s vital to make sure all financial information about your business is accurate.

  To be as efficient as possible, companies should work throughout the year to ensure processes are in place each month for a straightforward monthly close. A regular, clean month-end close sets businesses up to successfully and seamlessly execute a final closing of the books at the end of the year.

  No year-end close checklist is complete without making sure all leases and related financial documents are up to date and correct. After all, for most businesses, the cost and value of their leases are second only to the cost of their people. As a result, if a company’s lease accounting information isn’t complete and accurate, it can lead to expensive errors (such as findings, like a material weakness, significant deficiency or control weakness) and waste time during the year-end closing process.

  Monthly procedures to maintain accurate lease accounting

  Without accurate lease accounting, businesses risk making costly mistakes. According to the Visual Lease 2021 Lease Accounting Readiness report, 99% of senior finance and accounting professionals surveyed at private companies expressed concern regarding several pitfalls of misreporting company lease information, including:

  • Increased audit fees and fines (51%)
  • Risk of legal action (48%)

  To avoid these expensive risks and stay on top of monthly lease accounting, accounting teams should implement the following procedures.

  1. Centralize financial information for leases: A lease accounting software like Visual Lease can help keep track of this critical information for the company.
  2. Set a clear timeline: Ensure teams are on the same page and are on track to deliver all necessary information.
  3. Standardize all processes: Having a system for your lease accounting procedures allows your accounting teams to easily repeat them each month.
  4. Communicate regularly with the real estate team: Make sure your business’ real estate team knows what information they must relay to the accounting team and by when. It’s important to work with lease accounting software that can create a system audit trail and show what changes are made to which leases, who made the changes, and when.

  If your accounting teams use the right lease accounting software, maintain clear expectations and processes, and collaborate with the real estate team, your business will have an easier and more accurate closing of the books each year. These steps also set up your company for financial success for years to come.

   

  The post How to Prepare for the Perfect Year-End Close first appeared on Visual Lease.]]> https://visuallease.com/how-to-use-the-4-methods-of-calculating-depreciation-under-us-gaap/ Thu, 22 Dec 2022 20:20:03 +0000 https://visuallease.com/?p=7736 What is depreciation in accounting? The 4 depreciation methods in accounting Can you change depreciation methods from year to year? Straight line method Declining balance method Units of production depreciation...
  The post How to Use the 4 Methods of Calculating Depreciation Under US GAAP first appeared on Visual Lease.]]>
  • What is depreciation in accounting?
  • The 4 depreciation methods in accounting
  • Can you change depreciation methods from year to year?
  1. Straight line method
  2. Declining balance method
  3. Units of production depreciation method
  4. Sum-of-the-years’ digits method
  • Interested in lease accounting?

  To maintain accurate accounting, many companies must follow generally accepted accounting principles (GAAP or US GAAP), which work on the assumption that almost every type of business asset loses value over time.

  What is depreciation in accounting?

  Depreciation allows organizations to account for this lost value and allocate the cost of a tangible asset over its useful life – the estimated lifespan of a depreciable fixed asset, during which it can be expected to contribute to company operations. In accounting, useful life is an important concept since a fixed asset is depreciated over this period of time.

  GAAP introduced a set of accounting procedures for asset depreciation to ensure consistency and accuracy among organizations.

  The 4 depreciation methods in accounting

  To properly depreciate an asset under GAAP, accounting professionals must calculate the total cost of the asset, how long the asset will last before it must be replaced and how much an asset can sell for at the end of its useful life.

  There are four methods for calculating depreciation:

  • Straight line method
  • Declining balance method
  • Units of production method
  • Sum-of-the-years’ digits method

  Can you change depreciation methods from year to year?

  The depreciation method can change from year to year, however it’s best to remain consistent to ensure compliance with the US GAAP standards. Proper documentation to demonstrate the change and justification must be provided.

  Accountants are responsible for figuring out the correct GAAP depreciation method to use based on which method will achieve the most satisfactory allocation of cost. Let’s look more closely at these methods and how businesses can apply them.

  Accountants are responsible for figuring out the correct GAAP depreciation method to use based on which method will achieve the most satisfactory allocation of cost. Let’s look more closely at these methods and how businesses can apply them.

  1. Straight line method

  The simplest and most popular method of depreciation is the straight line method. This involves deducting the salvage value from the cost of the asset and dividing the resulting number by the asset’s useful life.

  To illustrate this formula, let’s say a company buys a $15,000 machine with a salvage value of $4,000 and a useful life of 10 years. If the company in this example used the straight line method of depreciation, the annual depreciation cost would be $1,100. 

  2. Declining balance method

  The declining balance method — a form of accelerated depreciation — allows an organization to depreciate an asset more heavily during its earlier years using a fixed percentage rate. The double declining method is a subset of the declining balance method, but as the name implies, it doubles the rate of depreciation.

  These methods are most useful for assets that lose value quickly, such as vehicles, computers, cellphones or other technology.

  

  3. Units of production depreciation method

  The formula for the units of production method is similar to that of the straight line method. But instead of using time to define the useful life of an asset, this method uses the number of units produced or hours of operation.

  The units of production method allows organizations to deduct higher depreciation costs during years when an asset is used more or produces more units. For example, this may be utilized by a manufacturing company that used a specific piece of machinery to produce X units in 2022 but that will be phased out in 2023 so they will have a lower rate of depreciation next year.

  

  4. Sum-of-the-years’ digits method

  The most complex method is the sum of the years’ digits, which is another form of accelerated depreciation. This method provides a better indication of value for fast-depreciating assets. Because the depreciation formula for the sum of the years’ digits is difficult to calculate, it can present a cumbersome challenge for asset-heavy businesses.

  

  Knowing when and how to apply these various depreciation methods in compliance with GAAP can be complicated. Leveraging an innovative software solution such as Visual Lease can help your organization streamline the process, eliminate risk exposure and save more on taxes.

  Interested in lease accounting?

  Take the next step and schedule a demo with Visual Lease to ease your lease accounting needs today!

  The post How to Use the 4 Methods of Calculating Depreciation Under US GAAP first appeared on Visual Lease.]]> https://visuallease.com/why-sustained-lease-accounting-compliance-depends-on-automation/ Tue, 20 Dec 2022 19:19:12 +0000 https://visuallease.com/?p=7732

  

  On-demand webinar summary

  How do you maintain confident, ongoing lease accounting compliance as your leases evolve?

  In our recent webinar, Why Sustained Lease Accounting Compliance Depends on Automation, lease accounting experts from Visual Lease shared:

  • The post-adoption lease accounting landscape
  • The difficulties and risks of using spreadsheets
  • Why auditors prefer software for reliability

   

   

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  

  Jason Lucas

  Manager, Sales Engineering Visual Lease

  Track changing lease terms

  As leases change, it’s virtually impossible to track them manually or using a spreadsheet. This is often because businesses typically have a large volume of leases – and each one contains its own unique, complex lease terms that must be interpreted.

  Lease accounting technology is the only way to update lease clauses and options without having to manually sift through contracts. This saves a lot of time – and headache – when maintaining compliance.

  Further, having easily-accessible lease data also enables you to leverage your lease data beyond compliance and make smarter business decisions, such as identifying gaps and savings opportunities.

   

  Provide historical lease data for audits

  Without technology that offers a complete audit trail of every update made to your leases, you, internal stakeholders and your auditors will be left wondering if your lease data is fully reliable or up-to-date.

  Unlike spreadsheets, lease accounting technology also ensures you can track who, what, where and when updates were made, so you can be fully confident in the accuracy of the data at the time of an audit.

   

  Accurate calculations and reports

  Just one error within your lease accounting calculation can lead to a failed audit.

  Technology, like Visual Lease, ensures precise calculations and reports – and reduces time and resources needed to do so. Additionally, if you use a spreadsheet, you are also going to be limited to the number of transactions that can be tracked and reported. This will create issues that can be avoided from using automated technology that offers calculations that are explained in every screen and backed by SOC I Type II audits that ensure consistency.

   

  Want to see more? View the on-demand webinar for a closer look at how Visual Lease supports Day 2 lease accounting compliance: Why Sustained Lease Accounting Compliance Depends on Automation.

   

  The post Why Sustained Lease Accounting Compliance Depends on Automation first appeared on Visual Lease.]]> https://visuallease.com/5-questions-that-should-be-on-every-financial-leaders-mind/ Mon, 19 Dec 2022 15:27:38 +0000 https://visuallease.com/?p=7792 When considering the financial impact of your lease portfolio, there are five questions to keep in mind. Detailed below, answering these questions can help you better understand: Your readiness for...
  The post 5 Questions That Should Be on Every Financial Leader’s Mind first appeared on Visual Lease.]]>

  When considering the financial impact of your lease portfolio, there are five questions to keep in mind.

  Detailed below, answering these questions can help you better understand:

  • Your readiness for sustained lease accounting compliance
  • How to reduce risks within your leases
  • Your preparedness for the next compliance task
  • Whether your organization has enough resources
  • How to ensure efficiency and accuracy

  Here’s how each of these critical points can affect your business’ success in 2023.

   

  1. Is your business set up to sustain lease accounting compliance?

  After initial adoption of the lease accounting standards, you will have to stay on top of evolving lease data to stay compliant. Every change made to your leases (such as terminations, expirations, etc.) will need to be tracked.

  Without the right tools, this is a complicated process due to the intricacies of the lease terms and the high volume of leases an organization holds. Your business can’t sustain confident, ongoing compliance without proper lease controls.

  Software solutions that provide lease administration and lease controls help organizations maintain accurate, up-to-date lease data and confident lease accounting. But not all lease accounting lease accounting technology supports ongoing lease administration required for ongoing lease accounting compliance. Unlike many other software solutions, Visual Lease has built-in lease administration capabilities required to keep businesses compliant.

  2. How can your company reduce risk within its leases?

  Leases are costly, complex contracts. Having the right controls in place ensures that businesses are equipped with full visibility into these dynamic documents which allows financial leaders to avoid costly risks associated with their lease portfolios.

  Without the right lease controls in place, businesses run the risk of making overpayments and missing lease options – both which cost the company and hurt the bottom line. In addition, lacking full visibility into your business’s lease portfolio could result in inaccurate financial reporting which then brings the risk of falling into non-compliance along with being subject to costly audits and fines.

  3. Is your company prepared for the next compliance task (ESG)?

  As ESG (environmental, social and governance) garners increasing attention and ESG reporting regulations continue to evolve, financial leaders must evaluate their preparedness. In fact, according to a 2021 survey from PwC, 79% of investors identified ESG risk as an important factor in investment decisions.

  When it comes to corporate leases, accurate and efficient portfolio management — along with lease optimization — can help companies comply with ESG priorities. For example, businesses can evaluate leases and lessors to show they are good ESG partners with greener building or equipment initiatives in place.

  Setting up the right data-gathering methods and technology also allows companies to constantly evaluate their leased asset portfolio for areas that can be consolidated and reduced, creating a more sustainable portfolio.

  4. Do you have enough resources to support lease accounting compliance and optimization?

  With the current shortage of finance workers (exacerbated by the Great Resignation), increasing compliance regulations and higher workloads, your business must prepare to enable teams for lease accounting and management success. Now more than ever, it’s important to invest in streamlined communication processes among departments as well as the right technology.

  5. How can your organization increase efficiency and ensure accuracy?

  Automation can help save businesses both time and money. Lease accounting involves complicated calculations that, if handled incorrectly, can lead to expensive mistakes. Automation serves to reduce the risk of costly human errors, avoid additional audit fees and streamline operations. In this way, integrations with the right lease accounting and management partners, such as Visual Lease, can help set up your company for lease portfolio success in 2023.

  Whether your lease accounting goals for 2023 involve saving money on audits or increasing efficiency while maintaining compliance, it’s important to have a plan regarding how you will attain them. And at the end of the day, it’s the right combination of people and technology that will best help you achieve your lease accounting and optimization goals.

   

  The post 5 Questions That Should Be on Every Financial Leader’s Mind first appeared on Visual Lease.]]> https://visuallease.com/how-to-prepare-for-day-2-lease-accounting/ Thu, 15 Dec 2022 21:25:00 +0000 https://visuallease.com/?p=7743

  

  On-demand webinar summary

  Your lease portfolio requires consistent upkeep to remain compliant with ASC 842. As your leases change, how will you stay audit-ready?

  In our recent webinar, How to Prepare for Day 2 Lease Accounting, experts from Visual Lease and BDO shared insight into:

  • What’s required to remain compliant throughout Day 2
  • When to reassess and remeasure
  • Processes to implement now for success later

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  

  Matthew Coker

  Managing Director, Accounting & Reporting Advisory Services BDO USA, LLP

  Key Elements to Sustain Lease Accounting Compliance

  

   

  When identifying a process to ensure ongoing lease accounting compliance, ask yourself:

  1. Have leases been added, terminated, shortened, extended or impaired?​
  2. Have there been changes to service agreements (embedded leases)?​
  3. Have assumptions changed related to extensions or purchase options?​
  4. Have leasehold improvements been made?​
  5. Do you have a process in place to maintain completeness and accuracy?

   

  When to Reassess Leases

  As leases evolve, you will need to continuously review them. In particular, it’s important to be aware of the following:

  • A significant event or change within the lessee’s control directly affects whether the lessee is reasonably certain to exercise (or not to exercise) an option​
  • An event occurs that contractually obliges the lessee to exercise (or not to exercise) an option to extend or terminate the lease​
  • The lessee elects to exercise an option even though the entity had previously determined that the lessee was not reasonably certain to do so​
  • The lessee elects not to exercise an option even though the entity had previously determined that the lessee was reasonably certain to do so​

   

  When to Remeasure

  There are numerous conditions that impact when to remeasure a lease.

  

  To learn more about what is required to maintain ongoing lease accounting compliance, view the on-demand webinar: How to Prepare for Day 2 Lease Accounting.

   

   

  The post How to Prepare for Day 2 Lease Accounting first appeared on Visual Lease.]]> https://visuallease.com/asc-842-roundtable-discussion-how-to-ensure-compliance-throughout-day-2-2/ Tue, 01 Nov 2022 17:05:56 +0000 https://visuallease.com/?p=7658

  

  On-demand webinar summary

  Without a firm grip on your leases, you will likely have trouble sustaining accurate lease data. This puts your business at risk of misreporting company lease information to comply with ASC 842, which can lead to increased audit fees and fines, legal action and more. 

  In our recent webinar, ASC 842 Roundtable Discussion: How to Ensure Compliance Throughout Day 2, experts from Visual Lease and Embark discussed how to instill confidence in your lease data through: 

  • Data Management: Keeping up with lease modifications and terminations, as well as data abstraction and validation 
  • Change Management: Understanding new requirements and educating staff, as well as maintaining processes, policies and controls 
  • Audit Prep: Ensuring you’re ready for your year-end audit

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  

  Matt Watson

  Director, Implementation Services
  Visual Lease

  

  Matt Fisser, CPA, ABV

  Managing Director, Financial Accounting A
  Embark

  

  Rosemary Courtney, CPA

  Manager, Technical Accounting
  Visual Lease

  To learn more, read the summary below or view the on-demand webinar. 

  The importance of data management

  You can’t manage your leases (stay on top of critical dates and options) without entering your lease data into a digitized solution. Often known as lease abstraction, this process is considerably one of the most time-consuming, risky parts of preparing for lease management and accounting.  

  Entering your leases incorrectly could lead to some big mistakes within your financial reports. In this webinar presentation, Matt Watson, Director of Implementation at Visual Lease, shared how businesses can validate their data right from the start for reliable results. 

  In addition, once your lease data is accurately abstracted within a dependable solution, that is when true data management comes in. Leases are fluid contracts – they are always changing. Whether your organization modifies, terminates or takes on new leases, each of these changes will need to be accounted for.  

  This can be incredibly cumbersome without technology that makes your lease data easily accessible. 

  Understanding new requirements and educating staff 

  To stay audit-ready, your business must plan for how its going to maintain policies and lease controls – and keep staff up-to-date on any changes. This includes changes to the accounting standards and the leases.  

  Because leases reside within different departments (such as supply chain, IT, etc.), you’ll need to make sure there’s a way for the departments to communicate any updates to leases they’re responsible for. This onerous process requires more collaboration than just between finance, accounting and real estate.  

  What to do to be audit-ready 

  Lastly, the presentation shared insights on documentation that businesses should have ready for their auditors. Businesses should provide both a PDF and Excel version of the disclosure report that includes the accounting calculations. This provides auditors with a view into your process, so they can see how your reports were calculated.  

  Besides disclosure reports, you may also want to produce a journal entry summary report, adoption memo, other testing scenarios and SOC reports if you used a software solution to prepare your lease financials. 

  For more details about how to stay audit-ready, view the on-demand webinar: ASC 842 Roundtable Discussion: How to Ensure Compliance Throughout Day 2. 

   

  The post ASC 842 Roundtable Discussion: How to Ensure Compliance Throughout Day 2 first appeared on Visual Lease.]]> https://visuallease.com/lease-audit-procedures-why-do-they-matter/ Thu, 27 Oct 2022 13:58:48 +0000 https://visuallease.com/?p=7666

  

  Lease audit procedures are necessary for an efficient, successful audit. At their core, lease audit procedures ensure your organization has controlled processes in place to support its financial reports.  

  Having such procedures enable auditors to get their job done quickly due to reliable, clearly stated and followed controls. The more organized and prepared you are, the more likely you will avoid running into issues within your audit.  

  Not only do lease audit procedures better prepare you for an upcoming audit, but lease audit procedures can also provide additional business benefits through supporting optimization of your lease portfolio. Below, we dive into how lease audit procedures can help your business. 

  6 Lease Audit Assertions

  1. Completeness: All leases and lease-related transactions have been identified, recorded, and reported accurately in the financial statements.
  2. Existence/Occurrence: The assets and liabilities related to leases actually exist and have occurred.
  3. Valuation/Allocation: The assets and liabilities related to leases have been valued and allocated correctly.
  4. Cut-off: All lease transactions have been recorded in the correct accounting period.
  5. Rights/Obligations: The company has the right to use the leased asset and the obligation to make lease payments.
  6. Presentation and Disclosure: Lease information has been presented and disclosed in the financial statements in accordance with applicable accounting standards.

  These assertions are used by auditors to assess the accuracy and completeness of a company’s lease accounting. By testing these assertions, auditors can help to ensure that the company’s financial statements are accurate and that they comply with applicable accounting standards.

  How to Better Prepare for the Audit Process for Lease Accounts

  Anticipate Audit Needs 

  Lease audits focus on providing an independent evaluation of asset control and risk. This evaluation is designed to drive continuous improvement to an organization’s processes and system.  

  The Journal of Accountancy outlines a number of challenges for auditors when approaching the leases section of the audit. Gaining a broader understanding of these challenges is an excellent first step in preparing for lease audit procedures under ASC 842.  

  When preparing for an audit, the goal for accounting and finance professionals is to ensure their books are in order for when the auditors come around. A significant component of this preparation is completeness assertion, which translates to ensuring all transactions that were supposed to be recorded have been recognized in the financial statements.  

  Nearly all (99%) senior finance and accounting professionals have concerns about misreporting company lease information. 

  Avoid Costly Mistakes 

  The absence of lease audit procedures can present a challenge when leased asset information is not readily available or in a central database. 

  To comply with the new lease accounting standards, all lease arrangements and amendments need to be identified, reviewed and abstracted. Financial statements are impacted with lease-related assets, receivables, liabilities and deferred inflows of resources coming on to the statement of net position.  

  Essentially, preparing for an audit means looking at an organization’s leased asset portfolio and ensuring all relevant stakeholders are assessed and addressed.  

  New lease accounting standards, like ASC 842, are likely to get more attention than usual from the auditors. Delays or missteps can put your business’ audit at risk of costly mistakes, such as increased audit fees, fines or damage to company and personal reputation. But having everything ready for the auditors puts the liability on them to get their job done accurately and efficiently.  

  Ensure Accurate Compliance 

  As mentioned earlier, the key to successfully completing lease audits is being prepared and organized. 

  The end goal of lease audit procedures is to ultimately eliminate the need to worry by ensuring procedures are identifiable and support compliance under the new lease accounting standards. 

  By having a centralized database and lease accounting system in place, finance and accounting professionals will not only be able to get the information they need quickly and easily, they will also subconsciously adopt time-tested lease audit procedures as a science.

  The post Lease Audit Procedures: Why Do They Matter? first appeared on Visual Lease.]]> https://visuallease.com/gasb-87-summary-page/ Wed, 26 Oct 2022 15:43:08 +0000 https://visuallease.com/?p=7627

  

  GASB 87 effective date

  Deadline for companies	Fiscal years beginning after June15, 2021

  GASB 87 Summary

  Issued by the Governmental Accounting Standard’s Board, GASB 87 is the new lease accounting standard for US government entities. All entities that prepare financial statements in accordance with GASB standards must comply with GASB 87 for fiscal years beginning after June 15, 2021.

  Who is subject to GASB 87?

  

  State, local and municipal governments

  

  Public benefit corporations and authorities

  

  Public employee retirement systems

  

  Public utilities, hospitals and other healthcare providers

  

  Public colleges and
  universities

  GASB 87 impacts lease accounting and reporting for both lessees and lessors as follows:

  

  Lessees must recognize lease liabilities and intangible right of use (ROU) lease assets on their statements

  

  Lessors must recognize lease receivables and deferred inflows of resources on their financial statements

  

  Was GASB 87 postponed?

  The Governmental Accounting Standards Board postponed the implementation date for GASB 87 back in May of 2020. The extension was implemented in order to give CPA firms and entities an opportunity to prepare to implement the new standard after disruptions during the COVID-19 pandemic.

  What does GASB 87 do?

  In 2017, the Governmental Accounting Standards Board (GASB) published the lease accounting standard GASB 87. The organization is the source of the accounting principles (GAAP) used by state and local governments in the United States.

  GASB 87 was created to increase visibility into lease obligations and remove ambiguity around lease obligations in financial disclosures, particularly balance sheets and income statements.

  What did GASB 87 replace?

  GASB 87 replaces the current operating and capital lease categories with a single model for lease accounting based on a definition of leases as contracts that convey control of the right to use a non-financial asset. The new rules require lessees to recognize a lease liability and an intangible asset while lessors are required to recognize lease receivables and a deferred inflow of resources on their financial statements.

  How Does GASB 87 Change the Balance Sheet?
  GASB 87 requires organizations to now record most leases on the balance sheet.
  For most organizations, this is a massive administrative lift. Leases are complex legal documents, sometimes hundreds of pages, which require trained professionals to negotiate and interpret; with countless obligations, clauses and critical dates to keep track of.
  Leases are also dynamic. Terms change all the time as organizations take on new spaces, scale back or renegotiate, and you must account for every change under GASB 87.
  To produce accurate lease accounting reports, the following information needs to be collected and tracked:
  
  Lease terms
  
  Discount rate
  
  Rent payment amounts and dates
  
  Lease option terms
  
  Variable or percentage rent terms
  
  Residual value guarantee terms
  Definition of a Lease Under GASB 87
  

  Under GASB 87, a lease is defined as a contract that conveys the right to use another entity’s nonfinancial asset for a period of time, including:

  • The ability to obtain the present use of the asset as specified in the contract

  • The right to control how the underlying asset is used

  

  Common examples of leased assets recorded under GASB 87 are:

  • Equipment for day-to-day operations (office equipment, medical equipment, telecommunications equipment, IT equipment)

  • Vehicles (automobiles, vans, trucks)

  • Real estate (property, buildings, offices, warehouses)

  

  In addition, some leases are exempt under GASB 87, such as:

  • Leases of certain types of intangible assets (e.g., patents, software licenses, the rights to explore for or exploit natural resources such as oil, gas, minerals and similar nonrenewable resources)

  • Leases of biological assets, including timber, living plants and living animals

  • Leases of inventory

  • Service concession agreements

  GASB 87 Compliance Software
  Visual Lease’s GASB 87 lease accounting software is the perfect tool to keep all of your leases in one single location, while making sure you stay completely GASB 87 compliant.
  GASB 87 Software Checklist
  When planning and preparing for GASB 87 and evaluating lease accounting software, naturally you’ll want to look for a solution that specifically supports GASB 87, which requires all contracts that meet the definition of a lease to be recognized in financial statements and classified as a finance lease.
  In addition, to ease the transition to GASB 87 and streamline the lease accounting process, you’ll want to look for a solution with the following capabilities and benefits.
  
  
  Intuitive and easy to use
  • Streamline lease data collection with other business applications, such as ERPs and accounts receivable
  • Enable automated calculations and financial reports
  • Support configurable data fields and reports to match your compliance requirements and organizational needs
  • Centralize all your lease information within one system
  
  Intuitive and easy to use
  • Incorporate years of lease financial management experience built within each feature and functionality
  • Prioritize future-readiness with ongoing investments in R&D
  • Focus on data security and privacy
  
  Intuitive and easy to use
  • Provide data visualization for visibility into lease details and costs, enabling more informed business decisions
  • Streamline lease detail management via system alerts for lease events and changes that could impact your ongoing financial reporting
  Lease Accounting Calculations

  Lease Accounting for Lessees

  Under GASB 87, lessees must recognize a lease liability and a right to use asset for all qualified leases.

  • The lease liability is generally calculated as the present value of payments the lessee expects to make during the lease term, including any contract renewal options the lessee is reasonably certain to exercise.

  • The lease asset is calculated as the lease liability plus any prepayments or initial direct costs, minus any lease incentives at or before commencement of the lease.

  As payments are made on the lease, the liability amount is reduced and interest expenses are recognized. The asset is amortized over the length of the lease term or over the life of the asset (whichever is shorter), unless the lease contains a purchase option that the lessee has determined is reasonably certain to be exercised, in which case, the lease asset should be amortized over the useful life of the underlying asset.

  Lease Accounting for Lessors

  Under GASB 87, lessors must recognize a lease receivable and a deferred inflow of resources on the financial statements. Just as with lessee schedules, the calculations can be complex.

  • At the start of the contract, the lease receivable is generally calculated as the present value of lease payments the lessor expects to receive over the term of the lease, minus any provision for estimated uncollectible amounts.

  • The deferred inflow is calculated as the lease receivable plus any payments made at or prior to the commencement of the lease.

  As the lessor receives payments, the lease receivable amount is reduced and interest revenue is recognized. The deferred inflow continues to be recognized as revenue over the life of a lease.

  Lease Accounting Remeasurements

  Organizations remeasure the value of lease assets and liabilities when there is some significant event or material change in circumstances, including:

  • Modification of a lease term, size or payment obligations — for example, the extension or expansion of a lease or the exercising of a lease option

  • Lease contraction due to full or partial lease termination or abandonment — for example, when an abandoned space is sublet, causing the abandonment of the primary asset

  • The full or partial impairment of a lease

  Remeasurements type	Description
  Modification	Any modification of lease term (i.e., change in payment term, extension of lease term, etc.)
  Full Impairment	Due to some event, the asset no longer has any value, but the organization still has obligation under the lease.
  Partial Impairment	Due to some event, the asset still has a value, but the value has been reduced by some amount or percentage.
  Full Termination	A lessee has ended the lease contract and no longer has the lease liability or asset on the books.
  Partial Termination	A lessee reduces the use of some portion of the asset (e.g., reduces total square footage of lease by terminating some portion), which reduces the amount of liability or asset on the books.
  Full Abandonment	A lessee decides to no longer use the entire asset as of some specific date; the lease contract is still in place and the asset remains as a liability on the financial statement.
  Partial Abandonment	A lessee decides to no longer use a portion of the asset as of some specific date; the asset remains as a liability on the financial statement.

  Disclosure Reporting

  

  For both lessees and lessors, GASB 87 now requires disclosure reports that provide aggregated totals and detailed supporting data such as:

  • Qualitative and quantitative information about leases, including variable payments not included in measurement of liability

  • Significant assumptions and judgments made when measuring leases

  • The amounts recognized in financial statements

  
  Lessee disclosure reports must provide:
  • Fully detailed lease descriptions
  • Amount of total leased assets — both gross and net figures
  • Future lease payment schedules, including interest payments
  
  Lessor disclosure reports must provide:
  • General descriptions of all lease arrangements
  • Inflows of resources, including lease and interest revenue recognized in the reporting period
  • Revenue from variable payment components not included in the lease receivable
  These new standards require organizations to gather and manage substantial amounts of data to generate disclosure reports related to real estate, equipment, vehicles, land and any other leases an organization holds.

  What To Look For in Lease Accounting Software

  Spreadsheets aren’t designed to handle the dynamics and complexity that impact the accounting calculations — lease transactions can result in hundreds of permutations and calculations. Most likely your current lease process has gaps that will need to be addressed when moving to adopt GASB 87. Many of these gaps can be addressed through the use of technology. Lease accounting software can help you meet GASB 87 requirements and maintain compliance beyond the initial reporting period.

  Evaluating lease accounting technology

  The right lease accounting software solution provides you with the proper tools to manage lease data and changes, perform the necessary calculations and generate reports according to GASB standards. In addition, choosing lease accounting and management software that has the capabilities described below will help to further streamline the accounting process and ensure ongoing GASB compliance.

  

  Lessee and lessor accounting
  Disclosure reporting capabilities
  Automated calculations
  Journal entries

  

  Lease amortization schedule
  Roll-forward reporting
  Handling for regulated leases
  Handling for short-term leases

  

  Ongoing compliance via
  modification, impairment,
  termination capabilities
  

  Compliance starts with a lease subledger
  GASB 87 introduces a much higher level of scrutiny. Now, organizations have significantly more lease information to track, update, calculate and report on. Given the cross-functional, complex and evolving nature of lease language, any lease accounting solution should start with a strong lease management software to act as a single system of record for all lease data and lease financials.
  Any sustainable solution should offer:
  
  Configurable tools to handle any lease scenario across any asset type to maintain a reliable, up-to-date source for qualitative lease details such as terms, changes and dates
  
  Integration capabilities to other cross-functional systems to maintain a single source of truth
  
  A comprehensive audit trail to track and reconcile any changes
  
  Defined user roles for anyone that touches leases and integrated guardrails to ensure any changes are in accordance with internal accounting procedures
  
  
  
  A lease software solution helps to streamlines this very complex process by providing automated calculations and workflows to:
  • Ensure that leases and the related assets, liabilities, revenues and expenses are accounted for consistently
  • Eliminate human error and reliance on formulas and cumbersome spreadsheets • Ensure accuracy by having all data and calculations in one system
  • Integrate leases and their pertinent data, such as liabilities, lease assets, interest expenses and revenue inflows, to the financial statements
  • Automatically generate journal entries and lease amortization schedules using the system data
  Lease reassessments and remeasurements
  With the enhanced level of lease visibility that GASB 87 requires, an organization’s lease accounting must explain all lease changes on the financial statements. This includes additions or subtractions due to new leases, modifications, impairments and terminations, as well as regular amortization.
  Accounting for lease remeasurement and reassessments is a common roadblock to sustainable compliance as accounting teams must rely on cross-functional stakeholders adhering to internal procedures as they manage lease modifications.
  Using lease technology to organize, update and manage lease data allows you to integrate lease renewals and other modifications into your accounting process, ensuring they are captured accurately and reported in a timely manner.
  Roll-forward reports are a valuable tool for meeting this requirement, providing a detailed disclosure of lease financials including period over period changes to lease assets and liabilities.
  By choosing a technology platform that automates roll-forward reporting, your organization can streamline data gathering, calculations and reporting while ensuring that the process meets compliance and disclosure requirements.
  Alerts, approvals, internal controls and audit trails
  Given the cross-functional nature of lease management, defined user roles and alerts and comprehensive approvals hierarchies are critical to maintaining a single source of truth.
  Look for systems that can streamline cross-functional workflows both internally and externally, with project management systems that can notify appropriate stakeholders when upcoming critical dates are near.
  Auditability cannot be compromised. Approvals hierarchies are important to make sure that mistakes – or intentional malfeasance – are identified. Audit trails must be maintained to track every change.
  
  The post What is GASB 87 & What Do I Need to Know first appeared on Visual Lease.]]> https://visuallease.com/exciting-announcement-vls-first-chief-customer-officer/ Wed, 12 Oct 2022 13:00:26 +0000 https://visuallease.com/?p=7575

  

  It’s been a pivotal year for Visual Lease. Over the past several months, we welcomed Robert Michlewicz as our new CEO, Amie Durr as SVP of Product and continue to experience accelerated growth in our customer, partner and employee base.

  And while there are many factors that have contributed to our growth, we continue to have one consistent priority: our customers. I am honored and excited to take on the role of Chief Customer Officer to ensure our customers get the greatest value from their partnership with Visual Lease.

  VL’s foundation.

  In our 25+ years of business, we’ve maintained a customer-centric mindset and approach. The VL team shares a deep passion for discovering our customers’ goals and challenges and works hard to shape our platform, services and partnerships to make their jobs easier. In fact, Visual Lease was originally created by our founder, Marc Betesh, after directly observing how organizations struggled to centralize and control their lease portfolios, and how it impacted their businesses.

  VL’s commitment.

  We have a customer base of more than 1,000 public, private and government organizations that is rapidly growing. This newly created office of the Chief Customer Officer will ensure that our customers continue to receive a high level of focus and get even greater value from Visual Lease. We will actively listen to their challenges and how market changes impact them. We will connect them to each other, so they can learn and collaborate. We will introduce them to additional ways our solutions, services and partnerships can benefit them. We will continue to use their perspectives and insights to shape our roadmap for the future.

  So, while 2022 has been a tremendous year for VL and our community of customers and partners, we know that there are new milestones and heights ahead that we’ll reach together!

  The post Exciting Announcement: VL’s First Chief Customer Officer first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-how-to-ensure-reliable-effective-implementation-and-adoption-2/ Thu, 06 Oct 2022 15:38:56 +0000 https://visuallease.com/?p=7598

  

  On-demand webinar summary

  Businesses commonly struggle to adapt the new methodologies and technology to achieve lease accounting compliance. In fact, one-third (33%) of private companies are still not fully prepared to transition to ASC 842.

  Our recent webinar, Lease Accounting: How to Ensure Reliable, Effective Implementation and Adoption, lease accounting experts from Visual Lease and RSM shared insight into:

  • Proven processes and tools to accelerate your progress
  • How to get started now and reduce the risk of error
  • Necessary, critical tips to ensure accurate lease accounting data

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  

  Matt Watson

  Director, Implementation Services
  Visual Lease

  

  Troy Sheehan, CPA

  Director, Consulting
  RSM US LLC

  

  Laura Adams

  Business Applications Manager, Consulting
  RSM US LLC

  To learn more, read the summary below or view the on-demand webinar. 

  What’s required to adopt ASC 842 

  To be successful in your lease accounting project, you must dedicate enough time, effort and resources.    

  “There are a lot of details that go into having a successful implementation. The key one is project management of all the different work streams that go into your Day 1 activities,” said Joe Fitzgerald. 

  The main activities you’ll need to track are lease data collection and lease technology implementation. Doing this right ensures your business has a comprehensive lease portfolio, reliable lease data and accurate reports.  

  Lease data collection and abstraction is particularly time-consuming, but essential to have a full picture of your leased assets. You will need to inquire with identified departments that utilize leased assets, enter into lease transactions and/or house lease agreements. These departments typically include corporate IT, G&A, legal, procurement and tax. 

  • Corporate IT
    • Responsible for: Leased computer and telephone equipment
  • General and Administration (G&A)
    • Responsible for: Leased copiers, cars, remote office locations, break room equipment
  • Legal
    • Responsible for: Reviewing leases and maintaining lists of executed leases
  • Procurement
    • Responsible for: Sourcing lease transactions
  • Tax
    • Responsible for: Overseeing preparation of personal property returns, which typically requires reporting leased assets

  Considerations to maintain ASC 842 compliance 

  Organizations often experience similar concerns related to sustaining lease accounting compliance post-initial adoption (Day 2). These commonly include: 

  • Resource constraints,  
  • Ongoing lease maintenance (reassessment, modifications and remeasurements), 
  • Ongoing collection and abstraction of new leases, 

  • Review of service contracts and embedded leases, 
  • And more. 

  To address these concerns, organizations may choose to outsource their Day 2 lease accounting efforts, rather than keeping the work in-house. Both options present pros and cons related to effort, cost, risk and organizational impact.  

  For a detailed breakdown relating to the pros and cons of outsourcing vs. insourcing your lease accounting, view the on-demand webinar: Lease Accounting: How to Ensure Reliable, Effective Implementation and Adoption. 

  The post Lease Accounting: How to Ensure Reliable, Effective Implementation and Adoption first appeared on Visual Lease.]]> https://visuallease.com/how-do-the-lease-accounting-standards-impact-your-footnote-disclosures/ Wed, 05 Oct 2022 17:18:35 +0000 https://visuallease.com/?p=7583 Do your lease footnote disclosures comply with the new lease accounting standards?   The footnotes of your financial statements must include certain information from your lease contracts. And with the newly...
  The post How Do the Lease Accounting Standards Impact Your Footnote Disclosures? first appeared on Visual Lease.]]>

  Do your lease footnote disclosures comply with the new lease accounting standards?  

  The footnotes of your financial statements must include certain information from your lease contracts. And with the newly implemented FASB, GASB and IFRS lease accounting standards, disclosure requirements have become more complicated. 

  What are footnote disclosures? 

  Footnote disclosures explain how an organization determined the numbers in their financial statements, such as their balance sheet (or statement of financial position), cash flow statements and income statement (or statement of activities). They highlight any differences the organization has made to its accounting methodologies from previous years and give an overall sense of its current and projected financial well-being. 

  Organizations must also fully disclose future contingencies, commitments and contractual obligations in their financial statements. Often, they use footnotes to provide this information.  

  How footnote disclosure requirements changed under ASC 842 

  Before ASC 842, footnote disclosure requirements were less detailed, and many organizations could easily manage their leases through spreadsheets. But the new lease disclosure requirements are much more complicated, making it nearly impossible to use spreadsheets to manage leases and track updates anymore. 

  For example, under ASC 840, finance leases (formerly called capital leases) had to be recorded on an organization’s balance sheet, but operating leases didn’t. Instead, they were listed in the footnote disclosures. 

  Under ASC 842, operating lease assets and liabilities must be “on the books” and recorded on the balance sheet, which can impact the ratios used to measure the organization’s financial health. To avoid confusion, it’s important to explain these differences in the operating lease footnote disclosures in a clear and organized way. 

  Disorganized footnote disclosures waste time and money 

  Leases are complex contracts that come in many shapes and sizes. Moreover, they can often be overlooked if not itemized and managed properly, resulting in increased financial risk for an organization. 

  Proper lease accounting management hinges on accurate footnote disclosures. Inaccurate disclosures can waste accounting professionals’ time and undermine an organization’s operability and reputation. 

  Furthermore, footnotes that are unclear or disorganized can easily bury important information. This can lead to mistakes and additional costs when preparing the annual financial statements both internally and externally. 

  The right tool can simplify footnote disclosures 

  Although footnote disclosures under the new lease standard can be overwhelming and complex, the right tool can vastly simplify the process. 

  To stay compliant, you’ll want to use a software solution that meticulously tracks lease accounting updates. It should also be easy to use yet robust enough to organize data from various sources. 

  A comprehensive tool like Visual Lease can generate audit-ready journal entries, disclosures and reports to help you comply with ASC 842, IFRS 16 and GASB 87 lease accounting standards. 

  The right lease management software should also keep all your lease accounting data in one place so you can easily generate statements and find the insights you need. After all, lease accounting shouldn’t just keep your organization compliant — it should also uncover new strategies to help you save money and time. 

  The post How Do the Lease Accounting Standards Impact Your Footnote Disclosures? first appeared on Visual Lease.]]> https://visuallease.com/how-to-prepare-for-asc-842-adoption-2/ Mon, 03 Oct 2022 15:06:32 +0000 https://visuallease.com/?p=7566

  

  On-demand webinar summary

  Are you confident that you have the resources you need to prepare your business for ASC 842 adoption? It’s important to anticipate and plan on meeting important milestones throughout your lease accounting project tTo ensure a smooth transition and achieve compliance, it’s important to be aware of the important milestones ahead of you.  

  In our recent webinar, How to prepare for ASC 842 adoption, lease accounting experts Joe Fitzgerald, SVP of Lease Market Strategy at Visual Lease, and Lisa Kaestle, Director of Accounting Advisory Services at Grant Thornton, shared insights and lessons learned from public companies, along with useful tips and insights private companies can use to successfully adopt ASC 842.  

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  

  Lisa Kaestle

  Director, Accounting Advisory Services
  Grant Thornton

  About Visual Lease 

  Visual Lease makes easy-to-use software to help organizations manage and account for their leases, and stay compliant with US-GAAP, IFRS and GASB lease accounting standards. 

  About Grant Thornton 

  With over 400 successful lease adoptions, Grant Thornton has seen it all. Between inefficiencies, errors, and restatement concerns, leasing will be at the center of discussions during your year-end audit. Find out more about our partnership and their self-service kit. 

  Here are some key takeaways from the webinar: 

  Lessons learned from public companies 

  Public companies have been reporting under ASC 842 for three years now. As a result, there have been many lessons learned in both initial adoption and ongoing compliance (typically referred to as Day 2) that private companies can use to their advantage.  

  • Adoption takes longer than expected 

  Preparing for ASC 842 compliance can certainly be time-consuming, but many companies don’t realize just how long it could take.  

  In the webinar, Lisa Kaestle described how initial adoption could easily take anywhere from 3-6 months. “It’s a long process and a lot of times, companies really need outside help. They need to make sure they collect all of their lease data – and that they work with the right vendor. There are a lot of obstacles to think about, including how to compile proper documentation for auditors,” said Lisa.  

  It’s important to get started on your lease accounting project as soon as possible to give your cross-functional teams the time they need to prepare for adoption. It’s never too early to start this process. 

  • Ensure you remain compliant for Day 2 

  Once you’ve achieved ASC 842 compliance, it’s equally important to remain compliant. As lease terms change over time, it’s critical to have the right processes and procedures in place to ensure your lease data is up-to-date.   

  The most effective way to do this is by getting all your lease data in one centralized location, so your teams can easily access and update your lease portfolio as needed. 

  “Day 1 is a major lift for any business, but if you don’t have those processes put in place for Day 2, it’s going to be the same big lift each time you go through an audit to prove your statements are materially correct and accurate,” stated Lisa. 

  • Identify the appropriate software solution

  Much of your business’ lease accounting success hinges on what software you choose to implement. It’s important to evaluate different solutions and find which one best fits your business needs.  

  It’s also important to understand that Excel is rarely the right approach, even for smaller portfolios. Further, Excel is not a strong software choice for Day 2 lease accounting.  

  At minimum, you’ll want to make sure the software provides: 

  • Automated calculations and reports backed by a SOC I Type II certification 
  • Centralized lease data that enables cross-departmental teams to have complete visibility 
  • Easily accessible, transparent historical data and audit trail functionality 

  Six steps private companies can take for the adoption process 

  Visual Lease and Grant Thornton are very experienced in helping clients with ASC 842 adoption. Together, they have assisted roughly 1,500 companies achieve compliance with the new lease accounting standards. 

  Based on their strong understanding of what it takes to be successful, they shared six steps to achieve lease accounting compliance.  

  • Kickoff

    • Learn the standards – and identify milestones up-front how to get started. Also, , identify a project lead and introduce potential cross-departmental stakeholders to ASC 842.  

  • Identify All Leases

    • Assess your business’ lease population and define your approach to identifying known (and unknown) leases.  

  • Implement Technology

    • Import your lease data and utilize configurable software, like Visual Lease, to streamline your work and ensure completeness, consistency and ease of use.  

  • Analyze Lease Data

    • Develop an efficient adoption strategy to make practical expedient and policy elections. Use third-party resources, trainings and checklists to ensure you extract lease data correctly. 

  • Design and Document

    • Utilize draft memo templates to document your compliance from adoption and going forward, and consider Day 2 plans.  

  • Complete Adoption and Go-Live

    • Finalize and test your reporting ahead of your audit, and take advantage of third-party advisors, like Grant Thornton, for disclosure guidance to be confident and prepared for your audit. 

   

  To learn more, view our on-demand webinar: How to prepare for ASC 842 adoption. 

  Visual Lease and Grant Thornton teamed up to provide you with a proven playbook for an easy transition to ASC 842. Learn how Grant Thornton can simplify the transition to the new lease accounting standard, and how Visual Lease software can provide you with confident, ongoing compliance. 

   

   

  The post How to prepare for ASC 842 adoption first appeared on Visual Lease.]]> https://visuallease.com/the-future-of-accounting-goes-beyond-excel/ Fri, 30 Sep 2022 15:57:20 +0000 https://visuallease.com/?p=7560 By: Joe Fitzgerald, Senior Vice President of Lease Market Strategy  Spreadsheet applications are easily the most important and universal accounting tools used today—so much so that you’d never guess the...
  The post The Future of Accounting Goes Beyond Excel first appeared on Visual Lease.]]>

  By: Joe Fitzgerald, Senior Vice President of Lease Market Strategy 

  Spreadsheet applications are easily the most important and universal accounting tools used today—so much so that you’d never guess the first version was actually developed as a school project.

  As the story goes, in 1978, computer programmer Dan Bricklin was pursuing an MBA at Harvard Business School. His finance class was tasked with an assignment to make financial projections for a hypothetical corporate merger using ledger sheets, the painstaking way that accountants manually tallied numbers in the bygone analog era.

  Bricklin, apparently intent on getting an A while also eluding the heavy workload, developed a spreadsheet on a personal computer to electronically process the calculations. The idea was completely novel and would prove to be revolutionary. In less than a decade, spreadsheet programs like Lotus 1-2-3 and Microsoft Excel were dominating the market. Nearly 40 years later, not much has changed. Excel and (now) Google Spreadsheets are still widely used applications in accounting – a fact that astounded Bricklin himself. “It’s like whoa, we haven’t thought of something better yet,” he said in a 2015 interview with Quartz.

  It is surprising that Excel continues to be the prevailing accounting practice because it is limited in addressing today’s sophisticated accounting practices and standards, and for that reason, it has become notoriously error-prone.

  Here are some of the ways that spreadsheets are falling short for businesses.

  Managing Stakeholders and Line Items

  Accounting requires managing a lot of moving parts. Many businesses have several – and sometimes, even hundreds of assets and multiple stakeholders (Real Estate, Finance, Legal and HR, among others), which each translate into different line items on a balance sheet.

  When it comes to spreadsheets, this ever-growing list of assets and stakeholders is a hotbed for errors. Research has repeatedly shown that 90% of spreadsheets contain errors and 50% of spreadsheet systems have “material defects.” Not only can these errors be destructive to business fundamentals and operations, but poor accounting practices can lead to failed audits, internal control deficiencies, fines, blown debt covenants and reduced credit ratings.

  Some companies have been transitioning to sophisticated and targeted software programs to help mitigate errors in bookkeeping, while also giving financial professionals time to perform higher-level tasks. In lease accounting, for example, specialized software is designed to address the critical and often nuanced needs of managing real estate leases, creating space for collaboration across different departments and stakeholders. These types of systems can track lease details both at the property level and throughout a portfolio, resulting in accurate financial reporting, efficient auditing and also, guaranteeing that critical deadlines are met.

  This has become a common trend throughout the business sector. There is a widespread exodus to more targeted accounting solutions. Mark Garrett, the former CFO at Adobe Inc., summed up the problem with spreadsheet applications back in 2017 when he told the Wall Street Journal, “I don’t want financial planning people spending their time importing, exporting and manipulating data, I want them to focus on what the data is telling us.” Adobe transitioned away from Excel last year.

  Navigating Complexities

  New lease accounting standards are also minimizing the effectiveness of spreadsheet applications like Excel. The Financial Accounting Standards Board (FASB) issued accounting guideline ASC 840 in 1976, two years before Bricklin first dreamed of a spreadsheet. ASC 840 has been the practicing standard until 2019, when FASB’s ASC 842 went into effect for public companies, requiring these enterprises to record leased assets on the balance sheet. And this year, the ASC 842 standard goes into effect for all private companies, as well. These regulations are a shake-up to the standard accounting practice, requiring more sophisticated financial calculations and involved accounting practices—and spreadsheets just aren’t designed for this level of complexity.

  The business community at large is recognizing the limitations of spreadsheet applications as a result, and many companies—Levi’s, P.F. Chang’s and Coca-Cola, to name a few—are transitioning to tailored accounting solutions that better address modern practices. “Excel just wasn’t designed to do some of the heavy lifting that companies need to do in finance,” said Paul Hammerman, a business applications analyst at Forrester Research Inc., in an interview with the Wall Street Journal.

  The pandemic has also ushered in changes in business strategy that is leading to the need for more sophisticated technology. Real estate has been central to these changes because for many businesses, real estate costs became a major liability during the pandemic. In the Commercial Real Estate in 2022: Outlook for an Industry in Recovery survey from Visual Lease, 100% of real estate professionals reported their tenants had requested changes to a commercial property lease in response to the pandemic, and in a separate survey conducted by Deloitte, 67% of respondents said they are executing a real estate rationalization program to either reduce, rightsize, expand or reduce ownership responsibilities. Under new lease accounting standard ASC 842, accountants are required to record these modifications.

  Bricklin was right; it is time to find something better. As accounting standards and business practices evolve, business organizations need to upgrade their technology, as well—and the toolkit should include a dedicated accounting software program that is designed to accommodate accounting complexities and modifications while empowering companies to maintain compliance with the new accounting standards.

  That is certainly true when it comes to proper lease management and accounting. We are seeing more and more organizations recognize the need for dedicated technology solutions to not only achieve, but maintain compliance with new standards and regulations. These solutions are bringing the industry into a new age, and it’s about time.

  The post The Future of Accounting Goes Beyond Excel first appeared on Visual Lease.]]> https://visuallease.com/lease-management-unlocking-roi-opportunities-within-your-lease-portfolio-2/ Mon, 19 Sep 2022 19:01:07 +0000 https://visuallease.com/?p=7540

  

  On-demand webinar summary

  Lease management is integral to achieve and maintain lease accounting compliance. But that’s not the only opportunity it presents.  

  In fact, 100% of recently surveyed senior finance and accounting professionals acknowledge that lease management, which is required to sustain accounting compliance, comes with real business benefits. But how do you identify – and benefit from – your lease information? 

  In our recent webinar, Lease Management: Unlocking ROI Opportunities within Your Lease Portfolio, experts in lease optimization and real estate shared: 

  • An overview of the lease management landscape
  • The impact of integrated lease management (reduced risk, reduced costs)
  • How to increase ROI from centralized lease data 

  

  Marc Betesh

  Founder & Executive Chairman
  Visual Lease

  

  Jason Aster

  Managing Director, Growth KBA Lease Services

  

  Tiffany Martin

  Real Estate Analyst Gartner

  To learn more, read the summary below or view the on-demand webinar. 

  Leases are incredibly expensive – and undermanaged by organizations

  Did you know that businesses often lack financial controls for their lease portfolio-related expenses, despite leases’ high cost and liability? This lack of control can put your organization at risk of losing a lot of time and money. 

  This is why lease management is important. Lease management enables you to: 

  • Reduce risk
    • Gain visibility into rights and obligations
    • Limit exposure to indemnification and other serious obligations
    • Control exposure to loss not covered by insurance required by the lease
    • Eliminate confusion and wasted time over repair and maintenance responsibility
    • Avoid damage to landlord-tenant relationship over misunderstood rights and obligations 
  • Reduce costs
    • Avoid overpayments by knowing what your leases say
      • Monitor OpEx, CAM, RE tax, utilities, sundry charges, supplemental services
    • Avoid missing the right to correct errors by managing audit windows
    • Take advantage of market opportunities by allowing cross-functional access to lease data
    • Secure proactive, effective and responsive use of your leased assets

  Lease management is two-fold

  A reliable lease management process consists of two things: 

  • Using dedicated technology to centralize and organize lease data 
    • Create a single source of truth by using a robust lease management system
  • Working with dedicated professionals to evaluate your lease portfolio 
    • Engage a third-party partner to guide or handle leases

  “It’s so important to have your leases organized. Having our leases all in one place has been a tremendous time-saver for us at Gartner,” said Tiffany Martin, Real Estate Analyst at Gartner. 

   

  For more information about lease management, view the on-demand webinar: Lease Management: Unlocking ROI Opportunities within Your Lease Portfolio. 

  The post Lease Management: Unlocking ROI Opportunities within Your Lease Portfolio first appeared on Visual Lease.]]> https://visuallease.com/2022-lease-market-analysis-lease-accounting-readiness-2/ Fri, 16 Sep 2022 17:20:37 +0000 https://visuallease.com/?p=7538

  

  On-demand webinar summary

  The latest report from The Visual Lease Data Institute (VLDI) features key findings and insights into market readiness for private companies and government entities. In our recent webinar, 2022 Lease Market Analysis: Lease Accounting Readiness, we dove into the latest insights from The VLDI Report, including: 

  • Common lease accounting challenges for private companies and the public sector market
  • Benefits of strong lease controls and accounting
  • How to leverage your lease data to make smarter, faster decisions

  

  Marc Betesh

  Founder & Executive Chairman
  Visual Lease

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  Read the summary below for a quick synopsis of the presentation, view the webinar on-demand, or view the report. 

  Common lease accounting challenges for private companies and the public sector

  Today, one-third (33%) of private companies are still not fully prepared to transition to ASC 842.

  And despite the GASB 87 effective date being six months earlier (June 15, 2021), an even larger portion of the public sector (44%) is not fully prepared to transition to GASB 87.

  Why? The reasons for delayed implementation and maintenance of the standards are due to:

  • Potential talent shortages & retention issues
    • Ninety-three percent (93%) of private companies say their team is already stretched thin, making the transition to compliance with ASC 842 even more overwhelming.
    • Similarly, (86%) of public sector entities say their team is already stretched thin, making the transition to compliance with GASB 87 even more overwhelming.
  • Demands of ongoing education
    • Knowledge maintenance was ranked as a top obstacle that private companies (33%) had to overcome throughout their lease accounting processes.
    • One-third (31%) of public sector entities ranked knowledge maintenance as a top obstacle they had to overcome throughout their lease accounting process.
  • Digital transformation challenges
    • Thirty percent (30%) of private companies reported adopting new technologies as a leading obstacle in their lease accounting projects.
    • Nearly forty percent (38%) of public sector entities cited challenges in adopting new technologies into the lease accounting process as a top concern.

  How to take control of your lease data

  The time commitment of gathering and managing lease data is another reason why organizations are not fully prepared for ASC 842 and/or GASB 87. It’s an incredibly large team effort that requires automation and cross-departmental team effort. In fact, private companies that are not using third-party software expect to spend 1,582 hours gathering all necessary lease information. 

  However, private companies who used third-party lease accounting software were able to save an average of 600 hours and public sector entities were able to save an average of 765 hours in this effort.  

  For more information about lease management, view the on-demand webinar: 2022 Lease Market Analysis: Lease Accounting Readiness.

  The post 2022 Lease Market Analysis: Lease Accounting Readiness first appeared on Visual Lease.]]> https://visuallease.com/asc-842-adoption-avoiding-the-pitfalls-2/ Thu, 08 Sep 2022 17:36:57 +0000 https://visuallease.com/?p=7521

  

  On-demand webinar summary

  How do you avoid the risks of improper ASC 842 adoption? Inaccurate lease accounting financials can result in a failed audit, additional fees and fines, so you need to ensure you do it right the first time.

  To do so, you’ll want to make sure you have a reliable and complete lease portfolio, lease data, system and processes. But this isn’t easy to accomplish, and many companies still struggle with ensuring their lease data is reliable.

  In our recent webinar, ASC 842 Adoption: Avoiding the Pitfalls, lease accounting experts from Visual Lease and Grant Thornton shared:

  • Answers to common lease accounting FAQs
  • How to circumvent common roadblocks during lease accounting adoption
  • Ways to avoid putting your business at risk and feel confident in your financial reports

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  

  Lisa Kaestle

  Director, Accounting Advisory Services
  Grant Thornton

  To learn more, read the summary below or view the on-demand webinar.

  Answers to Accounting, Operational and Software FAQs

  Did you know that today, nearly all private companies (98%) have started the transition to ASC 842, but one-third (33%) are still not fully prepared to transition to the new standard? This points to the massive pressure businesses are under as they attempt to retroactively learn and organize the details of their leases in advance of their initial reporting period under the new lease accounting standard.

  In this presentation, Lisa Kaestle of Grant Thornton answered some common FAQs related to the new lease accounting standard, such as:

  • Do I really have to gather all lease information, or can I estimate? Is there a materiality threshold?
  • What is an embedded lease? How do I know if I have an embedded lease?
  • What departments in my company will be affected? Can finance manage this transition alone? Who should be part of the team for this initiative?

  How to Mitigate Operational and Accounting Risks

  The new lease accounting standards open your business up to a much higher degree of scrutiny. There are major risks, including but not limited to:

  Operational Risks

  • Staff, workflow and system requirements and expenses
  • Lease review, approval and classification across the company
    • Database of record, lease administration and accounting
    • Lease data/process workflows/calculations/reporting
  • Lease data management across the company
  • Lease-buy decisions (short-term leases, fixed-versus-variable payments, lease incentives)

  Accounting Risks

  • Monitoring leasing activities
  • Accounting close cycle timeline and processes
  • Internal controls (systems, validation, lease portfolio changes, discount rates, lease re-assessment, disclosures)
  • Lease accounting calculations
  • Qualitative vs quantitative disclosures
  • Financial ratios and metrics (creditor and banking decisions)
  • Tax-to-book reconciliations
  • External and internal audits and reviews

  For more information about lease management, view the on-demand webinar: ASC 842 Adoption: Avoiding the Pitfalls.

  The post ASC 842 Adoption: Avoiding the Pitfalls first appeared on Visual Lease.]]> https://visuallease.com/how-to-ensure-complete-and-accurate-lease-data-for-lease-accounting-compliance/ Sat, 06 Aug 2022 00:38:28 +0000 https://visuallease.com/?p=7456

  

  On-demand webinar summary

  Before the new lease accounting standards, many companies lacked visibility into their lease portfolio. This cost many businesses millions of dollars in overpaid rent, missed lease options and more.

  But now, leases are in the forefront as companies prepare for and maintain compliance with the new standards. However, many businesses struggle to ensure their lease data is comprehensive and up-to-date.

  In our recent webinar, How to Ensure Complete and Accurate Lease Data for Lease Accounting Compliance, experts shared best practice tips to ensure a thorough lease portfolio.

  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  

  Rosemary Courtney

  Technical Accounting Director
  Visual Lease

  High-level key takeaways from the webinar include:

  • Common challenges and solutions for gathering and auditing lease data
  • Key advantages of using dedicated lease accounting technology

  To learn more, view the on-demand webinar or read the summary below.

  Common challenges and solutions when gathering and auditing lease data

   

  1. Ensuring a comprehensive lease portfolio is time-consuming 

  Many businesses have hundreds, if not thousands, of leases. To achieve and sustain lease accounting compliance, you need to have complete visibility into all your leases.

  However, gathering all your leases is time-consuming and laborious, and involves various departments.

  The sooner you begin, the better, to give your team enough time to identify and locate every lease across your business. If needed, you may want to hire third-party advisors experienced in lease accounting preparation to assist in this effort.

  2. Gathering lease data requires cross-departmental resources

  Because leases are typically scattered throughout various departments, you should identify all key stakeholders responsible for identifying leases up-front, including real estate, procurement, legal, IT and more.

  From there, this cross-functional team can work together to develop a reliable and sustainable process for data collection and maintenance to ensure your lease portfolio is complete and always up-to-date.

  3. Lease information is often not located in one location

  Prior to the new lease accounting standards, leases weren’t commonly tracked. And any leases that were tracked were likely inconsistent across the business.

  Once you’ve gathered all your leases for lease accounting compliance, it’s best to enter them in one single source of truth.

  A centralized lease portfolio enables you to track lease data in real time – and result in much faster, efficient lease accounting.

  4. Leases change often and must be maintained

  Maintaining compliance is a continuous effort, given leases’ dynamic nature. Staying compliant requires ongoing attention and a reliable process to identify and capture any financial changes to your lease portfolio.

  Without the right lease management software or tools, this can be extremely difficult to do.

  Robust technology, like Visual Lease, enables businesses to maintain one single source of truth for their lease portfolio and set internal controls for ongoing lease data maintenance, therefore supporting data integrity and accurate, up-to-date information.

  For more information, view the on-demand webinar, How to Ensure Complete and Accurate Lease Data for Lease Accounting Compliance.

  The post How to Ensure Complete and Accurate Lease Data for Lease Accounting Compliance first appeared on Visual Lease.]]> https://visuallease.com/the-necessary-steps-to-improve-lease-management-practices/ Wed, 29 Jun 2022 13:00:33 +0000 https://visuallease.com/?p=1846 What is lease management? What are lease management tasks? Who is responsible for lease administration? How can you optimize your lease management strategy? Why is lease management important? Lease Management...
  The post How to improve your lease administration process flow first appeared on Visual Lease.]]>
  • What is lease management?
  • What are lease management tasks?
  • Who is responsible for lease administration?
  • How can you optimize your lease management strategy?
  • Why is lease management important?
  • Lease Management Software

  Until recently, many companies were not paying much attention to their property and asset leases beyond paying the bills. Leases were simply considered a cost of doing business, and managing lease terms and obligations was not a priority. 

  With the establishment of new lease accounting standards that take effect for private companies in 2021, and took effect for public companies in 2019, that mindset is changing fast. Lease management has now become an essential practice that impacts financial reporting and the bottom line. 

  If your organization is working toward FASB/IFRS compliance, you’ll need to establish lease management policies and procedures. Below, we dive into why now is the best time to do it and how to create a streamlined lease management process flow. 

  What is lease management?

  In a corporate or non-profit organization, lease management means tracking and optimizing every aspect of your portfolio of leased assets. Properly tracking leases (not only real estate but also technology, vehicles, and even assets you control as part of service agreements) can help you significantly reduce the expenses associated with leasing. We’re not talking about small change here, but a chance to add millions to your bottom line. 

  What are lease management tasks?

  Lease administration requires a coordinated effort between the various teams performing these tasks: 

  • Lease negotiation and decision making, including lease structure, lease length, and lease-vs-buy options  
  • Lease tracking tasks, such as keeping track of upcoming renewals and exercising options, managing operating expenses, and updating lease data 
  • Lease accounting tasks, including payment of lease-related charges, recording journal entries, calculating asset and liability figures, generating reports, and performing remeasurement when leases change 

  What is a lease management system?

  A lease management system is a software solution designed to streamline and automate the management of lease agreements throughout their lifecycle. It helps organizations efficiently handle the tasks and processes associated with leases, such as tracking lease details, monitoring key dates, generating reports, and ensuring compliance with lease terms and regulations. 

  Where does responsibility for lease administration sit within an organization?

  Depending upon an organization’s size, lease administration can be cross-functional, spread across various departments such as accounting, real estate, legal and procurement, or handled by a single dedicated resource within any of these departments.  

  Companies that have a significant concentration of a specific asset type, like real estate, will most likely have an individual or even an entire department dedicated to the management of those leases. Further, with real estate leases, it is not uncommon for companies to outsource all or some portion of its real estate lease administration to a third-party broker or company. This same concept applies to other lease types, including fleet and IT equipment.

  How can you optimize your lease management strategy?

  Why has lease management process flow become so important? Under the old lease accounting rules, leases were not included on balance sheets and had little impact on financial reporting. Under the updated lease accounting standards, organizations must record both right-of-use assets and payment liabilities associated with leases on their balance sheets.  

  This is a big change: adding the value of the entire leased portfolio can make a huge impact on the outcome of financial reports. It also means the risks associated with poor lease decisions and management are magnified. That’s why financial leaders must now carefully scrutinize and manage leasing decisions, administration practices, and expenses. 

  Before you make the move to the newest standards, here’s how to get everyone on the same page and your lease management process flow in order. 

  How to establish a cross-functional lease tracking process 

  In the past, lease negotiation, administration, and accounting were done in silos with little to no coordination between the teams handling each task. That led to inconsistent lease decisions, scattered data, and often, overpayment of lease expenses due to lack of centralized records and audit capabilities. 

  An effective lease management process flow requires cross-functional collaboration as well as centralized access to lease data and lease management tools.  

  STEP 1: Centralize lease data and management tools

  For teams to work together on lease tracking, the first step is to gather all lease data in a central repository that creates a single source of truth as well as an audit trail for all lease decisions and changes. 

  Chances are, you’re in the process of centralizing lease payment data for FASB/IFRS compliance right now. To set your teams up for effective lease management process flow, choose a lease management software platform (like Visual Lease) that allows you to centralize ALL data related to lease contracts and provides tools for automating lease tracking tasks and auditing expenses. 

  When everyone managing leased assets is using the same system to update lease data, schedule payments, and create accounting journal entries, everyone is always working with the most current data. And you eliminate data integrity problems that can occur when data is moved between systems. 

  STEP 2: Develop leasing policies

  With centralized tracking tools and technology in place, you can now analyze your lease data and find out which leases are working well and which are costing you more money than you realized. Use those insights to determine how you want to standardize leasing decisions across the organization. 

  Best practice is for financial leaders to work with lease negotiators, administrators, and accountants to understand current practices and to establish cost-effective policies for leasing. 

  STEP 3: Create lease requisition and update processes

  To ensure your accounting team always has accurate lease information to feed balance sheets and financial reports, it’s essential to establish standard practices for every group that’s involved in acquiring and maintaining leases, including processing new leases, documenting lease changes, and handling lease terminations.

  Here’s what you might not know if you’re still in the process of consolidating lease data for FASB ASC 842 implementation: every time leases change, your accounting must be updated. So, it’s smart to minimize the burden on your accounting team by choosing lease accounting software that automates lease modification and re-measurement. 

  STEP 4: Set up controls  

  Adding leases to the balance sheet has increased the complexity of financial reporting. That means more oversight is needed to ensure accounting accuracy. Also, internal monitoring and process validation are required to ensure your policies and procedures are being followed and are driving better decisions and reduced expenses. 

  Your lease management software can aid that process in several important ways: 

  • Documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms 
  • Providing audit tools to find overpayments, late fees, and payments that shouldn’t have been made at all 
  • Allowing you to customize approvals required for lease administration and lease accounting tasks 
  • Providing an audit trail for all lease changes  

  

  Why is lease management important?

  Lease management is critically important to ensure your business remains confident in sustaining lease accounting compliance.
  Tackle lease tracking along with the lease accounting changes

  Leases are ever-changing. Terms are constantly modified as businesses renegotiate their lease contracts, take on new spaces or terminate their leases.  

  Under the new lease accounting standards (ASC 842, IFRS 16 and GASB 87), each of these modifications must be accounted for.  

  Lease management software provides businesses with a single source of truth to easily view and access your leases.

  What are the benefits of lease management?

  Lease management offers several benefits for organizations that have a portfolio of leased assets. Here are some key advantages:

  • Improved efficiency and time savings
  • Enhanced visibility and control over lease portfolio
  • Cost savings through optimized lease terms and space utilization
  • Compliance with lease accounting standards (ASC 842, IFRS 16)
  • Streamlined reporting and analytics for informed decision-making
  • Better collaboration and communication among stakeholders
  • Reduced risks of penalties and non-compliance
  • Proactive management of lease renewals and important dates
  • Minimized manual effort and administrative tasks
  • Data-driven insights for strategic planning and portfolio optimization.

  Lease Administration Software

  Your lease management software can aid the process in several important ways: 

  • Documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms 
  • Providing audit tools to find overpayments, late fees, and payments that shouldn’t have been made at all 
  • Allowing you to customize approvals required for lease administration and lease accounting tasks 
  • Providing an audit trail for all lease changes  

  FASB recently voted to extend the deadline for private companies to implement the new standards to December 15, 2021, and chances are you are breathing a sigh of relief. However, don’t make the mistake of underestimating the effort and putting off the problem. Instead, take this opportunity to examine and overhaul your lease management policies and process flow while you’re working toward lease accounting compliance.

  The post How to improve your lease administration process flow first appeared on Visual Lease.]]> https://visuallease.com/gasb-statement-no-99-the-impact-on-lease-accounting/ Tue, 07 Jun 2022 20:04:19 +0000 https://visuallease.com/?p=7131

  

  Suppose you’re an accountant who manages leases or a lease administrator working for a state, country or local government. You may even work for a public entity such as a public university, college, hospital, utility or airport. In either case, you are affected by this new Statement No. 99 and we’ve provided this summary to help you to quickly understand the impact on lease accounting under GASB 87 and accounting for SBITAs under GASB 96.

  Governmental Accounting Standards Board (GASB) Statement No. 99, Omnibus 2022 was released in April 2022. It started as an Omnibus project which GASB creates when enough issues and technical inconsistencies are identified across the existing body of Statements.

  Statement No. 99 responds to practice issues raised as the statements were adopted and to address accounting and financial reporting for financial guarantees. The following covers the practice issues impacting lease accounting (GASB 87) and accounting for SBITAs (GASB 96).

  Practice Issues

  1. Determining the lease term, also applies to the term of an SBITA (Statement 96)
  2. Classification of short-term leases, also applies to short-term SBITA (Statement 96)
  3. Recognition and measurement of lease liabilities and receivables, also applies to recognition and measurement of a subscription liability (Statement 96)
  4. Identification of lease incentives

  Effective Dates

  The requirements related to leases and SBITAs are effective for fiscal years beginning after June 15, 2022.

  1. Lease Term: Clarification of Lease Termination and Purchase Options

  GASB Statement 87 Paragraph 12

  The issue was raised to the Board that in certain situations, a purchase option could result in a lease liability that includes the present value of payments that would never be realized due to exercising the purchase option. The result would be an overstated present value. The Board believed the purchase option should be considered as an option to terminate and used when considering the lease term. GASB 99 clarifies the lease term should exclude the period, if any, after the option is estimated to be exercised.

  The Board also addressed the prescriptive nature of the last sentence in paragraph 12 of Statement 87. They believed it could lead accountants to view a lease termination due to the violation of contract terms and conditions as a termination option. GASB 99 clarifies what constitutes a lease termination option as an unconditional right in the lease contract. GASB 99 also clarified that this should only be applied to contracts that transfer ownership (paragraph 19 of GASB 87).

  2. Short Term Leases: Clarification of Cancellable Periods and Lease Extensions

  GASB Statement 87 Paragraph 16

  Cancellable periods in Statement 87 differed from Statement 96 and Implementation Guide 2019-3. Clarification provided by this Statement 99 aligns 87 and 96 with the same definition which includes that both parties to the lease have an option to terminate the lease without the need for permission, and/or both parties must agree to extend the lease term.

  Another issue the Board responds to in this Statement is how to assess a short-term lease when an extension is created. The concern was that only considering the remaining term may influence entities to structure their leases to avoid recognition. The clarification is that the extension of a lease requires the lease to be reassessed and if the term (original lease term plus the modified term) is greater than 12 months, the lease needs to be reclassified. For a lease that is reclassified from a short-term lease, the measurement of the lease receivable or liability should be from the modification’s start date. This Statement also applies to paragraph 13 of Statement 96 for SBITAs.

  3. Lessee and Lessor: Clarification of Variable Payments and Lease Remeasurements

  Other Than Short-Term Leases and Contracts That Transfer Ownership
  Lessee GASB Statement 87 Paragraphs 21, 22, 26 & 28
  Lessor GASB Statement 87 Paragraphs 44, 45 & 50

  Accountants raised concern over what variable payments should be included in the lease liability or receivable. To clarify, variable payments, per paragraphs 21, 22, 44 and 45 of GASB 87, that are calculated using an index or rate (such as the Consumer Price Index or a market interest rate) or that are fixed in substance should be included as part of the lease liability and receivable. All other variable payments, including those based on usage of the asset by the lessee, should not be included.

  The Board also addressed a lease remeasurement issue. They noted that by including language that a lease is “not required” to be remeasured, the lease accountant believed this meant they had the option to remeasure. To clarify, GASB 99 states that a lease liability or receivable remeasurement should not be carried out solely due to a change in an index or the variable payment rate nor, for lessees, should the discount rate be reassessed solely due to a change in the incremental borrowing rate. This also applies to the remeasurement of a subscription liability in Statement 96.

  4. Clarification of Lease Incentives

  Paragraph 61 of GASB 87

  The Board believes the original language in this paragraph needed to be adjusted given lease incentives paid to or on behalf of a lessee does not imply the lessor has legally assumed the preexisting lease obligation. To clarify GASB 99 adjusted the language to read:

  “a lease incentive is equivalent to a rebate or discount and includes an assumption of, or an agreement to pay, a lessee’s preexisting lease obligations to a third party, other reimbursements of lessee costs, rent holidays, and reductions of interest or principal charges by the lessor.”

  
  The post GASB Statement No. 99: The Impact on GASB 87 and GASB 96 Compliance first appeared on Visual Lease.]]> https://visuallease.com/buyers-guide-to-gasb-87-lease-accounting-software/ Tue, 31 May 2022 22:46:02 +0000 https://visuallease.com/?p=7111

  How to make an informed decision on your lease accounting solution 

  Investing in a dedicated lease accounting solution is the best way to achieve GASB 87 compliance. The lease accounting standard requires operating leases to be recorded on the balance sheet in the form of right of use (ROU) assets with corresponding lease liabilities. Doing this well – and with accuracy – means choosing technology that can automate required reports and calculations, and support ongoing management of your leases.  

  However, it’s not always clear which solution is best for your organization. While tools like Excel have certainly been useful for accounting purposes in the past, it’s not the ideal choice for something as complex as achieving and maintaining lease accounting compliance.  

  Just like your leases, lease accounting requirements may change and evolve over time. It’s critical to stay on top of these changes to stay compliant, and with the right lease accounting software, you’ll be able to do so effectively. 

  In this blog, we will share a summary of the information that can be found within our Buyer’s Guide to Lease Accounting Software for GASB Compliance, so you can feel confident about your selected lease accounting solution.  

  Who should be involved?

  To get (and stay) compliant, it’s important to involve key personnel that represent various functional areas across your business. This often includes departments like accounting, procurement, contracting and more.  

  Including cross-departmental stakeholders ensures you have visibility into every lease held by your organization, and enables you to easily track any lease changes over time.  

  In the Buyer’s Guide, we share questions for you to consider when identifying which stakeholders should be involved, such as: 

  • How does your organization acquire leases? 
  • How does your accounting team receive notification when other teams add new leases, or make lease changes? 
  • How does your organization make strategic decisions about renewals and asset use? 

  Risks that arise without lease accounting software

  In a recent VLDI report, a staggering 99% of surveyed senior finance and accounting professionals acknowledged real fears in potentially misreporting their lease information. This points to a critical need for automation, as manual solutions (e.g. Excel) put you at higher risk of error.  

  Under GASB 87, inaccurate lease accounting financials can result in increased audit fees and fines, damage to your organization’s reputation and potential legal action.  

  In addition to providing automation, dedicated lease accounting technology should solve your existing (and future) pain points, such as:  

  • Pain Point
  • Solution

  Pain Point	Solution
  Organizations often have time constraints and lack of resources dedicated to lease accounting.	Save time by selecting lease accounting software with flexible, intuitive tools that enable you to easily control your leases and run financial reports. The software should also have accessible training for every user and various accounting partnerships, including managed services.
  Organizations often lack control and visibility into their leases and lease data.	Lease accounting software should make it easy to account for and view every lease at-a-glance, including unique clauses and options. Further, it should include lease administration capabilities to track key clauses, obligations, options and critical dates that might be buried in a 200-500 page document.
  Organizations may lack confidence producing accurate accounting calculations and reports.	Gain confidence by selecting a lease accounting software that provides: Automated, reliable calculations Transparency into the math backing the calculations Comprehensive remeasurement calculations to keep you compliant through Day 2 Third-party auditing to ensure data security and calculation accuracy This ensures your data is safe -- and your disclosures are accurate.

  Lease accounting need-to-knows

  Preparing for lease accounting is time-consuming. It requires a lot of time and effort to identify, gather and organize lease data. In particular, embedded leases (lease components within a contract) are more difficult to locate and often require more time to pinpoint. And, regardless of how many leases you have, gathering leases is a tedious and lengthy process, which is why organizations should get started as early as possible. 

  Also, remember that lease accounting compliance isn’t a one and done disclosure; it’s ongoing. Therefore, your solution should support ongoing maintenance of your lease portfolio.  

  Don’t delay – invest in the right solution

  Selecting the right lease accounting solution isn’t easy, but it’s critical to ensure you are set up for success with GASB 87.  

  With our Buyer’s Guide to Lease Accounting Software for GASB Compliance, you will be able to make an informed decision about which lease accounting technology is right for your organization.

  You will get insight into:
  
  The non-negotiable capabilities you need to get and maintain compliance with GASB 87
  
  How to identify and align internal stakeholders on a strategy and solution
  
  Potential roadblocks and what you need to know to get around them
  Click here to download
  The post Buyer’s Guide to GASB 87 Lease Accounting Software first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-building-confidence-in-compliance-efforts/ Tue, 24 May 2022 18:29:41 +0000 https://visuallease.com/?p=7095 On-demand webinar summary  Lease accounting is an incredibly time-consuming, complex endeavor that involves a lot of initial preparation, cross-departmental collaboration and ongoing maintenance. So, how can businesses ensure their lease...
  The post Lease Accounting: Building confidence in compliance efforts first appeared on Visual Lease.]]> On-demand webinar summary 

  Lease accounting is an incredibly time-consuming, complex endeavor that involves a lot of initial preparation, cross-departmental collaboration and ongoing maintenance. So, how can businesses ensure their lease accounting remains reliable and accurate?  

  In our recent webinar, Lease Accounting: Building confidence in compliance efforts, Joe Fitzgerald, SVP of Lease Market Strategy at Visual Lease, and Denise Hinkle, Principal of Business Development at Scribcor Global, covered how businesses can successfully prepare for lease accounting and offered tips about how to feel confident about compliance Many companies struggle to feel confident in their lease accounting compliance efforts with the new standards (ASC 842, IFRS 16 and GASB 87). 

  High-level takeaways from the webinar include: 

  What makes lease accounting so complex?

  There are multiple factors that make lease accounting difficult to both achieve and maintain. Besides the complex calculations required, leases themselves are lengthy and intricate. Typically, lease contracts are detailed documents with critical information such as obligations, clauses, options and dates. If your lease contracts are in different offices or handled by different departments, they may be difficult to locate and identify. 

  Further, any changes within your leases must be represented on the balance sheet, or you risk misreporting your company’s lease information.  

  Misreporting lease financials can result in increased audit fees and fines, along with damage to your company’s reputation and the risk of legal action. It’s important to keep this in mind as you prepare for lease accounting.

  How to prepare for lease accounting success

  There are steps you can take that have been proven to set you up for success. In this webinar, you will learn about each one, including but not limited to: 

  • Establishing a dedicated team 
    • Who needs to be involved? 
    • What are they responsible for?  
    • Which departments need to be consulted? 
  • Identifying your leases 
    • What are best practices to do this? 
    • Where do you begin? 
  • Determining a reliable process 
    • What will it take to adopt and maintain the lease accounting standard? 
    • What are the risks of your identified solution? 
    • What should you (and should you not) do? 
  • Creating a post-adoption plan 
    • How will you account for ongoing lease data maintenance? 
    • Who will be responsible, and for what? 
    • What will your processes look like? 

  For more information about how to be confident in your lease accounting compliance efforts, view our on-demand webinar, Lease Accounting: Building confidence in compliance efforts.  

  The post Lease Accounting: Building confidence in compliance efforts first appeared on Visual Lease.]]> https://visuallease.com/how-to-optimize-your-equipment-leases-while-accomplishing-lease-accounting-compliance-on-demand-webinar/ Tue, 17 May 2022 17:40:29 +0000 https://visuallease.com/?p=7091 On-demand webinar summary  Do you know if you are overpaying for your leases? Unfortunately, many businesses are, but are not aware of it until after they begin tracking their lease...
  The post How to optimize your equipment leases while accomplishing lease accounting compliance first appeared on Visual Lease.]]> On-demand webinar summary 

  Do you know if you are overpaying for your leases? Unfortunately, many businesses are, but are not aware of it until after they begin tracking their lease data to comply with the new lease accounting standards (ASC 842 and IFRS 16). This is often due to the lack of visibility into lease terms, such as expiration dates, options and more. 

  In particular, businesses in the manufacturing industry often have a large volume (hundreds and thousands) of equipment leases that they lack visibility into. This lack of control often costs them a significant amount of money.  

  In our recent webinar, How to optimize your equipment leases while accomplishing lease accounting compliance, Joe Fitzgerald, SVP of Lease Market Strategy at Visual Lease, and Jon Hunke, VP of Accounting and EIT at MDU Construction Services Group, shared why and how businesses should optimize their lease portfolios while accomplishing lease accounting.  

  Some key takeaways from the webinar include: 

  Lease optimization is the next logical step after lease accounting 

  Although lease accounting is an elaborate and complex process, when done right, it can also provide additional advantages beyond compliance. In fact, in a recent VLDI report, 100% of surveyed senior finance and accounting professionals acknowledged that lease accounting compliance comes with real business benefits.   

  This is because once all your lease data is in an easily accessible, reliable location, you’ll be in a better position to analyze your leases and identify new opportunities for savings. This is where lease optimization comes into play.  

  Lease optimization will help you make strategic leasing decisions 

  The process of lease optimization enables you to revisit existing leases and bridge gaps to make better informed business decisions, such as identifying an opportunity to purchase an existing lease rather than continuing to lease a particular asset or property. Optimizing your equipment leases also empowers your business to: 

  • Level-set lease rates across your lease portfolio, 
  • Improve vendor management, 
  • And more (further defined further in the webinar). 

  Lease optimization leads to significant cost savings

  Having visibility into your leases also enables you to identify areas where you may be overpaying for leases. Before businesses optimized their lease portfolio, many have found that they significantly overpaid for existing leases due to lack of awareness into the contract terms.  

  In example, a large manufacturing company lost $105k because they did not realize that their lessor was continuing to bill expenses for surrendered property. 

  For more insight about the steps you can take to optimize your lease portfolio, view our on-demand webinar, How to optimize your equipment leases while accomplishing lease accounting compliance.  

  The post How to optimize your equipment leases while accomplishing lease accounting compliance first appeared on Visual Lease.]]> https://visuallease.com/the-impact-of-asc-842-on-lessees-and-lessors/ Fri, 06 May 2022 17:51:37 +0000 https://visuallease.com/?p=7081 The new lease accounting standards have radically changed the way private and public companies record leases on the balance sheet. Naturally, this had a direct impact on lessees, lessors and...
  The post The impact of ASC 842 on lessees and lessors first appeared on Visual Lease.]]>

  The new lease accounting standards have radically changed the way private and public companies record leases on the balance sheet. Naturally, this had a direct impact on lessees, lessors and how they classify lease agreements.

  Under ASC 842, lease agreements are defined as “a contract, or part of a contract, between a lessor and a lessee that conveys the right to control the use of identified property, plant, or equipment (an identified asset) to the lessee for a period of time in exchange for consideration.“

  Both the lessee and lessor are signatories to the agreement and must abide by its rules. Additionally, both parties will need to classify what kind of lease the agreement is, either finance or operating as defined under ASC 842.

  What’s the difference between a lessor and a lessee?

  Before we review how both parties classify a lease under ASC 842, let’s take a look at the definitions of a lessor and lessee.

  The lessor is the party that either owns or leases and subleases the asset – which can range from property, vehicles or equipment.

  The lessee is the party receiving the right to use the asset for a specified period of time, per the lease agreement.

  Under ASC 842, the definitions of a lessor and lessee haven’t necessarily changed, however, both parties must change how they present leases in their financial statements.

  For the first time, lessees must show all leasing obligations, including operating leases, on the balance sheet – and classify them either as operating or finance leases.

  Before ASC 842, operating leases were not included in the balance sheet. This is one of the larger changes lessees must address under ASC 842. Luckily for lessors, this change isn’t as significant because they already had to make these classifications prior to the new lease accounting standard.

  What’s the difference between an operating lease and a finance lease?

  ASC 842 requires the classification of a lease at the commencement of the lease agreement, based on specified economic criteria. It’s important for both parties to understand these criteria as they determine differences between and classification of an operating lease and a finance lease.

  Operating leases are contracts that permit the use of a certain asset without transferring the ownership of that asset for any less than a major part of the asset’s life. For example, the lessee uses the asset, while the lessor provides the maintenance or upkeep of the asset. Expenses related to operating leases were not previously recorded on a company’s balance sheet until ASC 842. The leased asset, along with the corresponding liabilities, are now presented on the balance sheet.

  A finance lease is a contract that does not qualify as an operating lease; the risks and rewards associated with the leased asset get transferred to the lessee. In other words, they have full control of the asset. Under ASC 842, finance leases continue to be recorded on the lessee’s balance sheet as an asset with a corresponding liability.

  The impact of ASC 842 and the importance of lease accounting software

  Although lessees and lessors have not fundamentally changed under ASC 842, the impact of the new lease accounting standard has required both parties (especially lessees) to classify their leases with a higher degree of scrutiny.

  Given the transparent nature of ASC 842, whether it’s a finance or operating lease, both parties need to ensure they are properly accounting for them on the balance sheet.

  Lease classification is just one of the many complexities of ASC 842. To ensure your lease data and financial reports remain accurate, you’ll want to make sure your lease data is always up-to-date and organized in one centralized location. By utilizing lease management and lease accounting software such as Visual Lease, you’ll be able to leverage the platform as your single source of truth to manage and track your lease data.

  Visit our blog to stay up to date on the latest news, trends and tips in lease accounting.

  Looking for more information or have a lease accounting question? Get in touch with one of our lease accounting experts. Click here to schedule time with one now.

   

  The post The impact of ASC 842 on lessees and lessors first appeared on Visual Lease.]]> https://visuallease.com/gasb-87-roundtable-discussion-recap-anticipating-common-lease-accounting-challenges/ Fri, 06 May 2022 17:29:56 +0000 https://visuallease.com/?p=7079
  

  On-demand webinar summary 

  The GASB 87 Roundtable Discussion is a webinar series hosted by Visual Lease. Each webinar provides insights by our panelists regarding specific topics around GASB 87. Previously, our panelists discussed how to maximize the value of your lease accounting software.

  In our latest episode, Anticipating Common Lease Accounting Challenges, host Joseph Fitzgerald, SVP of Lease Market Strategy at Visual Lease, discussed how organizations can anticipate and prepare for Day 2 challenges. Our panelists, Michael Luff, CPA & Technical Leader at CLA, Rosemary Courtney, Manager of Technical Accounting at Visual Lease, Todd Worms, Senior Manager of Customer Support at Visual Lease and Bill Harter, Principal Solution Advisor at Visual Lease provided expert tips and advice to help attendees get ahead of these potential roadblocks.

  You should feel empowered to help ensure your organization is ready for what’s ahead. Let’s dive in.

  The importance of ongoing data management

  The quality of your lease data impacts the accuracy of your lease accounting calculations and reporting. As changes occur to a lease contract, complex components such as remeasurements and modifications must be accounted for under GASB 87. If these calculations are done manually by your organization, it’s typically a red flag for auditors, as this approach is more prone to human error.

  Top considerations for continued compliance

  Staying educated on GASB 87 is critical for your continued compliance. Maintaining and updating internal controls over contracts and agreements are also crucial to ensure the integrity of the process. Further, collaboration and communication between administration, accounting and any departments handling leases are necessary to ensure continued compliance.

  What to expect from your support team

  Once software implementation is complete, VL’s support team becomes the main point of contact for our clients. Typically, the support team will help clients understand how to use Visual Lease and are there to help troubleshoot any potential technical issues. Visual Lease prides itself in its unparalleled support and collaboration with its customers, and has invested heavily in creating the best support staff possible, which is why we have a 99% customer retention rate!

  Tips to ensure audit-readiness

  Working through extensive data validation to ensure your subledger details are consistent with your source documents should yield positive results for your organization’s audit. Documenting all input assumptions is also key to a smooth audit process, along with timely updates through process enhancements.

  Data integrity challenges

  Leveraging your lease accounting software is key to addressing common Day 2 challenges. Organizations can use software to maintain control over some of the lease accounting requirements, such as processing additions, terminations, modifications, etc. It’s also important to stay on top of deadlines and be proactive on the platform post-adoption.

  For more insight into common Day 2 GASB 87 lease accounting challenges, view our on-demand webinar “GASB 87 Roundtable Discussion: Anticipating Common Lease Accounting Challenges”.

  Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS solution has been used by over 1,000 companies with a 99% retention rate. 

  The post GASB 87 Roundtable Discussion Recap: Anticipating Common Lease Accounting Challenges first appeared on Visual Lease.]]> https://visuallease.com/how-to-avoid-lease-accounting-risks/ Tue, 26 Apr 2022 20:59:13 +0000 https://visuallease.com/?p=7063 On-demand webinar summary  According to a recent VLDI survey, 35% of private companies were less than halfway through or had not yet started the process of gathering information needed to...
  The post How to avoid lease accounting compliance risks first appeared on Visual Lease.]]> On-demand webinar summary 

  According to a recent VLDI survey, 35% of private companies were less than halfway through or had not yet started the process of gathering information needed to adopt ASC 842. This puts businesses in danger of misreporting lease financials, which exposes them to serious consequences, such as increased audit fees.  

  In our recent webinar, How to Avoid Lease Accounting Compliance Risks, Rosemary Courtney, Manager of Technical Accounting at Visual Lease, and Bill Harter, Principal Solution Advisor at Visual Lease, discussed common challenges and risks associated with lease accounting compliance. They also provided tips to ensure you are set up for a successful audit post-adoption.  

  As a result, you should have a better understanding of the risks of inaccurate lease financials and how to avoid these mistakes. Let’s take a closer look.  

  Lack of processes

  The new lease accounting standards require cross-functional collaboration in order to stay on top of any updates made to leases. Without clear responsibilities and defined processes, some critical lease updates may slip through the cracks – and put you at risk of inaccurate lease information. That’s why it’s important to develop defined, reliable processes that involve the right personnel while clearly identifying internal controls.  

  Manual accounting calculations

  Manual accounting calculations are not only time-consuming given the complexity of ASC 842, but they are also prone to human error. Automated technology significantly reduces both the risk of miscalculation and time spent on reporting. 

  Lack of dedicated resources

  It’s rare for companies to have a dedicated resource for lease accounting. So, how do you ensure you stay compliant amidst employee turnover? Our experts agree that naming a project lead in each functional area that contributes to the lease portfolio is the best approach, such as finance, real estate and legal.  

  Lack of visibility into maintaining lease information

  Leases change all of the time (i.e. extend, terminate) and each change needs to be accounted for on the balance sheet. It can be difficult to ensure your lease data is up to date if your leases are not in an accessible, centralized location.  

  For more insight into how to prepare for lease accounting success, view our on-demand webinar “How to Avoid Lease Accounting Compliance Risks”.   

  Related Resources: 

  • Five Questions That Should Be On Every Financial Leader’s Mind 

  Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS solution has been used by over 1,000 companies with a 99% retention rate.   

   

  The post How to avoid lease accounting compliance risks first appeared on Visual Lease.]]> https://visuallease.com/what-is-ifrs-16-what-do-i-need-to-know/ Tue, 29 Mar 2022 18:24:20 +0000 https://visuallease.com/?p=6990 What is IFRS 16? What changed under IFRS 16? What is considered a lease under IFRS 16? Exceptions to the IFRS 16 Lease Accounting Standard IFRS 16 Impact on Financial...
  The post What is IFRS 16 & What Do I Need to Know? first appeared on Visual Lease.]]>
  • What is IFRS 16?
  • What changed under IFRS 16?
  • What is considered a lease under IFRS 16?
  • Exceptions to the IFRS 16 Lease Accounting Standard
  • IFRS 16 Impact on Financial Reporting
  • IFRS 16 Impact on the Balance Sheet
  • IFRS 16 Impact on Profits and Loss Statement
  • IFRS 16 Impact on Cashflow Statement
  • Who Does IFRS 16 Impact?
  • History of IFRS 16

  What is IFRS 16?

  IFRS 16 Summary: What is IFRS 16?

  The International Accounting Standards Board (IASB) published the new IFRS 16 lease accounting standard, which replaces IAS 17. For the global community, IASB is responsible for developing and promoting the International Financial Reporting Standards (IFRS) for accounting.

  What changed under IFRS 16?

  IFRS 16 changes the way companies account for leases in their financial disclosures, including balance sheets and income statements. Under IFRS 16, a lessee applies a single lease accounting model where leases are considered finance leases.  A lessor classifies a lease as either a finance lease or an operating lease.

  Here’s what Ernst & Young (EY) says about the changes: “Whether you report under International Financial Reporting Standards (IFRS) or U.S. GAAP, you are likely to be facing significant changes in reporting requirements as you assess the impact of new standards for revenue recognition, financial instruments, and lease accounting. And these changes are not just impacting organizations reporting under IFRS and US GAAP — many national accounting standard setters are also aligning local standards to IFRS.” Read more here: IFRS Compliance Software & New IFRS Lease Accounting Changes

  IFRS Compliance Software

  What is considered a lease under IFRS 16?

  Under IFRS 16, a lease is defined as a contract that enables international businesses to use another entity’s identified asset for a specified period of time in exchange for consideration. Common leased assets include:

  • Real estate property, buildings, offices and warehouses
  • Office equipment
  • Medical equipment
  • IT equipment
  • Vehicles (automobiles, trucks, vans)

  These contracts must specify a timeline in which the right-of-use of the asset is established (or an identified amount of use). It should also include all the potential economic benefits from using said asset. Simply put, some contracts that may not have been considered a lease with the original IAS 17 compliance standard, may now be a lease under IFRS 16 – and must be added to the balance sheet.

  Exceptions to the IFRS 16 Lease Accounting Standard

  Under the International Financial Reporting Standards (IFRS) 16, the lease accounting standard, there are a few exceptions or specific scenarios where certain leases may be excluded or treated differently. Here are some exceptions to IFRS 16:

  • Short-term leases: Leases with a lease term of 12 months or less and that do not contain a purchase option are considered short-term leases. Entities can choose to exclude short-term leases from recognizing lease assets and liabilities on the balance sheet. Instead, they can expense the lease payments on a straight-line basis over the lease term.
  • Low-value leases: Leases of assets with a low value (i.e. under $5,000) when new, such as small office equipment or computer peripherals, can be excluded from the balance sheet. While there is no specific threshold defined in IFRS 16, it suggests that a materiality-based approach can be adopted for such leases.
  • Leases of biological assets: Leases of biological assets within the scope of IAS 41, Agriculture, are exempted from the requirements of IFRS 16. These leases are accounted for under the applicable provisions of IAS 41.
  • Leases of minerals, oil, natural gas, and similar assets: Exploration and evaluation assets, as defined in IFRS 6, Exploration for and Evaluation of Mineral Resources, are excluded from the scope of IFRS 16. Therefore, leases of minerals, oil, natural gas, and similar assets are not subject to the requirements of IFRS 16.
  • It’s important to note that the specific application of these exceptions may vary depending on the circumstances and professional judgment exercised by the reporting entity. It is recommended to consult the full text of IFRS 16 and seek guidance from accounting professionals or standard-setting bodies for specific situations.

  IFRS 16 Impact on Financial Reporting

  IFRS 16 has a significant impact on financial reporting, affecting the balance sheets, profit and loss statements, and cash flow statements of companies. It’s important to note that the impact of IFRS 16 on financial reporting can vary depending on the specific lease arrangements and the nature of the business. Companies should carefully assess the implications and ensure accurate and transparent reporting in accordance with the standard.

  IFRS 16 Impact on the Balance Sheet

  Recognition of lease assets: Under IFRS 16, lessees are required to recognize lease assets, representing the right to use the leased asset, on the balance sheet. This increases the total assets of the company.

  Recognition of lease liabilities: In addition to lease assets, lessees must recognize lease liabilities, representing their obligation to make lease payments, on the balance sheet. This increases the total liabilities of the company.

  Change in presentation: The classification of leases as operating leases or finance leases, which was previously used under IAS 17, is eliminated. Instead, the balance sheet shows a single category of lease assets and lease liabilities.

  However, if a lease’s terms happen to be under 12 months or low value under $5,000, they will typically be exempt from this new rule (assuming the asset itself isn’t recognized as high value or has purchase options).

  IFRS 16 Impact on Profits and Loss Statement

  Changes in expense recognition: Under IFRS 16, lessees are required to recognize both interest expense on the lease liability and depreciation of the right-of-use asset. This replaces the straight-line operating lease expense recognition under IAS 17. As a result, the profit and loss statement shows higher expenses in the earlier years of the lease and lower expenses in the later years.

  Impact on EBITDA and operating profit: The changes in lease expense recognition affect EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and operating profit. EBITDA increases as lease expenses previously classified as operating expenses are replaced by depreciation and interest expenses. Operating profit may also be affected due to changes in lease-related costs.

  IFRS 16 Impact on Cashflow Statement

  Changes in cash flow presentation: Under IFRS 16, lease payments are classified differently in the cash flow statement compared to IAS 17. The operating lease payments, previously presented as operating cash outflows, are now divided into a principal portion classified as financing activities and an interest portion classified as operating or financing activities.

  Impact on operating cash flow: The classification of lease payments and the inclusion of interest and principal portions affect the operating cash flow. In the earlier years of the lease, operating cash outflows decrease as a portion of lease payments is classified as financing activities. Conversely, financing cash flows increase as the principal portion is classified as such.

  Who Does IFRS 16 Impact?

  Lessees who follow the International Financial Reporting Standards are affected by the new lease accounting standard. Over 160 countries all over the world will need to adhere to IFRS 16, including Spain, Ukraine, United Kingdom, Russia, Norway, Brazil, Japan, France and more.

  History of IFRS 16

  The International Accounting Standards Board introduced IFRS 16 in 2016. It is one of the most significant changes to their lease accounting policies in over 25 years. The goal of the new standard was to create transparency in representing leases on the balance sheet for all international businesses. IFRS 16 replaces IAS 17 as the new standard that all companies who operate under IFRS must adhere by and went into effect on January 1st, 2019.

  Transition with IFRS 16 Software

  Visual Lease provides international businesses with the tools to achieve and maintain IFRS 16 compliance while unlocking financial opportunities within their lease portfolios. Visual Lease’s powerful and easy-to-use cloud-based solution automates lease accounting, all in one centralized location.

  Looking for a reliable lease accounting software? Click here to schedule a demo and see how Visual Lease can help you with IFRS 16.

  
  

  The post What is IFRS 16 & What Do I Need to Know? first appeared on Visual Lease.]]> https://visuallease.com/gasb-96-what-you-need-to-know/ Tue, 15 Feb 2022 21:35:31 +0000 https://visuallease.com/?p=6615

  

  Table of Contents

  • What is GASB 96?
  • Who does GASB 96 apply to?
  • What is a SBITA under GASB 96?
  • What is an Example of a SBITA?
  • What contracts are exempt under GASB 96?
  • What are short-term SBITAs?
  • How to recognize and measure an SBITA?
  • What Are the Footnote Disclosure Requirements for a SBITA?
  • What are the stages of SBITA?
  • What is a subscription asset?
  • What is a subscription liability?
  • What are the outlays under GASB 96?
  • What are the disclosure requirements under GASB 96?

  What is GASB 96?

  In May of 2020, the Governmental Accounting Standards Board, or GASB, finalized how SBITAs are recorded on financial statements through the issuance of GASB Statement No. 96.

  GASB 96 requires all covered organizations or governmental entities to record a right-to-use subscription intangible asset and corresponding subscription liability. The standard also provides guidance in accounting for cash outlays such as implementation fees, related to SBITAs to prevent future disparities in how government entities report on non-subscription costs.

  Who does GASB 96 apply to?

  GASB 96 applies to all public sector entities that follow Generally Accepted Accounting Principles (GAAP) in filing their annual financial statements, including state and local governments, school districts and public higher ed institutions.

  What is a Subscription-Based Information Technology Arrangement (SBITA) under GASB 96?

  Issued by the Governmental Accounting Standards Board, GASB 96 defines Subscription-Based Information Technology Arrangements (SBITAs) and provides guidance on accounting and financial reporting for government entities. The statement was created to regulate the accounting and disclosure around subscription-based payments for cloud-based software agreements.

  Under GASB 96, a SBITA is a contract that conveys control of the right to use another party’s (a SBITA vendor’s) IT software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.

  For GASB 96 to be directly applicable, the organization must first determine that the contract is a SBITA. A crucial component in defining the subscription terms is the element of control over the underlying IT assets. An assessment must be made, and specific stipulations are required in understanding what rights your organization has regarding the present service capacity. Once this distinction is made, excluding certain exemptions, the subscription term is the noncancellable period of time that the government has the right to use the underlying IT asset.

  What is an Example of a SBITA?

  An example of a SBITA is a subscription-based software service, such as Software as a Service (SaaS) platforms. Some specific examples include Salesforce, Microsoft Teams, and Dropbox. These arrangements involve a contract between a government entity and another party, granting the right to use IT software for a period of time in exchange for a fee.

  What contracts are exempt under GASB 96?

  GASB 96 excludes contracts that only provide IT support services, but includes contracts providing IT support services in conjunction with the right to use a related IT asset. The following are also exempt from the scope of GASB 96:

  • Standalone IT services contracts that do not include the right to use an underlying IT asset
  • Agreements providing outside entities the right to use their own IT software and associated assets through an SBITA
  • Contracts that meet the definition of a lease under GASB 87, Leases
  • Contracts that fall under the scope of GASB 94, Public-Private and Public-Public Partnerships and availability Payment Arrangements
  • Contracts that fall under the scope of GASB 51, Accounting and Financial Reporting for Intangible Assets
  • Short-term SBITA contracts

  What are short-term SBITAs?

  GASB 96 provides exemptions for short-term SBITAs. Under GASB 96, a short-term SBITA has a maximum possible term of 12 months at the commencement of the subscription term. This includes any renewal or extension options regardless of whether the government is reasonably certain to exercise these options. The governmental entity is not required to recognize a subscription asset and liability for any short-term SBITA.

  How to recognize and measure an SBITA?

  If an SBITA is identified, government entities recognize a subscription liability and a subscription asset at the beginning of the subscription term of the SBITA, which occurs when the government entity obtains control of the right to use the underlying IT asset.

  The subscription term is the period that the government has the noncancellable right to use the underlying IT assets, plus the following periods, if applicable:

  • Periods covered by a government’s extension option if it is reasonably certain that the government will exercise that option
  • Periods covered by a government’s termination option if it is reasonably certain that the government will not exercise that option
  • Periods covered by a vendor’s extension option if it is reasonably certain that the SBITA vendor will exercise that option
  • Periods covered by a vendor’s termination option if it is reasonably certain that the vendor will not exercise that option

  What Are the Footnote Disclosure Requirements for a SBITA?

  • Description of the SBITA: This should include the basis, terms, and conditions on which variable payments are not included in the measurement of the subscription liability.
  • Sum of subscription-based assets and related accumulated amortization: This should be disclosed separately from other capital assets.
  • Outflow of resources recognized in the reporting period: This should include variable payments not previously included in the measurement of the subscription liability, as well as other payments such as termination penalties.
  • Principal and interest requirements to maturity: This should be presented separately for the subscription liability for each of the five subsequent fiscal years and in five-year increments thereafter.
  • Details of SBITAs that have been committed but not yet commenced: This should include the basis, terms, and conditions of the arrangement, as well as the estimated amount of the subscription liability.
  • Components of any loss associated with an impairment: This should include the amount of the loss, as well as the factors that contributed to the impairment.
  • Balance restatement details for the fiscal year 2023 only: This should include the reason for the restatement, as well as the impact on the financial statements.

  What are the stages of SBITA?

  The amortization of the subscription asset should be recognized as an outflow of resources over the term of the subscription. Activities associated with a SBITA are grouped into stages:

  Stage
  Preliminary project
  Initial implementation
  Operation and additional implementation

  Activities
  The decision to obtain technology
  Design, configure, code, test, and install
  Maintenance, troubleshooting, ongoing access

  Cost treatment
  Expensed as incurred
  Capitalized
  Capitalized or expensed as incurred

  • Preliminary project stage: This stage includes activities associated with an entity’s decision to obtain the technology provided by the SBITA. Any cost incurred in the preliminary project stage will be expensed as incurred.
  • Initial implementation stage: This stage includes activities related to designing, configuring, coding, testing, and installing the subscription assets. These charges are capitalized as part of the subscription asset.
  • Operation and additional implementation stage: This stage includes activities that relate to maintenance, troubleshooting, and other activities associated with ongoing access to the underlying IT assets. Activities in this stage may be capitalized as part of the subscription asset.

  What is a subscription asset?

  In addition to the subscription liability, the government must recognize a subscription under GASB 96. The subscription asset is measured as the initial value of the subscription liability plus:

  • Payments made to the vendor at the commencement of the subscription term
  • Capitalizable initial implementation costs
  • Minus any vendor incentives received at the commencement of the subscription term

  The government entity will need to amortize the subscription asset systematically and rationally over the shorter of the subscription term or the useful life of the underlying IT asset. Amortization of the subscription asset begins at the commencement of the subscription term and is reported as an outflow of resources by the governmental entity.

  What is a subscription liability?

  The initial subscription liability is measured as the present value of the total subscription payments expected to be made to the vendor during the subscription term. The total future payments are discounted using the interest rate the vendor charges the government, which may be the interest rate implicit in the SBITA. If the implicit interest rate is not readily determinable, the government may use an estimated incremental borrowing rate for the present value calculation.

  GASB 96 outlines that the payments included in the present value calculation of the subscription liability should include the following:

  • Fixed payments
  • Variable payments based on an index or a rate, measured using the index or rate as of the commencement of the subscription term
  • Variable payments that are fixed in substance
  • Termination penalties, if the subscription term reflects the government exercising either an option to terminate the agreement or a fiscal funding or cancellation clause
  • Incentives receivable from the vendor
  • Other payments the government is reasonably certain will be required to be made to the vendor

  In subsequent periods, the government will accrue interest on the remaining subscription liability at the applicable discount rate. The subscription payments will be allocated first to the accrued interest, and then to reduce the outstanding subscription liability.

  What are the outlays under GASB 96?

  There may be cash outlays for other activities associated with SBITAs under GASB 96. The type and timing of the activity dictates the accounting treatment of these cash outlays; other activities associated with SBITAs are grouped into three stages:

  1.Preliminary project stage

  The preliminary project stage includes costs associated with activities such as evaluating alternatives, determining needed technology, and selecting an SBITA vendor. Outlays in this stage should be expensed as incurred.

  2.Initial implementation stage

  The initial implementation stage includes all ancillary charges necessary to place the subscription asset into service. Outlays in this stage generally should be capitalized as an addition to the subscription asset.

  3.Operation and additional implementation stage

  The operation and additional implementation stage, includes activities such as subsequent implementation activities, maintenance, and other activities for ongoing operations related to a SBITA. Outlays in this stage should be expensed as incurred unless they meet specific capitalization criteria.

  What are the disclosure requirements under GASB 96?

  A government entity should disclose the following information about its SBITAs (which may be grouped for purposes of disclosure) in notes to financial statements:

  1. A general description of its SBITAs, including the basis, terms, and conditions on which variable payments not included in the measurement of the subscription liability are determined
  2. The total amount of subscription assets, and the related accumulated amortization, disclosed separately from other capital assets
  3. The amount of outflows of resources recognized in the reporting period for variable payments not previously included in the measurement of the subscription liability
  4. The amount of outflows of resources recognized in the reporting period for other payments, such as termination penalties, not previously included in the measurement of the subscription liability
  5. Principal and interest requirements to maturity, presented separately, for the subscription liability for each of the five subsequent fiscal years and in five-year increments thereafter
  6. Commitments under SBITAs before the commencement of the subscription term
  7. The components of any loss associated with an impairment

  Ready for GASB 96

  Meeting the compliance standards for GASB 96 requires consistency, accuracy and the collection of your portfolio data — specifically information surrounding SBITAs. At the same time, evaluating accounting software solutions will allow you to implement a solution that will allow you to meet the standards outlined in GASB 96.

  The post GASB 96: What You Need to Know first appeared on Visual Lease.]]> https://visuallease.com/how-to-apply-the-asc-842-discount-rate-update-for-private-companies-and-nonprofits/ Tue, 25 Jan 2022 15:48:10 +0000 https://visuallease.com/?p=6595 The Financial Accounting Standards Board (FASB) recently issued an update to ASC 842 that addresses complexities associated with discount rate calculations. In this blog, we share how this update affects private...
  The post How to Apply the ASC 842 Discount Rate Update for
  Private Companies and Nonprofits first appeared on Visual Lease.]]>

  The Financial Accounting Standards Board (FASB) recently issued an update to ASC 842 that addresses complexities associated with discount rate calculations. In this blog, we share how this update affects private companies and nonprofits.       

  What does the discount rate update mean for private companies? 

  The update to ASC 842 simplifies the way private companies, nonprofit organizations and employee benefit plans are required to determine the present value of lease payments. Under the new update, these businesses can elect risk-free rates by class of underlying asset, rather than at the entity wide level.  

  This update replaces the previous rules within ASC 842 for how private companies and nonprofits handled discount rates to comply with the lease accounting standard.  

   Why was the discount rate update proposed? 

  Prior to the update, companies ran into similar challenges when determining the discount rate and present value of lease payments. They had to use the rate implicit in the lease to calculate the right of use (ROU) asset and lease liability. However, the rate implicit in the lease isn’t always accessible. 

  Given the difficulties private companies were experiencing, FASB recognized a need to streamline calculation guidance – and in response, proposed and issued this discount rate update.  

   How do private companies apply the new discount rate guidance? 

  Organizations may now make a policy election to use a risk-free rate as the discount rate for all leases. This calculation is much easier to run, which helps businesses save time and lowers the impact on the balance sheet.  

   Are you set up to account for lease accounting guidance updates? 

  The discount rate update issued by FASB to ASC 842 is just one example of why private companies and nonprofit organizations can benefit from lease accounting technology. Beyond providing lease accounting automation, ASC 842 software like Visual Lease is equipped to seamlessly adapt to changes to the lease accounting standards or a lease portfolio.  

  It can also streamline your lease accounting process by automatically generating audit-ready journal entries, disclosures and reports that you need to achieve and sustain compliance.  

  Additionally, the right solution will provide you with the visibility you need to thoroughly understand your lease data and use that information to make better informed operational decisions.  

  Interested in learning more? See how lease accounting software like Visual Lease can help. 

   

  The post How to Apply the ASC 842 Discount Rate Update for
  Private Companies and Nonprofits first appeared on Visual Lease.]]> https://visuallease.com/is-lease-capitalization-required-for-all-operating-leases-under-asc-842/ Thu, 30 Dec 2021 18:55:03 +0000 https://visuallease.com/?p=6538 What is lease capitalization? Lease capitalization is the act of recording Right-of-Use Assets and related lease obligations on a company’s balance sheet, as required for the lease accounting standard ASC...
  The post Is lease capitalization required for all operating leases
  under ASC 842? first appeared on Visual Lease.]]>

  What is lease capitalization?

  Lease capitalization is the act of recording Right-of-Use Assets and related lease obligations on a company’s balance sheet, as required for the lease accounting standard ASC 842.

  Placing these operating lease liabilities on the balance sheet can have a significant impact on a business’ financial position – potentially affecting credit rating and debt covenants under its corporate borrowings.

  What is the importance of lease capitalization under ASC 842?

  With the new lease accounting standard, there is an emphasis on accuracy, comprehensiveness and transparency as to what is accounted for in a company’s balance sheet. The new lease accounting standard emphasizes accuracy, comprehensiveness and transparency of a company’s balance sheet.

  It’s common for business’ stakeholders – such as a public company’s shareholders or a privately held company’s bank or private lender – to want to understand the financial health of the business they have invested in and/or provided financing.

  As a result of ASC 842, a company’s audited financial statements now have a more accurate representation of the company’s overall financial health.

  Which leases are under ASC 842?

  Prior to ASC 842, operating leases were not captured on the balance sheet. However, under ASC 842, both operating leases and finance leases (formerly known as capital leases) need to be included on the balance sheet (in our Complete Guide to Lease Accounting, we share how operating and finance leases are capitalized and accounted for).

  To identify whether a lease is classified as a finance lease or operating lease under ASC 842, check out our blog on Capital Lease Accounting for ASC 840 and ASC 842.

  There are some exceptions to capitalization under ASC 842, such as the ability to not capitalize short-term leases (leases of 12 months or less). To see a further breakdown and examples, take a look at our blog on Balance Sheet Changes for ASC 842.

  ASC 842 requires businesses to disclose much more detail about their lease portfolios. If your company has a high volume of leases (100 or more), and/or manages complex leases (like real estate), it is impossible to keep track of them without leveraging lease accounting software.

  Leases are incredibly dynamic – changing constantly as companies renegotiate their lease terms. And each of these lease modifications needs to be examined and potentially accounted for under the new lease accounting standards. Lease capitalization has been restructured and needs to be accurately accounted for on the balance sheet – one of the many elements associated with the new lease accounting standards. It’s important to not only understand the rules but make sure your company utilizes the right software to get and stay compliant.

   

   

  The post Is lease capitalization required for all operating leases
  under ASC 842? first appeared on Visual Lease.]]> https://visuallease.com/no-further-delays-from-fasb-its-time-to-move-your-asc-842-lease-accounting-project-forward/ Mon, 15 Nov 2021 16:58:32 +0000 https://visuallease.com/?p=6465
  

  Joe Fitzgerald

  SVP of Lease Market Strategy
  Visual Lease

  On November 10, 2021, The Financial Accounting Standards Board (FASB) decided not to issue a third delay to the ASC 842 effective date for private companies. It was widely agreed that after two prior deferments, impacted organizations have had enough time to effectively prepare for their transition to the new standard.  

  The decision, however, came as a surprise to many private organizations that were, indeed, relying on the prospect of more time.  

  In late July 2021, we surveyed 500 senior accounting and finance professionals at private companies with more than 1,000 employees to understand where they were in their journeys toward complying with ASC 842.  

  Despite the deadline being mere months away, 75% of respondents stated they were not yet compliant with ASC 842, with 30% less than halfway through the process. Furthermore, 40% claimed they were only somewhat confident about their ability to successfully adopt the new standard in time for their next scheduled reporting period after December 15, 2021.  

  This data indicates that despite the many known risks associated with misreporting lease financials– including increased audit fees (51%), damage to an organization’s reputation (49%) and risk of legal action (48%) – private companies have largely underestimated the time and resources required to navigate this complex process, likely banking on yet another extension from FASB.  

  However, last week’s FASB session made it clear that despite private companies being largely underprepared and underconfident in their ability to adopt ASC 842, the sand has run out of that hourglass. 

  In addition to dealing with the pressures of meeting the confirmed deadline of December 2021, private companies are simultaneously evolving how they prioritize and manage their commercial real estate leases to accommodate new business needs. To effectively make changes and then measure their impact, they require easy access to their lease agreements.  

  What many of these same companies fail to realize is that they can leverage their lease accounting compliance project to gain a better overall visibility into their lease portfolio.  

  With the right technology and personnel in place, organizations can effectively achieve and sustain lease accounting compliance, and go one step further to maximize the value of their leases. However, there is one major caveat, and that’s time.  

  Private companies cannot spare another moment – leases are dynamic agreements, and the rules surrounding the already complicated standard are ever-changing. Impacted companies must act now to ensure they mitigate the risks and capitalize on the benefits associated with managing and tracking their lease portfolios.  
   

  To help you get on the right track, quickly, we’ve rounded up a few resources to best position you in your journey toward complying with ASC 842:  

  • Our first report under The Visual Lease Data Institute, which I referenced earlier in this blog post, explores the opportunities and barriers that companies face in their efforts to comply with ASC 842. It’s jam-packed with unique insights informed by a proprietary survey of 500 senior finance and accounting professionals at private organizations with more than 1,000 employees. 
     
  • Access to our bench of experienced industry experts, some of whom helped inform the construction of ASC 842. Leveraging our knowledge as seasoned accounting and finance professionals, we’re here to address any and all questions about the lease accounting guidelines, the technology and vendor landscape, audit preparedness and how to unlock real ROI for your company along the way. 
     
  • Our Lease Accounting Milestone Planner (LAMP)TM, an interactive and easy-to-use tool that will provide you with clear next steps and goals to help manage your lease accounting process, both before and after you meet initial compliance.

  There’s no time to waste. With Visual Lease’s help, get started today.   

   

  The post No Further Delays From FASB: It’s Time to Move Your ASC 842 Lease Accounting Project Forward first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-and-lease-administration-software-why-you-need-both/ Thu, 09 Sep 2021 20:06:05 +0000 https://visuallease.com/?p=2203 Lease accounting compliance is not just a one-and-done disclosure. It is a new approach to accounting that includes an ongoing, cross-departmental effort – and a much higher level of scrutiny....
  The post Lease Accounting and Lease Administration Software: Why You Need Both first appeared on Visual Lease.]]>

  Lease accounting compliance is not just a one-and-done disclosure. It is a new approach to accounting that includes an ongoing, cross-departmental effort – and a much higher level of scrutiny.

  Lease accounting is interdependent on lease administration. The lease accounting standards (ASC 842, IFRS 16, GASB 87) require collecting leases from across your organization and staying on top of them as they change throughout the year. It is a collaborative effort that requires dedicated people (often cross-departmentally in IT, procurement, legal, etc.) with strict attention to detail.

  To do so effectively, you need to implement strong lease controls and reliable technology. And though the lease accounting market offers a wide selection of software solutions to streamline compliance efforts, most lack essential lease administration capabilities. Many of the products on the market fail to address the importance of long-term lease administration throughout the financial process.

  It is not possible to maintain lease accounting compliance without accompanying technology that supports both lease accounting and lease administration. Here’s why.

  Software that includes both lease administration and lease accounting functionality is important to:

  #1 Ensure centralized lease data

  Having both lease administration and accounting together in one robust solution provides reliable, consistent lease information to support continued compliance and confident financial reporting. This significantly reduces errors, increases efficiencies and helps establish cross-functional collaboration across your business.

  Consider this: When you get a new lease, it must be reviewed and abstracted into a system. You’ll need to implement controls that track both the legal and financial elements of that lease, which can control start dates, options, dollar amounts, etc. A platform that has both lease accounting and lease administration ensures that, from day one, your lease information is reliable and up to date.

  With lease administrators owning the role of maintaining a single source of truth, accountants can be confident that all data and calculations will be consistent and accurate. In addition, software that supports both functions boosts efficiency by cutting down on time-consuming, tedious tasks outside of the accounting scope, such as searching for pertinent documents, tracking monthly rent increases and handling lease amendments.

  #2 Track lease changes throughout the year

  Leases are dynamic – and maintaining lease accounting compliance is not a one-and-done disclosure. It is an entirely new approach to accounting and an ongoing process. This can be tricky because leases are complex legal documents that sometimes do not have a clear owner. There are leases (real estate, equipment, embedded leases in maintenance agreements, etc.) that are often handled by different departments within a business.

  Lease terms change as your business takes on new spaces, scales back or renegotiates. Implementing lease controls within lease accounting and administration software is the only way to ensure reliable data, repeatable processes, trustworthy guardrails and ongoing monitoring throughout the lease lifecycle. While some organizations selected lease accounting solutions lack this capability, they will run into major issues sustaining compliance as their leases change.

  #3 Maintain a comprehensive audit trail

  It is important to remember that compliance is not just about meeting accounting standard requirements, but also implementing proper policies and procedures to reduce risk.

  Using lease accounting and lease administration software that has comprehensive user rights, integrated approval workflows and audit trail capabilities provides additional peace of mind knowing that any changes – including ones made to critical dates, financial impacts of modifications and more – are fully auditable.

  Leases are often managed and modified by a variety of entities both inside and outside an organization. Due to the number of people involved in altering important calculations, the accuracy of the lease data can be difficult to control and may be prone to error without a solution built to handle multiple users. Taking this precaution in the beginning of your compliance journey will save you a lot of time long-term.

  Lease accounting and lease administration go hand-in-hand

  Lease accounting solutions that do not integrate lease administration into the software are unreliable, incomplete and more complex. Having both within one location is essential to ensure a well-rounded compliance strategy that covers everything you need for complete and accurate data management.

  The post Lease Accounting and Lease Administration Software: Why You Need Both first appeared on Visual Lease.]]> https://visuallease.com/a-complete-guide-to-lease-accounting/ Thu, 09 Sep 2021 17:31:14 +0000 https://visuallease.com/?p=2571
  Table of contents

  Introduction

  Lease Accounting FAQs

  What is lease accounting?

  What are the new lease accounting standards?

  ASC 842IFRS 16

  GASB 87

  Other National Standards

  Why Use Lease Accounting Software

  What is lease accounting software?

  How does lease accounting software impact financial statements?

  What common risks does lease accounting software solve?

  Lease Accounting Standards Impact on Legal Teams

  The Different Types of Leases and Lease Components

  What are finance (capital) leases and how are they treated under ASC 842?

  What is an operating lease and how is it capitalized?

  How do you measure a finance lease vs. an operating lease?

  What is a short-term lease and how is it treated under ASC 842?

  What is an embedded lease?

  Why do embedded leases have a bigger impact under ASC 842?

  What are lease components?

  What is a direct finance lease?

  What are initial direct costs?

  What are prepaid lease payments?

  What are lease incentives?

  Reporting with New Lease Accounting Standards

  What are the different types of standard reports (disclosures) under ASC 842/IFRS 16?

  Lease Accounting Disclosure

  Lease Accounting Standard

  Journal Entry Summary

  Change Log

  Understanding Financial Aspects of a Lease

  What is a right-of-use (ROU) asset?

  What is lease liability?

  What are discount rates?

  What is an incremental borrowing rate (IBR)?

  What is an interest expense?

  What are disclosures?

  What are practical expedients?

  What is important about lease transitions?

  What is the impact of different currencies on lease accounting?

  What are lease remeasurements?

  What is amortization expense?

  What are terminations?

  Implementing New Lease Accounting Standards

   

   

  Table of Contents

  An all-encompassing guide to lease accounting standards (including FASB ASC 842, IFRS 16, GASB 87), changing accounting guidelines, implementation and lease accounting software.

  

  Introduction to Our Lease accounting Guide

  Making a successful transition to the latest lease accounting requirements, including ASC 842 and IFRS 16, is a threefold process of:

  • Understanding the changes to the standards and what those changes mean to a business and its accounting practices
  • Identifying and gathering all of the necessary data
  • Implementing a lease accounting solution that will aid in achieving and maintaining compliance

  This guide is designed to provide information and resources you need to thoroughly understand the new lease accounting requirements, to not only meet all compliance deadlines but also improve your leasing policies and procedures for the long term.

  Lease accounting FAQs

  What is lease accounting?

  Lease accounting is the process of recording and reporting on all of the leased property, equipment, and other non-owned assets that a business or other organization holds. Generally, these contracts are categorized as either operating leases or finance leases.

  Under the requirements of the latest lease accounting standards — ASC 842, IFRS 16, and GASB 87, as well as local versions of each — all leases and similar contracts (not just capital leases) must now be accounted for as assets and liabilities on the balance sheet. Therefore, lease accounting requires the ability to gather accurate lease data and update the information as the terms change (when lease terms are renewed, canceled, and so on).

  The use of a software solution for tracking, updating, and managing leases helps to ensure the accuracy of the data that is needed for disclosure reports, both for initial adoption and for long-term reporting.

  Why is lease accounting important?

  Lease accounting is critical for a clear view of a company’s financial health. It helps assess risks, reveals lease impacts on the balance sheet, and benefits investors and leadership.

  New lease accounting standards

  ASC 842

  Find all of the major changes to Lease Accounting with the new Topic 842 on our ASC 842 Summary page. You will be able to find summaries, effective dates & much more regarding the impact ASC 842 will have on your balance sheets.

  IFRS 16

  IFRS 16 effective date

  Effective date for companies

  Fiscal years beginning on or after January 1, 2019

  IFRS 16 summary

  The International Accounting Standards Board (IASB) published the new IFRS 16 lease accounting standard, which replaces IAS 17. For the global community, IASB is responsible for developing and promoting the International Financial Reporting Standards (IFRS) for accounting.

  IFRS 16 changes the way companies account for leases in their financial disclosures, including balance sheets and income statements. Under IFRS 16, all leases are considered finance leases.

  Here’s what Ernst & Young (EY) says about the changes: “Whether you report under International Financial Reporting Standards (IFRS) or U.S. GAAP, you are likely to be facing significant changes in reporting requirements as you assess the impact of new standards for revenue recognition, financial instruments, and lease accounting. And these changes are not just impacting organizations reporting under IFRS and US GAAP — many national accounting standard setters are also aligning local standards to IFRS.” Read more here: IFRS Compliance Software & New IFRS Lease Accounting Changes

  IFRS Compliance Software

  IFRS 16: additional reading

  

  IFRS 16: Software

  

  Fixed Asset Retirement with IFRS 16

  

  IFRS vs. GAAP Lease Accounting

  GASB 87

  GASB 87 effective date

  Deadline for companies

  Fiscal years beginning after June 15, 2021

  GASB 87 summary

  In 2017, the Governmental Accounting Standards Board (GASB) published the lease accounting standard GASB 87. The organization is the source of the accounting principles (GAAP) used by state and local governments in the United States.

  GASB 87 was created to increase visibility into lease obligations and remove ambiguity around lease obligations in financial disclosures, particularly balance sheets and income statements.

  GASB 87 Compliance Software

  GASB 87: additional reading

  

  GASB 87 compliance: 4 things you need to know

  Summary of other national standards

  While many countries are adopting the IFRS 16 standard, some nations are making minor adjustments to the global standard. For example, in 2016, the Australian Accounting Standards Board (AASB) published the lease accounting standard  AASB 16, which replaces AASB 117 in Australia.

  AASB 16 removes the ability for operating leases to be reported in the footnotes of financial  statements. Based on IFRS 16 with a few variations, AASB 16 requires all operating leases to now be  accounted for as finance leases. With small adjustments to the data inputs, the Visual Lease platform provides Australian firms with compliance under AASB 16.

  Why use lease accounting software

  What is lease accounting software?

  Lease accounting software helps you manage and optimize leases. Lease software helps to streamline your organization’s lease portfolio management and seamlessly generate accurate financial calculations. With changing compliance standards it is essential to have a simple way to stay compliant and control all lease aspects.

  How does lease accounting software impact financial statements?

  The new ASC 842 and IFRS 16 lease accounting standards require significantly more assets and liabilities to appear on the balance sheet. In fact, the standards specify more than 40 different types of data that must be tracked to do the required calculations.

  Lease accounting software provides tools to input and report on all the financial aspects of leases to meet the new compliance requirements. The technology performs critical accounting calculations and automates the process of adding information to the balance sheet, including ROU assets, interest expenses, liabilities, practical expedients, and other elements required under FASB and IASB guidance.

  

  What common risks does lease accounting software solve?

  Without a lease accounting solution to help with lease tracking, reporting, and management, your business may  be exposed to a number of risks, including:

  • Inconsistencies in the way assets are accounted for
  • Human error in calculations or in migrating data from one source to another
  • Widely dispersed lease records rather than a central data repository
  • Lack of visibility into lease terms, changes, and important dates
  • Missing details such as embedded leases that are part of a larger contract
  • Lack of a structured change management process
  • Mistakes in complex calculations for common area maintenance (CAM) and other costs
  • No record of what changes have been made to leases, when, and by whom
  • Increased odds of failing an audit

  This is because lease documents and the standards contain many intricacies.  

  The new lease accounting standards are complex of necessity, to capture the challenging and dynamic nature of the underlying agreements. Therefore, reporting on assets and liabilities is extremely difficult without software.

  Leases also may contain both lease and non-lease components, which in turn affects how leases are calculated.

  The best lease accounting software simplifies all those risks and more. It puts a secure system in place for capturing all the necessary data, tracking changes, and reporting lease costs in accordance with your accounting policies and procedures as well as with ASC, IFRS, or GASB requirements.

  Get more details in our blog: Lease accounting auditing risks multiply without software.

  Lease accounting standards impact on legal teams

  For most corporate attorneys, FASB ASC 842 compliance and accounting changes in general are an accounting exercise that doesn’t impact their responsibilities. What most attorneys don’t know is that there are significant ASC 842 legal implications that put companies, as well as their officers and boards, at risk.

  Visual Lease is a lease accounting solution that was developed by attorneys & accountants, so our software platform is designed to avoid the potentially disastrous legal consequences of lease accounting mistakes. At virtually all the companies we talk to every day, the FASB ASC 842 compliance effort is driven by accounting and SEC compliance teams with very little input from the legal department. Learn more about the legal implications of FASB ASC 842 compliance efforts.

  The different types of leases and lease components

  What are finance (capital) leases and how are they treated under ASC 842?

  A finance lease is one that essentially represents a purchase agreement or uses substantially all of the life or value of the underlying asset, and qualifies according to at least one of the lease classification test questions (above).

  Although the name has changed, the way finance leases are capitalized on the balance sheet under ASC 842 is essentially the same method used for capital leases under the previous (840) standard.

  When you transition existing leases to the new standard, you need to reclassify capital lease assets and capital lease liability (840) as ROU assets and lease liabilities (842). Any prepaid rents, lease incentives, and initial direct costs should be rolled up into the ROU asset.

   

  What is an operating lease and how is it capitalized?

  An operating lease is defined as a lease in which the lessee gets control over the use of the underlying asset without ownership. Previously, operating leases were unrecorded liabilities, so the balance sheet only included prepaid or deferred rent.

  Now, all operating leases (except for short-term leases) must be capitalized as ROU assets and lease liabilities on the balance sheet, in the same way you record finance (previously called capital) leases.

  The operating lease liability is accounted for using an amortized cost basis. Amortization of the ROU asset is calculated as the difference between straight-line rent and interest expense for the period. These two expenses added together give you the total lease expense to book on your P&L.

  How do you measure a finance lease vs. an operating lease?

  When measuring a finance lease, the ROU is amortized on a straight-line basis, and the lease liability is amortized using the effective interest. The lease liability is increased by the interest incurred in the period, and the carrying amount is reduced by the lease payment.

  When measuring an operating lease, a single lease cost is calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis. This single cost includes the interest charge and ROU amortization; the straight-line lease expense is calculated by dividing the undiscounted payments by the lease term.

  

  What is a short-term lease and how is it treated under ASC 842?

  According to ASC 842, a short-term lease is one that has a term of 12 months or less at commencement, and that does not have a renewal or purchase option that the lessee is reasonably certain to exercise.

  While you don’t have to include short-term leases on the balance sheet under ASC 842, you can recognize short-term lease payments on a straight-line basis over the lease term. However, this option must be elected at the asset class level. In other words, you can’t pick and choose which leases to define as short term; you need to define the entire asset class as a practical expedient.

  What is an embedded lease?

  An embedded lease is a component within a contract for other goods or services, which includes the use and control of a particular related asset. An embedded lease can exist within a contract even though the contract never uses the word “lease,” sometimes making it easy to overlook lease elements.

  For example, embedded leases are often found in IT service contracts where a vendor provides service-related equipment (such as onsite servers). Embedded leases may also be found in supply contracts, dedicated manufacturing capacity contracts, and advertising agreements.

  Why do embedded leases have a bigger impact under ASC 842?

  Previously, because operating leases were not on the balance sheet, embedded leases little impact on the income statement since the expense was usually being straight-lined. But now that all leases must be capitalized on the balance sheet, you need to:

  • Examine all contracts to find any embedded leases within them
  • Separate the lease components (for use of assets) from non-lease components (payments for the service) within the contract

  Identifying embedded leases and their components is a complex task that takes time, judgment, experience, and consistency. It is another area where you might want to enlist the help and guidance of an accounting advisor.

  What are lease components?

  When a contract contains one or more leases, ASC 842 requires that the contract be separated into the various components. According to ASC 842, a contract can contain the following:

  • Lease components — the right to use an underlying asset, such as the rent for the right to use office space
  • Non-lease components — an activity that transfers a good or service to the lessee, such as CAM charges on office space
  • Non-components — costs that are incurred regardless of whether a lease exists, such as property taxes on the lease

  Note that under ASC 842, non-lease component costs/revenues are accounted for under different standards rather than according to lease accounting guidance.

  Got questions about CAM? Check out these FAQs.

  What is a direct finance lease?

  In a direct financing lease, the lessor acquires an asset and leases it to a customer/lessee to generate revenue from the resulting interest payments. Under this arrangement, the lessor recognizes the gross investment in the lease and the amount of related unearned income.

  Under a direct financing lease, the lessor cannot be a manufacturer or dealer. This type of arrangement is usually offered by financing institutions, such as equipment leasing companies.

  What are initial direct costs?

  These are costs that would not have been incurred without the execution of the lease. In other words, they are costs that are directly attributed to negotiating and arranging the lease. For example, payments made to an existing tenant to terminate a lease and real estate commission payments are deemed initial direct costs.

  What are prepaid lease payments?

  These are lease payments made by the lessee to the lessor before or at the commencement of a lease.

  What are lease incentives?

  These are (1) payments made by the lessor to or on behalf of the lessee, or (2) any losses incurred by the lessor from assuming a lessee’s pre-existing lease with a third party.

  Reporting with new lease accounting standards

  Under ASC 842, disclosure reports must provide more qualitative and quantitative details, including:

  • Weighted average discount rate
  • Weighted average remaining lease term
  • Cash paid for amounts included in lease liabilities
  • A more descriptive maturity analysis, which must be also be tied back to the balance sheet

  Lease accounting software provides reporting capabilities to support compliance and data management.

  What are the different types of standard reports (disclosures) under ASC 842/IFRS 16?

  Lease accounting disclosure

  A Lease Accounting Disclosure report provides the required values for quantitative reporting as prescribed by the latest lease accounting standards. It includes sections for lease expense, other information including ROU assets obtained in exchange for lease liabilities, and maturity analysis.

  Lease accounting standard

  A Lease Accounting Standard report provides a detailed view of the calculation inputs and resulting lease schedules for the lease accounting calculations included for a specific date range.

  Journal entry summary

  A Journal Entry Summary report that detailed journal entries for the calculations included for a specific date range. It typically includes totals for debits and credits by calculation and period.

  Change log

  A Change Log report provides a detailed audit log of records and selected fields that have been added, edited, or deleted within a specific date range. Data points include the user who made each change, the date/time of each change, and the field name, as well as the old and new values. This type of report allows the user to track/audit changes that impact lease accounting calculations, such as useful life or fair market value.

  Understanding financial aspects of a lease

  What is a right-of-use (ROU) asset?

  This new feature of the lease guidance represents the unused value of the leased asset remaining over the lease term. It is measured by taking the lease liability, adding in the initial direct costs and any prepaid lease payments, and then subtracting any lease incentives.

  What is lease liability?

  The lease liability is the current value of all outstanding lease payments that are not yet paid. It is discounted by using the incremental borrowing rate (IBR) or the implicit rate in the lease and calculated using an NPV (net present value) of all known payments that are unpaid.

  

  What are discount rates?

  A lease accounting discount rate is the implicit lease discount rate or the incremental borrowing rate (IBR) used to measure your operating and finance lease liabilities under ASC 842.

  What is an incremental borrowing rate (IBR)?

  According to FASB, IBR is “the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.”

  What is an interest expense?

  In the accrual method of accounting, this is the amount of interest incurred on debt during a particular period of time and appearing as a separate line on a company’s income statement for the period cited. The interest expense is also used, along with depreciation, when a lease is capitalized and posted as an asset on the balance sheet.

  What are disclosures?

  The purpose of lease disclosures is to provide clarity around financial statements, giving users insight into the “amount, timing, and uncertainty of cash flows arising from leases.” Under ASC 842, lessees must disclose quantitative and qualitative information about their leases, including the judgments made in measuring leases and the amounts recognized in their financial statements.

  What are practical expedients?

  Practical expedients are options created by FASB to simplify certain practices under the latest ASC 842 lease accounting standards. Read more in our blog ASC 842 practical expedients and transition requirements.

  What is the importance of lease transitions?

  The transition from the previous lease accounting standards to ASC 842 compliance requires making decisions about a variety of practical expedients that affect how leases are defined and accounted for moving forward. Without these transition relief options, companies must reassess all existing contracts to (1) determine which ones contain leases and (2) classify (or reclassify) those leases.

  What is the impact of different currencies on lease accounting?

  For companies that do business outside of the United State, some leases might contain figures in a currency other than U.S. dollars — bringing exchange rates into ROU asset remeasurements and other lease accounting processes.

  Download a white paper from Visual Lease accounting partner KPMG for SEC guidance on exchange rates and lease accounting.

  What are lease remeasurements?

  When there is a material change to a lease — something that causes a change in either the payments or the value of the lease asset itself — it triggers the need for lease remeasurements. For example, remeasurements may be needed due to abandonments, asset impairments, and other causes.

  Any remeasurements will affect how you do your lease accounting entries moving forward. Read more in our blog 6 frequently asked questions about lease accounting remeasurements.

  What is an amortization expense?

  An amortization expense is the write-off of an intangible asset over its expected period of use, representing consumption of the asset and resulting in a decline of the residual asset balance over time.

  Amortization is generally calculated on a straight-line basis. The write-off amount appears in the income statement, usually in the depreciation and amortization line item.

  What are lease terminations?

  A lease termination occurs when you are not using a leased asset and the lessor agrees to let you out of the lease agreement. Termination triggers the need for a remeasurement including any one-time termination fee you might pay, along with writing down the asset and the liability.

  Implementing new lease accounting standards

  What are the secrets to a successful lease accounting platform implementation?

  • Start your lease inventory ASAP.
  • Pinpoint what lease data you need to track.
  • Create a compliance team that represents all the stakeholder departments.
  • Educate yourself and your team.
  • Set a realistic timeline.
  • Keep the lines of communication open.
  • Start NOW!

  For more details, read our blog how to prepare for lease accounting implementation: 7 essential tasks.

  What’s next? Get the readiness checklist.

  Obviously, there is a lot to consider when evaluating lease accounting software and getting ready for FASB, IASB, and other compliance requirements.

  Are YOU ready to make the transition? Request a demo now.

  

  About Visual Lease

  Visual Lease is the #1 lease optimization software for managing, analyzing, streamlining and reporting on lease portfolios. Developed by industry-leading lease professionals and CPAs, it combines GAAP, IFRS and GASB-compliant lease accounting controls with easy, flexible and automated lease management processes.  More than 1,000 of the world’s largest publicly traded and privately-owned corporations rely on Visual Lease to control their lease portfolios, integrate with their existing business systems and maintain regulatory compliance. Committed to ongoing innovation and unparalleled customer service, Visual Lease helps organizations transform their lease compliance requirements into financial opportunities. For more information, visit visuallease.com.

  The post Lease accounting Guide & New Standards first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-disclosures-6-tips-for-successful-asc-842-reporting/ Thu, 09 Sep 2021 16:22:11 +0000 https://visuallease.com/?p=3621 Under the FASB ASC 842 standard for lease accounting, organizations face significant changes including both new disclosures and specific requirements for how to report those disclosures. For instance, in the...
  The post Lease accounting disclosures: 6 tips for successful ASC 842 reporting first appeared on Visual Lease.]]>

  Under the FASB ASC 842 standard for lease accounting, organizations face significant changes including both new disclosures and specific requirements for how to report those disclosures.

  For instance, in the first year of ASC 842 adoption, public companies must provide the annual disclosures required by the new accounting standard in each quarterly report. That is, they must include the disclosures in their first, second and third quarter Form 10-Q filings. (See also tip #6 below.)

  Thinking ahead and planning for disclosure requirements is crucial for initial ASC 842 adoption as well as ongoing compliance. It helps to ensure that lease accounting and reporting are thorough and accurate.

  In this blog, we offer 6 tips on what to disclose in ASC 842 reporting. These tips can help you meet the new requirements and satisfy auditors, whether your organization is:

  • Preparing for compliance and for issuing your first financial statements under ASC 842
  • Post-ASC 842 adoption and looking for ways to improve the reporting process moving forward

  Tip #1: Disclose how you determined your lease discount rates.

  Are lease discount rates relevant to your financial reporting? If so, the ASC 842 standard requires you to disclose how you determined those rates, including any related assumptions and judgments.

  For most lessees, the discount rate is their incremental borrowing rate (IBR). However, providing a generic disclosure that just repeats the ASC 842 definition of IBR will not satisfy this disclosure requirement.

  Instead, you should provide specific information on how you determined the IBRs reflected in the measurement of your leases, including: 

  •     What inputs you used
  •     What adjustments you made to those inputs in estimating your discount rates
  •     Whether you took a portfolio approach, determining an IBR for a group of leases

  Tip #2: Determine the ROU asset carrying amount in your operating leases.

  Unless the value of a right-of-use (ROU) asset in an operating lease is impaired, you need to determine the carrying amount of the ROU asset from the date the lease started through the end of the lease term.

  You can do this using one of two methods:

  Method 1: Derive the carrying amount of the ROU asset from the carrying amount of the lease liability at the end of each reporting period as follows.

  

  Method 2: Calculate ROU asset amortization as the difference between the straight-line lease cost for the period (including amortization of initial direct costs) and the periodic accretion of the lease liability using the effective interest method as follows.

  

  Tip #3: Disclose if you chose to not separate lease and non-lease components.

  An ASC 842 practical expedient allows companies to save time by calculating the value of fixed lease payments without having to perform an allocation to the lease and non-lease components.

  However, if you choose to take advantage of this practical expedient and not separate lease components from non-lease components, you must also:

  • Disclose that you elected to apply this practical expedient
  • Disclose the class(es) of underlying assets for which you elected it — for example, perhaps you applied it to all your real estate leases but not your equipment leases

  Read more about this and other practical expedients in our blog ASC 842 Practical Expedients and Transition Requirements.

  Tip #4: Disclose variable lease costs and short-term lease costs separately.

  The lease accounting standard under ASC 842 requires that you disclose your variable lease costs and short-term lease costs separately rather than as a single amount.

  Where do variable short-term lease costs belong?

  Since it is not uncommon to have short-term leases that include variable payments, you might wonder: Should you disclose these costs along with other short-term lease costs? Or should you include them with variable lease costs?

  As a rule, you should disclose variable short-term lease costs with other short-term lease costs. However, since ASC 842 is not clear in this regard, disclosing variable short-term lease costs with variable lease costs would also be acceptable.

  Either way, be sure to disclose where you choose to include variable short-term lease amounts in your quantitative lease cost disclosures.

  What qualifies as a variable lease cost?

  It is important to disclose all amounts that meet the definition of variable lease costs. That is,  disclose not only costs related to the performance or use of the underlying asset (such as percentage rent or per-usage fees), but also any other variable payments not included in the measurement of the lease liability. For example:

  • Incremental rent above the amount included in the lease liability and paid during the year due to a change in the Consumer Price Index (CPI)
  • The portion of property taxes or insurance payments attributable to the lease component — or the entirety of those payments if you elected not to separate lease and non-lease components
  • The portion of common area maintenance (CAM) charges or other service payments attributable to the lease component — or the entirety of the payments if you did not separate lease and non-lease components

  Tip #5: Disclose the nature of your variable lease payments.

  The ASC 842 lease accounting standard also requires companies to disclose information about the nature of their leases. This greater level of detail allows auditors, stakeholders and other interested parties to better understand a company’s leasing strategy and how its future lease payment obligations may differ from the lease liabilities on the balance sheet.

  If your variable lease costs are relevant, and especially if they are a significant portion of your company’s total lease costs, you should provide detailed disclosures about those payment arrangements, including information such as:

  • Why you have a significant number of variable payments
  • The basis, terms and conditions you used to determine the variable lease payments
  • Expectations of, and the reasons for, variability in amounts owed from period to period

  Tip #6: Carry forward ASC 840 comparative disclosures as required.

  If your company has elected the effective date transition method for transitioning to ASC 842, you do not need to revise the financial statements for comparative periods presented before your ASC 842 adoption date, nor provide ASC 842 disclosures for periods before that date.

  However, this transition method does include some important new requirements for carrying over comparative disclosures from ASC 840.

  Namely, in your post-adoption financial statements, you must carry forward all the disclosures that were required under ASC 840 for comparative periods before the effective date. This includes the final disclosures of future operating and capital lease commitments prepared as of the last balance sheet to which ASC 840 applied.

  You must present the disclosures that you carry forward in each set of interim and annual financial statements  — for example, in your quarterly and annual reports — issued for the year of adoption.

  For accurate, consistent and thorough reporting…

  Keeping these disclosures and other ASC 842 lease accounting requirements in mind as you gather and abstract your lease data will help to ensure the accuracy, consistency and thoroughness of your financial reporting.

  Additionally, the use of a lease accounting solution such as Visual Lease will further help by providing a single centralized source for storing, tracking and managing lease data, with configurable tools for lease calculations and reporting, as well as integration to the balance sheet.

  To learn more about the lease disclosure requirements, read our blog 3 Things to Consider When Generating Lease Accounting Disclosure Reports.

  The post Lease accounting disclosures: 6 tips for successful ASC 842 reporting first appeared on Visual Lease.]]> https://visuallease.com/fasb-accounting-overview-for-corporate-real-estate/ Thu, 09 Sep 2021 12:00:33 +0000 https://visuallease.com/?p=1127 The upcoming FASB accounting changes are not only a challenge for corporate accounting teams, but also for the commercial real estate group. To get you up to speed, here’s an...
  The post FASB Accounting Overview for Corporate Real Estate first appeared on Visual Lease.]]>

  The upcoming FASB accounting changes are not only a challenge for corporate accounting teams, but also for the commercial real estate group. To get you up to speed, here’s an executive summary of the new lease accounting standards (both U.S. and international) with a focus on the business risks involved.

  FASB accounting: a primer for CRE executives

  When do the IFRS and FASB accounting changes take effect?

  Both the new lease standard from the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released their respective new leasing standards in the first quarter of 2016.

  The US standard, ASU 2016-02, is effective for public business entities for annual periods beginning after December 15, 2018. The International standard (IFRS 16) takes effect in January 2019.

  What’s changing and why?

  The essence of the two standards requires that leases are to be put on the balance sheet as “Right of Use” (ROU) assets, and corresponding liabilities. That’s a big change for commercial real estate accounting. And it’s not only accounting for real estate that’s changing: the new FASB accounting rules also impact equipment and asset leases.

  The purpose of the IFRS and FASB accounting change is to be provide greater transparency in a company’s leverage since leasing is in essence a form of financing.

  How are the IFRS and FASB accounting changes different?

  Perhaps the greatest difference between the US standard and the International standard is the question of finance leases versus operating leases.

  The FASB decided to maintain two methodologies, one for operating leases, and one accounting for financing or capital leases. The IASB opted to classify all leases as financing leases. The FASB argued that there was a need to differentiate between the two types of leases to maintain a level of simplicity since most leases wouldn’t meet the criteria for a capital lease.

  Under the new FASB accounting rules, the four criteria for a capital lease are:

  • The lease automatically transfers ownership of the property to the lessee by the end of the lease.
  • The lease contains a bargain purchase option.
  • The lease term equals 75% or more of the estimated economic life of the property.
  • The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair market value of the property.

  Conversely, the IASB opted to classify all leases as financing leases, again arguing for simplicity.

  Learn more: IFRS & FASB Changes: a Lease Accounting Quick Reference Guide

  IFRS and FASB accounting changes: Understanding the risks

  With the release of new leasing standards by both the FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) CRE executives face one of the most daunting challenges in recent memory that will impose considerable legal and operational risks on public companies.

  Missing the IFRS / FASB accounting compliance deadline

  Perhaps the biggest risk with the new leasing standards will be missing the effective dates. If you aren’t well along with the implementation process, you’re already late. The new standards require that public companies put all leases of more than one year on the balance sheet as “value in use” assets and corresponding liabilities. It’s been estimated that the new standards will result in over $1.2 Trillion in incremental assets and liabilities on worldwide balance sheets.

  The Financial Accounting Standards Board (FASB) new lease standard will take effect for fiscal years, and interim periods within those fiscal years, beginning December 15, 2018 primarily for public business entities. The effective date for the International Accounting Standards Board (IASB) will be January 1, 2019. Most commentators estimate that it will take at least a year or more to complete the transition to the new leasing standards.

  For companies with centralized real estate organizations and centralized lease data bases, implementation of the FASB accounting changes will be tedious but relatively straight forward. But many companies have their leases scattered through their divisions which could well extend the time to convert by several months, maybe years. Getting all lease data into one unified database will be the priority, and then updating your lease administration software to complete the necessary calculations will be the next step.

  Certain industries which primarily lease their operating assets will be challenged to meet the deadlines. This would include retailers with large portfolios of stores, airlines with vast fleets of leased aircraft, and shipping companies, with large fleets of leased water craft. With the explosion of cloud computing, IT assets have been growing exponentially, and most of these servers and main frames are leased.

  CRE managers will be well advised to coordinate closely with external auditors on the update and transition process. Failing to convert could result in a violation of the Sarbanes Oxley (SOX) regulations which could result in sizable fines, and possible prosecutions, with all the bad publicity that would come with an SEC violation.

  Learn more: Lease Portfolio Management: Policies & Procedures to Reduce Risk

  Lacking the resources and expertise to implement the FASB accounting changes

  Chances are you will not have sufficient manpower or expertise to collect the data you need to convert to the new FASB accounting standards. An immediate priority will be to assess staffing levels and recruit the necessary manpower to complete all tasks of conversion.

  It may make sense to contract with consulting firms that have the necessary expertise and manpower to get the job done. While more expensive, this approach assures that conversion meets deadlines with full compliance.

  Impact of the FASB accounting changes on loan covenants

  Other risks that will come with the new standards will be possible violations of loan covenants. By substantially increasing the liability side of the balance sheet, could affect allowable debt levels in various corporate financing contracts. Coordinating with your company’s key lenders will be a priority action item.

  What other changes can you expect as a result of the new FASB accounting standards?

  In one of my early blog posts in 2015, I characterized the coming leasing standards as a “Tsunami” in that the changes would sweep across corporate portfolios like a monstrous wave, causing havoc with corporate accounting, leasing strategy, and balance sheet reporting. Like any major change to rules and standards long embedded in corporate accounting, the impact to corporate leasing practices will be forever changed.

  Learn more: Corporate Real Estate Strategies and the New Lease Accounting Standards

  How these changes will affect real estate markets, corporate real estate ownership, leasing demand, and other related factors is up for speculation. One thing’s for sure. CRE managers will be held accountable for the successful transition to the new standards. With only months left, time is of essence.

  “>

  The post FASB Accounting Overview for Corporate Real Estate first appeared on Visual Lease.]]> https://visuallease.com/asc-842-10-changes-you-need-to-know-about-your-balance-sheet/ Wed, 08 Sep 2021 17:11:06 +0000 https://visuallease.com/?p=1993

  ASC 842 Lease Accounting Balance Sheet Examples
  

  The Federal Accounting and Standards Board (FASB) created the new lease accounting standard (ASC 842), which has raised questions about how balance sheets are affected. We’ve answered your top 10 questions about how ASC 842 will impact your balance sheet.

  What is the purpose of the FASB lease accounting changes?

  FASB ASC 842 increases disclosure and visibility into the leasing obligations of both public and private organizations.

  Prior to ASC 842, most leases were not included on the balance sheet. The new standard requires companies to report right-of-use (ROU) assets and liabilities for almost all leases. The changes make it easier for users of financial statements to see a company’s exposure to risk and the true financial position of the organization, and to make comparisons between organizations.

  Another important purpose of ASC 842 is to more closely align with the new international lease accounting standard (IFRS 16), especially around the definition of a lease.

  Are operating leases on the balance sheet?

  Under the ASC 840 standard, only accounting for capital leases were recorded on the balance sheet. Operating leases were off the balance sheet, and the impact was generally limited to deferred rent or prepaid rent. The only insight you had for future obligations was limited to the maturity analysis in the disclosure report.

  Under ASC 842, every lease (with the exception of short-term leases as defined below) must be represented on the balance with a liability and a ROU asset.

  Additionally, disclosure reports must include more qualitative and quantitative disclosures under 842, such as weighted average discount rate, weighted average remaining lease term, cash paid for amounts included in lease liabilities, and a more descriptive maturity analysis (which must be tied back to the balance sheet).

  How are ASC 842 short term leases and low value leases defined?

  Under ASC 842, a short-term lease is defined as a lease that has a term of 12 months or less at commencement, and the lease does not have a renewal option that the lessee is reasonably certain to exercise.

  Short-term leases do not need to be included on your balance sheet under ASC 842. However, you may recognize short-term lease payments on a straight-line basis over the lease term (similar to the way operating leases are recognized under ASC 840).

  This practical expedient for short-term leases must be elected at the asset class level. That means you can’t pick and choose leases to define as short term; you’ll need to define the entire asset class as part of your practical expedient.

  It’s also important to note that FASB has not defined a materiality threshold (where low value leases under a certain threshold may be excluded). IFRS (the international standard) has defined a low value lease threshold under which leases don’t have to be capitalized on the balance sheet, but FASB has not included this practical expedient to date. We recommend discussing the issue with your auditors to determine if they will allow you to use a materiality threshold.

  How are capital leases reported on the balance sheet under ASC 842?

  A finance lease (previously called a capital lease in ASC 840)  is a lease that’s effectively a purchase arrangement.

  ASC 840 capital leases and ASC 842 finance leases are substantially the same. Both are capitalized on the balance sheet, and the method for doing so is similar under both standards.

  ASC 842 Lease Accounting Example

  Here’s an example of a balance sheet for 840 and a balance sheet for 842. Both represent the same capital/finance lease data.

  

  As you can see, only the terminology has changed. Total assets and liabilities remained the same for the reporting period. If we were to look at the income statement, the amortization and interest expense are calculated the same way in ASC 842 as they were in ASC 840. So there would be no impact to the P&L in this example.

  When transitioning your existing leases to the new standard, you will need to reclassify Capital Lease Asset and Capital Lease Liability (840) to ROU Asset and Lease Liability (842). Any prepaid rents, lease incentives, and initial direct costs are rolled up into the ROU asset. (Refer to question 8 for more details about calculating the ROU asset).

  How are operating leases reported on the balance sheet under ASC 842

  In an operating lease, the lessee obtains control over the use of the underlying asset without ownership. (Refer to question 9 for information about how to classify a lease as either an operating lease or a finance lease for ASC 842 reporting.)

  Under ASC 840, operating leases were unrecorded liabilities. Balance sheet impact for operating leases was limited to prepaid or deferred rent.

  Accounting for operating leases represents the biggest change in ASC 842, and it will materially impact your balance sheet going forward.

  All operating leases (except for short-term leases) are now capitalized on the balance sheet for FASB 842 the same way we previously would record capital leases under ASC 840, and now finance leases under ASC 842. They are recorded on the balance sheet as a ROU asset and lease liability.

  Operating lease expense is still straight-lined over the lease term:

  • Operating lease liability is accounted for the same way as a finance lease, using an amortized cost basis.
  • Amortization of the ROU asset is calculated as the difference between straight line rent and interest expense for the period.

  These two expenses added together give you the total lease expense to book on your P&L.

  Operating Leases on the Balance Sheet Example

  Here’s an example of a balance sheet for 840 and a balance sheet for 842. Both represent the same operating lease data.

  

  In this example, we have included only a single operating lease. It’s a real estate lease with an initial lease term of January 1, 2018 to December 31, 2025. The rent starts out at $27,000 per month, and increases 2% each year until it gets to the final amount of $31,014.51. For the sake of simplicity, we do not have any prepaid rents, initial direct costs, or lease incentives on this lease.

  As you can see, under ASC 840, we have a very small deferred rent balance of $23,610 as of 12/31/18. Our Total Assets are only about $9.8 million and our Total Liabilities are only $5.5 million. Realistically, we have a future cash obligation on this lease of almost $2.5 million dollars, but the only way we would see that under 840 is if we dug into the disclosure report and looked at the maturity analysis. And remember, even the maturity analysis is not a fair representation of our actual liability, because of the time value of money.

  Looking at the same example under ASC 842 (using a 5% discount rate), you can see a very different impact on the balance sheet.

  To provide an apples-to-apples comparison with 840, we are capitalizing this lease on 1/1/18 and not transitioning. Our net present value of payments, which is the starting point for your lease liability, is almost $2.3 million.

  As of 12/31/18, you can see that we have a total right of use asset of $2,046,000, and a total lease liability of $2,069,000 (including both short term and long term lease liability). Our Total Assets for the year went from about $9.8 million to $11.8 million. Our Total Liabilities went from $5.5 million to about $7.6 million.

  For this example, there’s no change to the P&L. Our straight line rent expense under ASC 840 is $347,610 for 2018. Under ASC 842, the total lease expense is the same, but $239,000 is related to amortization, and $108,000 is related to interest expense. For 2018, we’ve made $324,000 in payments, but only reduced the liability balance by $216,000.

  Keep in mind that the impact on this balance sheet represents only a single 5-year real estate lease. When you extrapolate this out to an entire property portfolio, and also capitalize any equipment leases you may have, the balance sheet impact will be much, much larger.

  How has lease classification changed under ASC 842?

  Upon adoption of ASC 842, almost all leases will be capitalized on the balance sheet. However, you will still need to classify them as either finance leases (previously called capital leases) or as operating leases using the lease classification test so that you can apply the correct accounting treatment.

  Lease Classification Test

  The lease classification test questions determine whether the leased asset is essentially owned as well as controlled by the lessee. If so, the lease must be classified as a finance lease. If the lessor retains ownership, the lease must be classified as an operating lease. So if the lease is non-cancelable and you answer YES to one or more of the lease classification test questions, then the lease is classified as a finance lease.

  These four lease classification test questions remain the same as ASC 840:

  Transfer of title test: By the end of the lease term, will ownership of the asset transfer from the lessor to the lessee?

  Bargain purchase option test: Is there a purchase option in the lease that the lessee is reasonably certain to exercise?

  Lease term test: Does the lease term encompass the major part of the remaining economic life of the underlying asset?

  Present value test:  Is the present value of lease payments plus RVG (residual value guaranteed by the lessor) greater than or equal to substantially all of the fair market value of the asset?

  A fifth test question has been added in ASC 842:

  Alternative use test: Is the asset so specialized that it is only useful to the lessee? This new test question means that after the asset is returned to the lessor, will it have no value to anyone else without a major overhaul by the lessor?

  You may have noticed that the “bright lines” for lease classification tests have been removed in ASC 842. Previously they indicated what percentage constitutes a “major part” of economic life (75%) or “substantially all” of the fair market value (90%). These are now considered guidelines under the new standard and you can elect what percentage you choose to use.

  In the past, it was easy to manipulate this number and classify more leases as operating leases (which did not need to be capitalized). Under ASC 842, all operating leases are recorded on the balance sheet anyway, so there’s no reason to do this.

  How is lease liability calculated?

  Lease liability is calculated as the Present Value of minimum future lease payments. You will need to make assumptions about the probable amounts owed under residual value guarantee, and also whether you are reasonably certain to exercise renewal options, termination options, and purchase options, because exercising these options impacts your minimum future lease payments.

  The discount rate to use for the calculation is either the rate implicit in the lease (if known), or your organization’s incremental borrowing rate.

  It’s important to remember that the assumptions you make at the inception of the lease (about whether or not you will exercise options) can and often do change over time. When those changes happen during the term of a lease, you will need to remeasure both your lease liability and your ROU asset. Remeasurements may also be needed due to abandonments, asset impairments and other causes.

  How to calculate ROU?

  The ROU asset is calculated as the lease liability plus or minus certain adjustments, which include:

  + Initial Direct Costs

  + Prepaid Lease Payments

  – Lessor Incentives

  – Accrued Rent

  – ASC 420 Liability at Transition Date

  All of these assets and liabilities that adjust the ROU asset are now reclassed from the balance sheet and included as one number to show the total leased asset.

  What is an embedded lease?

  Accounting for embedded leases represents one of the trickier aspects of implementing the new ASC 842 standard. Simply put, embedded leases are components within contracts that entail the use of a particular asset, where the user has control over that asset. A lease may exist within a contract even though the contract may not contain the word “lease.”

  For example, embedded leases are commonly found in IT service contracts, where a vendor may provide specific equipment (such as on site servers). They are also frequently found in supply contracts, dedicated manufacturing capacity contracts, and advertising agreements (such as use of billboards).

  You may have done some embedded leases accounting in the past, and the process has not changed much in ASC 842. However, this is now a significant issue because embedded leases have a much bigger impact on your income statement under the new rules.

  Under ASC 840, operating leases were off balance sheet, so any embedded leases had an immaterial impact to the income statement since the expense was probably being straight lined anyway.

  ASC 842 requires ALL leases to be capitalized on the balance sheet, including all embedded leases. That means you will need to examine your contracts to find any embedded leases within them, and you will need to separate the lease components (for use of assets within a contract) from non-lease components (payments for the service) within these contracts.

  This is a complex and time-consuming task, so be sure to allocate the necessary time and resources to get it done. It also involves making judgments, so it’s imperative that people doing this work are experienced with leases and understand the standard. Also, you must document your policies and procedures to support your decisions and to provide justification for future audits.

  How to identify an embedded lease

  As you review the content of your existing contracts, ask these questions to decide (ideally with the guidance of your advisory partners) if they contain embedded leases:

  1. Does the agreement entail the use of one or more specific assets?

  If no assets are specified, then no lease can exist within the contract. However, if an asset is explicitly or implicitly identified within an agreement, then a lease may exist.

  • “Explicit” means the asset is identified on the contract, such as by a serial number or VIN number.
  • “Implicit” means use of a specific asset is implied even if not explicit, such as when the supplier can’t fulfill the contract with any other asset for legal or economic reasons.

  For example, power purchase agreements may include the use of a specified plant. Oil and gas drilling contracts may specify the use of equipment and pipelines.

  2. Is the asset physically distinct?

  For a lease to exist, a specified asset must be a physically distinct object. Something intangible, such as exploration rights, cannot be considered an asset. A biological entity also cannot be considered an asset under 842.

  3. Does the supplier have substantive substitute rights for the asset?

  If your agreement does specify the use of an asset, can the supplier easily substitute a different asset, and would the supplier benefit from doing so?

  • If the supplier can substitute the asset and benefit economically by exercising that right, a lease may not exist in the contract.

  Here’s an example: If a supplier uses trucks to ship materials and has the ability to substitute different trucks (with a smaller or larger capacity as needed), then there is no lease.

  • If the supplier can’t substitute the asset and would not benefit from doing so, then the use of that asset may be considered a lease.

  For example: A managed services contract might include office copiers. It’s not likely that the supplier can easily swap out one machine for another. And it’s also not likely that the supplier would benefit financially from doing that even if they could. In that case, the use of the office copier would constitute a lease.

  4. Does the customer obtain the economic benefit from using the asset?

  If you as the customer get substantially all of the economic benefit from the use of the asset, then your use of that asset may be considered a lease.

  Common practice is to interpret “substantially all” to mean greater than or equal to 90% of the economic benefits of the asset.

  • Can the customer direct use of the asset?
    If you have physical control and decision making authority over when and how the asset is used throughout the period of the lease, then a lease may be present.

   

   

   

   

  Read More Content About ASC 842

  

  ASC 842 Compliance Software

  

  ASC 842 Summary

  

  Leasehold Improvements for ASC 842

  The post Balance Sheet Changes for ASC 842 [2021] first appeared on Visual Lease.]]> https://visuallease.com/lease-standard-update-unintended-consequences/ Wed, 08 Sep 2021 12:15:34 +0000 https://visuallease.com/?p=569

  Leasing is perhaps one of the most pervasive forms of financing in the global economy, yet traditional accounting standards remain essentially silent on the off- balance sheet treatment of leasing. This has now changed with the release of new accounting standards which essentially require all leases of one year or more in term to be placed on the balance sheet assets (value in use) and corresponding liabilities.

  FASB published the new standard in February 2016, stating that it will be effective for public companies starting at the fiscal year 2019, but requires look back  figures for three years: 2017, 2018, and 2019. A recent IBM study estimated that this accounting change would add potentially $1.35 trillion to company balance sheets in the form of assets (right of use) and liabilities. Clearly this enormous increment to a company’s capital structure will have both expected and unexpected consequences. It’s uncertain how these changes will affect rental markets, leasing strategies, and corporate capital structures. In reviewing several hundred corporate responses to the exposure drafts in 2013, most respondents cited the incremental cost of implementation and complexity associated with the implementation of the standards. In its final form, the two standards differ in one major way and that is, the IASB standard treats all leases regardless of size as capital leases, whereas the FASB differentiates between capital leases (interest expense and depreciation) and operating leases (straight line amortization).

  Here are a few of the unintended consequences which may transpire over time.

  Leasing demand: There will be some measure of reduction in leasing demand, which will have the effect of creating property surpluses in the near term. Property owners will be compelled to lower market rental rates to stimulate demand. It’s possible that this disruption to property markets could in some cases lead to failures and even bankruptcies. Loan covenants on commercial property could be stressed by the fall off in the rental market. It’s possible that we’ll witness real estate company mergers and consolidations to pick up the slack in the rental markets. We may also see a disproportionate growth in corporate development and a parallel decline in sale/leaseback transactions, again an unintentional response to leasing bias.

  • Shorter term leases: Lessees will opt for shorter term leases as a means to mitigate the balance sheet effect of their lease commitments. Lessors will compete on asking rental rates and other terms that will reduce the net present value of the lessees’ rental stream. Another response will be the advent of various leasing options that will provide various methods to increase leasing flexibility without necessarily increasing the over-all asset value of the lease.
  • There will be a myriad of techniques to move some portion of rental to alternative non-balance sheet accounts, as a way to respond to tenant demand for lower rental commitments. For example, tenants may opt to pay for services that historically have been part of the base rent such as insurance, property tax, etc. This shift will also affect escalations, such as shifting away from such traditional formulas as porter’s wage escalations, or CPI formulas.
  • Another unintended consequence may be the emergence of various forms of barter. A law firm, for example, may barter its legal services for lower rental in its offices. A retailer may offer special discounts on its merchandise such as building supplies in exchange for lower rent. Architects may enter into a barter deal with its landlord to exchange design services for lower rent.
  • Because of the differences between the IASB and FASB standard relative to Type A versus Type B leases, US companies will place a higher premium on property ownership, particularly in the United Kingdom and Continental Europe. Since all leases internationally will be classified as capital leases (Type A) some companies will opt to own commercial properties (as investments) as opposed to forgo asset appreciation in a capital lease structure. This possibility may shift demand for commercial properties more toward corporate owners and away from institutional investors.
  • Brokerage Fees: Because of the demand for shorter term leases, it’s possible, maybe inevitable, that commercial brokerage fees will, in the aggregate be lower, over time. To what extent this possibility will impact real estate company profitability is an open question. Certainly the brokerage community will see a reduction in their fee income, and may well lead to an eventual reduction in brokers. Or we may see another form of brokerage compensation that is decoupled from total rental as a way to mitigate the effect of brokerage fee as a function of total rental.
  • Stock market effects: This accounting change will restructure company balance sheets, and have a net effect of reducing stock holder equity and thus share price. This will be particularly true of corporate entities which have leased large portfolios of properties such as retailers, tech companies with large portfolios of leased equipment, and airlines who typically lease their fleets. How this impact on corporate equity will translate into devaluation of stock value is uncertain, but a possibility. This effect will be heightened for the retail and airline industries which rely heavily on leasing to finance their assets.

  The coming change in lease accounting standards will create significant uncertainty in property markets as the standard is implemented. And uncertainty creates both opportunities and risks. In essence the accounting standards boards will have turned building tenants into property owners. How this change will impact property markets relative to demand, supply, pricing, and lending is fraught with uncertainty. One thing is for sure: there will be  increased demand for experienced corporate real estate professionals who can help their companies transition to the new world of balance sheet transparency.

   

   

  The post Lease Standard Update – Unintended Consequences? first appeared on Visual Lease.]]> https://visuallease.com/asc-842-balance-sheet-changes-a-quick-reference/ Wed, 08 Sep 2021 12:12:27 +0000 https://visuallease.com/?p=1945   Are you beginning to plan for your transition to ASC 842? Learn about the biggest ASC 842 balance sheet changes, the important implications of the changes, and get access...
  The post ASC 842 Balance Sheet Changes: A Quick Reference first appeared on Visual Lease.]]>

   

  Are you beginning to plan for your transition to ASC 842? Learn about the biggest ASC 842 balance sheet changes, the important implications of the changes, and get access to a helpful resource that explains the details and the transition process.

  WHAT’S NEW in ASC 842: balance sheet changes

  Here’s an overview of what has changed under the new standard, and how the ASC 842 balance sheet changes will impact your financial reporting.

  Most leases are now included on the balance sheet.

  Prior to ASC 842, only capital leases (leases that are essentially purchase agreements) were recorded on the balance sheet. 

  Under the new standard, companies must report right-of-use (ROU) assets and liabilities for almost all leases (including operating leases), with the exception of short term leases with terms of 12 months or less. That means not only high-value real estate leases, but also leases for IT and office equipment, vehicles, construction equipment, and other leased assets. 

  This is the biggest change in ASC 842, and it’s why the transition will be a major project for most companies. You will need to find, extract, and centralize all your lease data so you can add assets and liabilities to the balance sheet.

  Leases have a much larger impact.

  For any firm with more than a few leases, the total of all leases that must be reported under ASC 842 represents a significant value that was not previously visible on your balance sheet. When you add that value to your total assets and liabilities, the overall picture will look very different than it did in the past.

  That’s one reason it’s important to start your transition well in advance. Your financial leadership will want to understand the impact the ASC 842 balance sheet changes have on your company’s financial statements and make decisions accordingly.

  Embedded leases must be reported.

  To complicate things further, it’s not only property and equipment lease contracts that you’ll need to include on the balance sheet. You will also need to report on embedded leases, which are components within contracts that entail the use of a particular asset, where the user has control over that asset. 

  A lease may exist within a contract even though the contract may not contain the word “lease.”

  For example, many service contracts include assets that are supplied by the vendor as part of the service. 

  Examining your contracts and identifying embedded leases can be a complex and time consuming task, so this new requirement is another good reason to get started on your transition sooner rather than later.

  Revised lease type terminology.

  FASB has adjusted the terminology for leases that represent a purchase agreement, formerly known as capital leases. In the ASC 842 standard, these leases are now called finance leases. The treatment of finance leases under 842 is essentially the same as treatment for capital leases under the previous standard.

  Revised lease classification test.

  A fifth lease classification question has been added in ASC 842, as part of the test to determine whether a lease is a finance lease or an operating lease:

  Alternative use test: Is the asset so specialized that it is only useful to the lessee? 

  This new test question means that after the asset is returned to the lessor, will it have no value to anyone else without a major overhaul by the lessor? 

  As in the previous standard, if you answer YES to one or more of the lease classification questions, the lease must be classified as a finance lease.

  In addition, the “bright lines” for lease classification tests have been removed in ASC 842. Previously, a “major part” of economic life was defined as 75%, and “substantially all” of the fair market value was defined as 90%. In ASC 842, these percentages are now considered guidelines under the new standard and you can elect what percentage you choose to use.

  New treatment of operating leases on the balance sheet.

  In the past, operating leases were unrecorded liabilities, with the balance sheet only including prepaid or deferred rent. Adding operating leases is the biggest of the ASC 842 balance sheet changes.

  Under the new FASB standard, operating leases are capitalized on the balance sheet in a similar way we previously would record capital leases under ASC 840: by recording an asset and a liability. Liability is accounted for using an amortized cost basis. Amortization of the ROU asset is calculated as the difference between straight line rent and interest expense for the period.

  These two expenses added together give you the total lease expense to book on your P&L.

  New requirements for disclosure reports.

  Under ASC 842, disclosure reports must include more qualitative and quantitative details, including:

  • weighted average discount rate
  • weighted average remaining lease term
  • cash paid for amounts included in lease liabilities
  • a more descriptive maturity analysis (which must be tied back to the balance sheet)

   

  The post ASC 842 Balance Sheet Changes: A Quick Reference first appeared on Visual Lease.]]> https://visuallease.com/capital-lease-accounting-for-asc-840-and-asc-842/ Wed, 08 Sep 2021 11:48:10 +0000 https://visuallease.com/?p=2982 Table of Contents What is Capital Lease Accounting? What is a Capital Lease? Main Differences Between a Capital Lease vs. Operating Lease What are the 4 Criteria for a Capital...
  The post Capital lease accounting for ASC 840 and ASC 842 first appeared on Visual Lease.]]> Table of Contents
  • What is Capital Lease Accounting?
  • What is a Capital Lease?
  • Main Differences Between a Capital Lease vs. Operating Lease
  • What are the 4 Criteria for a Capital Lease under ASC 842?
  • What is the Difference Between a Capital Lease vs. Finance Lease?
  • How is a Capital Lease Recorded on the Balance Sheet?
  • Capital Lease Journal Entry Example
  • How Does the Transition to ASC 842 Affect Businesses?

  What is Capital Lease Accounting?

  Capital lease accounting refers to the set of financial reporting rules and procedures used to record and disclose the financial implications of a capital lease arrangement in a company’s financial statements.

  A capital lease is a contract allowing a renter to use an asset temporarily. This lease shares the same economic characteristics of asset ownership in accounting, as the lease requires book assets and liabilities to cover the lease should the lease contract meet specific criteria.

  A lessee must use the capital lease accounting method in their new lease accounting journal entries and subsequent records if the rent contract entered into satisfies any of the four criteria set by the Financial Accounting Standards Board (FASB). Here are the basics of the capital lease accounting method.

  What is a Capital Lease?

  A capital lease or finance lease is a contract between the business acting as the lessee, and the lessor. The two parties agree that the lessor’s property will be rented out by the business in exchange for periodic rental payments. The business can never claim ownership of the asset and is required to return the said asset to the lessor after the rental period is over.

  Under the capital lease accounting, the lessor transfers the rights and risks of owning a rental asset to the business renting the property. Thus, the asset is treated like it has been bought and paid for by a loan. The asset will then be depreciated over the rental period.

  What are the Differences Between a Capital Lease vs. Operating Lease?

  An operating lease differs from a capital lease because each follows a different accounting treatment and structure. An operating lease is a contract allowing the renter to use an asset but it does not offer any ownership rights to the lessee.

  Operating lease accounting is a one-off recording in the balance sheets. This means that a rented asset and related liabilities of future payments are excluded from the company’s balance sheet so that the ratio of debt to equity is kept low. Traditionally, operating leases helped American companies keep billions of assets and liabilities from being included in their balance sheets.

  A lease must meet specific requirements of the generally accepted accounting practices or GAAP to be recorded as an operating lease and exempted from being classified as a capital lease. Firms must assess their contracts using the “bright line” test to determine whether their rental contracts should be booked as operating vs. capital leases.

  What are the 4 Criteria for a Capital Lease under ASC 842?

  According to ASC 842, there are four tests to determine whether a lease is an operating lease or capital lease. An assessment must be conducted upon signing of the rental contract. Below are the four tests:

  1. Will the ownership or title of the asset be transferred to the renter when the lease term ends?
  2. Is a bargain purchase option available?
  3. Is the lease life equal to or greater than 75 percent of the remaining asset’s economic life?
  4. Is the present value, or PV, of the lease payments equal to or greater than 90 percent of the asset’s fair market value?

  A lease is classified as an operating lease if none of the above conditions are met. Otherwise, it can be classified as a capital lease. In some cases, the Internal Revenue Service has reclassified an operating lease as a capital lease, which has resulted in an increase in a firm’s tax liability and taxable income.

  What is the Difference Between a Capital Lease vs. Finance Lease?

  A capital lease, according to the ASC 842, is now referred to as a finance lease. This is because a large number of rental contracts are now capitalized except for those with a lease term of 12 months or less. The nomenclature capital lease is no longer appropriate, which is why the correct term to use is the finance lease.

  Below is an excerpt from ASC 842, defining what a lease is:

  Under the lessee accounting model in previous GAAP, the critical determination was whether a lease was a capital lease or an operating lease because lease assets and lease liabilities were recognized only for capital leases. Under Topic 842, the critical determination is whether a contract is or contains a lease because lessees are required to recognize lease assets and lease liabilities for all leases— finance and operating—other than short-term leases (that is, if the entity elects the short-term lease recognition and measurement exemption).

  How is a Capital Lease Recorded on the Balance Sheet?

  Given the capital lease’s nature of being a financing arrangement, businesses must break down the periodic rental payments into interest expense according to the firm’s applicable depreciation expense and interest rate.

  Capital Lease Journal Entry Example

  For this capital lease accounting example, say the company makes $1000 in monthly rental payments with an estimated interest of $200. The following should then be entered in the balance sheets:

  $1000 credit to the cash account

  $200 debit to the interest account

  $800 debit to the capital lease liability account

  It is important for businesses to depreciate the leased asset to factor in the useful life and salvage value of the asset. In our example, let us assume that the asset still has a useful life of 10 years and zero salvage value using the straight-line basis depreciation treatment. The firm has to record an $833 debit entry to the depreciation expense account monthly and a credit recorded to the accumulated depreciation account. Once the leased asset has been disposed of, then the fixed asset must be credited while the accumulated depreciation account should be debited to reflect the remaining balances.

  How Does the Transition to ASC 842 Affect Businesses?

  There are changes in lease accounting with the transition from ASC 840 to ASC 842. For example, there is another criterion in determining whether the leased asset should be treated as a capital lease or operating lease. It then becomes imperative for businesses to select a lease accounting software with features reflecting these changes in the GAAP such as our software at Visual Lease.

  Let our experts help you today.

  
  

  The post Capital lease accounting for ASC 840 and ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-is-proud-to-be-named-high-performer-and-momentum-leader-by-g2/ Thu, 05 Aug 2021 13:09:33 +0000 https://visuallease.com/?p=6066
  
  This summer, Visual Lease was named High Performer and Momentum Leader by G2, a business software and services review website. The High Performer award was based on Visual Lease’s high levels of customer satisfaction and ratings from active users. The Momentum Leader award was based on a composite score that combines a product’s growth indicators with customer satisfaction ratings.
   
  
  We are ecstatic to be named among the best of the best. Real reviews from real customers are what we use to enhance and improve our product, and they also help us gain insight into new problems we can solve along the way.
  Here’s what customers are saying about Visual Lease on G2:

  

  Excellent customer service

  

  “They provide excellent customer service and work to help you get the most out of the platform.”
  

  - Administrator in Medical Devices

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  “I like VL’s willingness to work with us. Whether it is a small change to the database or a request for additional services. VL’s customer service is GREAT!!”
  

  - Administrator in Medical Practice

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  “The functionality is user-friendly, and the customer service is quick and reliable.”
  

  - Administrator in Hospital & Health Care

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  User-friendly functionality

  

  “We looked at multiple different products before selecting Visual Lease. It has the most complete package to support both lease administration and lease accounting.”

  - VP of Real Estate & Facilities

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  “User-friendly interface and a powerful reporting tool.”

  - Senior Financial Compliance Specialist

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  “I like the ease-of-use best. It is a modern online tool and most things come intuitively. You have transparent data as well as reports available to gain a quick overview of leases as well as access data very quickly.”

  - Executive Sponsor in Automotive

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  “Visual Lease is easy to navigate and has a lot [more] behind-the-scenes adaptability than most lease softwares that I have seen.”

  - Administrator in Automotive

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  Solutions-driven product

  
  “Helps to optimize internal processes to work smarter with your team.”
  - Global Workplace Lease Administrator
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  “The reporting feature is super helpful for our accounting team.”
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  “Very user friendly and helpful for audits.”
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  “Provides an efficient process for managing leases and calculating accounting journal entries.”
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  The post Visual Lease is proud to be named High Performer and Momentum Leader by G2 first appeared on Visual Lease.]]> https://visuallease.com/the-benefits-and-business-impact-of-lease-optimization/ Fri, 25 Jun 2021 18:28:24 +0000 https://visuallease.com/?p=5867 There is power within your lease portfolio. Over the last year, public and private businesses have taken a closer look at their leases – and experienced the downstream benefits of...
  The post The benefits and business impact of lease optimization first appeared on Visual Lease.]]>

  There is power within your lease portfolio. Over the last year, public and private businesses have taken a closer look at their leases – and experienced the downstream benefits of lease optimization. Businesses who must comply with the new lease accounting standards (e.g., FASB ASC 842) are now examining their leases with a higher level of scrutiny than ever before. Additionally, over the last year, companies looked to their leases to reduce the financial impact of COVID-19. In return, these businesses have experienced operational benefits associated with lease optimization.

  What is lease optimization?

  Optimizing your lease portfolio means:

  1. Having a controlled inventory of all lease documentation that is updated to account for all changes and modifications.
  2. The ability to capture, monitor and act on all critical lease dates, including end of-term options.
  3. Ensuring changes in lease terms are reflected in payment schedules and lease accounting disclosure reports.
  4. Conducting regular audits of your leases and the underlying assets by taking stock of your portfolio and identifying gaps and opportunities.

  Lease optimization allows your business to uncover savings, streamline lease accounting compliance and accommodate pivotal business needs with agility.

  Identify cost-saving opportunities

  Over the last year, businesses looking to cut excess business expenses were increasingly mindful of their leases, given leases are the second largest business expense besides payroll. Lease optimization helps organizations identify areas of their leases where they are overspending – and save money through visibility into that data.

  Real customer lease optimization examples

  Here are some examples of how Visual Lease has helped hundreds of customers save money through lease optimization. Before partnering with us:

  • A large manufacturing company lost $105k because they did not realize that their lessor was continuing to bill expenses for surrendered property.
  • One of the largest insurance companies in the US lost $185k because they didn’t realize their landlord needed to offset operating expense increases against tax decreases.
  • A national bank lost $500k because the tenant forgot to request reimbursement for tenant improvements from the landlord.
  • A large tech company lost $210k because the tenant was not aware that tax abatements were not being added back to the base tax amount.

  These are examples that with the right information, perspective and tools in hand, lease optimization can be leveraged to materially improve business processes and generate savings in a previously undermanaged area of an organization.

  Capture modifications and adjustments that impact lease accounting compliance

  Leases change – and adjustments need to be tracked and evaluated under the new lease accounting standards (ASC 842, IFRS 16, GASB 87).

  Determining whether a modification has taken place can be operationally challenging, particularly for companies with large lease portfolios or for organizations that do not have the systems and processes in place to properly handle and account for these events. This analysis is complicated and will most likely require a dedicated team and technology to ensure attention to detail.

  That said, this is THE perfect time for you to take the extra steps towards optimizing your lease portfolio.

  You need to feel confident throughout every stage of the lease accounting compliance journey:

  • Day 1 – Compliance (centralizing leases and producing accurate reports)
  • Day 2 – Sustainable Auditability (implementing processes and controls)
  • Day 3 – Optimization (revisiting and bridging gaps)

  Accommodate business needs with agility

  Another positive of lease optimization is that it enables your business to pivot and identify emerging lease needs as your organization grows – or vice versa. Having the ability to access your leases in one centralized location – and report on your portfolio in any way helps you to identify the most effective way to scale your lease portfolio to meet your needs.

  The post The benefits and business impact of lease optimization first appeared on Visual Lease.]]> https://visuallease.com/private-market-prepares-to-adopt-new-lease-accounting-rules-lessons-learned-from-public-companies/ Thu, 17 Jun 2021 18:59:43 +0000 https://visuallease.com/?p=5847 This article originally appeared here in Forbes. As a result of Covid-19 and the changing landscape related to leases, private companies have received more time to prepare for and adopt...
  The post Private market prepares to adopt new lease accounting rules: Lessons learned from public companies first appeared on Visual Lease.]]>

  This article originally appeared here in Forbes.

  As a result of Covid-19 and the changing landscape related to leases, private companies have received more time to prepare for and adopt the new lease accounting standards in their financial reporting. Last year, the Financial Accounting Standards Board (FASB) further delayed the deadline for private companies to comply with the lease accounting standard ASC 842, which brings most of a company’s operating leases onto its balance sheet. This delay has given private companies nearly two additional years to comply with the new lease accounting standard. Because public companies have already gone through this process, there are many lessons that can be derived from their journey to help private companies as they move through their own adoption.

  Perhaps the biggest lesson learned from public companies, which we’ve seen through our clients’ experiences, is that adopting the new lease accounting standard takes time, can be quite complex and results in a resource-consuming process, particularly if there is a lack of cross-departmental collaboration. With the ASC 842 deadline for private companies looming, there are several things private organizations can do to set themselves up for success.

  Know What Lease Data To Gather And Where To Get It

  Public companies learned that gathering and validating data was the most challenging part of the lease accounting compliance journey. Companies with large, diverse lease portfolios found lease contracts — and thus the data within those documents — can be scattered across any number of separate sources. Not only is it tedious to gather contracts and relevant data, but it’s also easy to overlook required information if the individuals abstracting the data don’t have an informed sense of what is required for compliance. Failure to properly capture all the relevant data elements can ultimately diminish the value of a company’s financial reporting. Due to this important — and heavy — lift, and despite the deadline delay, getting an early start is key to a private company’s successful adoption.

  It’s worth noting that not all required data elements for effective lease accounting compliance will be found within an organization’s lease agreements. In some cases, only about half of the data will be found within contracts, while the remainder will be contained in other sources and require some level of judgment to establish.

  When private companies begin down the road to lease accounting compliance, they should first reflect on what the required data is and where it can be found within their organization. These answers can be overwhelming, but in this case, knowledge is power. This is because there can be as many as 70 distinct data elements, such as lease terms, payment schedules, end-of-term options and incentives, that need to be identified and captured to be compliant with the lease accounting standards. To properly collect, organize and analyze all the required data, private companies should get ahead of the process and start to prepare now.

  Use A Centralized Data Repository

  Another lesson learned from public companies is the importance of a central lease document and data repository. A 2016 survey by PwC found that 39% of companies manage their lease agreements and related accounting in a decentralized manner. While this approach can work for some, it’s time-consuming and can increase the chance of human error during the data collection process. Public companies that had an organized centralized lease portfolio learned that it saved them time on gathering and analyzing required information, which ultimately saved them money in the long run.

  When setting up a centralized lease portfolio, public companies were able to streamline and optimize global reporting processes and track lease data in real time, which has proven benefits for lease accounting compliance. By having all of the necessary lease data at their fingertips, these organizations experienced a faster, more efficient lease compliance process while also uncovering cost savings including overpayments, unreceived lease incentives and reduced full-time equivalent costs, among others. Not to mention, centralizing leases can be instrumental in supporting a company’s audit process.

  Put Dedicated Teams In Place

  Public companies have also seen the value of having the right people in place:

  • Cross-departmental collaboration: Working with other internal teams on data collection creates visibility across an organization, streamlining the process and positioning the accounting team as a stronger partner to their business.
  • IT assistance: When opting to leverage a centralized data repository or any other dedicated technology, it is critical to enlist one’s IT department from the outset of the project to ensure a smooth implementation, particularly as it relates to the eventual integration with other systems such as an ERP.
  • Dedicated players: Bringing in experienced lease accounting, project management and other expert professionals — whether they’re in-house or outside service providers — can minimize the impact on a company’s other resources.

  While every organization’s lease accounting compliance journey is different, many public companies discovered that some of the most daunting tasks with the new leasing standards were only tangentially related to accounting. Rather, the most significant challenges were in the preparation process. Once private companies get their leases in order and dedicate the time and resources required, they are positioned to better achieve compliance and drive a positive impact on their business’s financial reporting and compliance.

  The post Private market prepares to adopt new lease accounting rules: Lessons learned from public companies first appeared on Visual Lease.]]> https://visuallease.com/identifying-trends-and-forging-ahead-the-pandemics-impact-on-the-commercial-real-estate-industry/ Thu, 03 Jun 2021 17:21:48 +0000 https://visuallease.com/?p=5800 This article originally appeared here in Forbes. In 2020, many companies were forced to make tough decisions regarding their leased commercial spaces. From office closures to consolidations and deferrals, many...
  The post Identifying trends and forging ahead: The pandemic’s impact on the commercial real estate industry first appeared on Visual Lease.]]>

  This article originally appeared here in Forbes.

  In 2020, many companies were forced to make tough decisions regarding their leased commercial spaces. From office closures to consolidations and deferrals, many of these decisions will have long-term impacts beyond the pandemic. To survive and thrive in today’s new norm, these same companies now need to evaluate how these decisions will continue to affect the leasing landscape, and what that means for their future finances and operations.  

  Lease Market Considerations for 2021 

  Covid-19 had a devastating effect on the real estate market in 2020. As organizations continue to adapt to remote work environments, the trickle-down effects will likely play out over the next few years. Unlike the economic downturn in 2008, the commercial real estate market was in a strong position at the start of 2020 — in fact, it was predicted to grow. However, as tenants struggled to meet their rent obligations, and tenant-landlord tensions and lawsuits ensued, the market quickly took a downward spiral. 

  Despite this negative trend, several bright spots signal recovery within commercial real estate. We surveyed several hundred companies across retail, manufacturing, health care, financial services and more to gain critical insight into how the leasing market has changed since the start of the pandemic and to help organizations to make better-informed business decisions for the year ahead.  

  Revenue Impact of the Pandemic 

  By the end of 2020, nearly three in five respondents to our survey reported a 59% loss of revenue in their business since the start of the Covid-19 outbreak in March 2020. Of those that saw a negative impact on revenue, 80%, fortunately, expect that impact to be short-term. As a result, many organizations are more likely to seek and prioritize opportunities to save money — and leases provide a way for companies to do just that. 

  Over the past year, many organizations made changes to space and equipment leases. However, most still need to get creative and find other ways for monetary gain. PPP loans, insurance policies and lawsuits were some ways that businesses across all sectors chose to subsidize their company’s overhead in the short-term, but these options are now carrying over into 2021. 

  The Future of Office Space 

  To cut additional costs, many have turned to their commercial office leases to identify savings. With the pandemic, there has been a monumental shift in the traditional office space, but most companies are not resolved on what that looks like for their businesses in the future. This year, the industry will need to consider several changes to the office market as they make broader business plans: 

  • Remote work: The acceleration of remote work has shifted the office environment, resulting in widespread downsizing and a decreased demand in the market. Despite this change in behavior, there are now new opportunities for organizations looking to retain office space in major cities, such as opting for smaller regional offices or expanding office space to allow for social distancing.
  • Coworking: Coworking spaces and other short-term rental options may see a rise in popularity as companies continue to explore ways to stay out of the traditional long-term lease options but still provide a home base to employees.
  • Subleasing: In addition to coworking, the sublease market has become larger than it was during the dot-com bubble, providing another flexible lease situation for companies to consider.

  Important Lease Clauses In 2021 

  Lease clauses offer necessary legal protections for both tenants and landlords. However, the onset of the coronavirus pandemic presented unique challenges, which left attorneys scrambling to identify protections for their clients. Many explored force majeure clauses to save costs, only to find that these clauses do not typically extend to pandemics or other public health crises. 

  To date, the biggest impact that Covid-19 has had in the market is that it’s suspended progress on new transactions, and by the end of 2020, global CRE deal volume declined 36% YoY. Tenants have been reluctant to sign new leases and because of this, landlords do not have visibility into the future of their buildings. To add to the lack of certainty, where leases are expiring, others could potentially not be renewed until there is more clarity on their business needs, leading to reduction through attrition in the short-term. As such, new leases should include updated clauses to make new and existing tenants feel comfortable with signing their agreements. Our survey identified the most important lease clauses to consider in today’s environment as flexible termination (34%), specific pandemic force majeure clauses (32%) and shorter lease windows (16%). 

  To effectively navigate today’s commercial real estate landscape, it’s important to recognize that some changes brought on by the pandemic — such as remote work environments and reimagined workspaces — are likely here to stay. Companies will need full visibility into lease terms and options for negotiation and payment to better manage their businesses in this new climate. Flexibility ultimately creates a win-win scenario for tenants and landlords alike in 2021 and beyond. 

  The post Identifying trends and forging ahead: The pandemic’s impact on the commercial real estate industry first appeared on Visual Lease.]]> https://visuallease.com/identifying-the-right-lease-accounting-solution-for-your-business/ Wed, 19 May 2021 16:21:57 +0000 https://visuallease.com/?p=5786 Lease accounting is a massive, cross-functional effort. It involves various stakeholders and systems that impact (and are impacted by) leases. It is not just an accounting problem – and goes...
  The post Identifying the right lease accounting solution for your business first appeared on Visual Lease.]]>

  Lease accounting is a massive, cross-functional effort. It involves various stakeholders and systems that impact (and are impacted by) leases. It is not just an accounting problem – and goes further beyond producing a disclosure report.

  The dynamic nature of leases prompts constant adaptation, and organizations need an easy way to manage those changes. The bigger the portfolio, the more complicated it becomes, which is why it is important to determine how you will handle accurate lease information and financials.

  There needs to be a reliable way to manage leases throughout the year, given lease changes can result in hundreds, potentially thousands of calculations and permutations. While the market offers a wide selection of solutions, not every tool is one-size fits all. Each lease accounting solution offers its own experience – from implementation to daily usage and beyond.

  In this blog, we’ll break down the top differentiating areas and questions you should consider (beyond producing accurate calculations and reports) when evaluating lease accounting software.

  Configurability vs. customization

  Every business is unique with their own processes and leases that contain specific information. Your lease accounting solution should be flexible to match the way you run your business. Weighing the differences between a custom and configurable solution can save you significant time and money.

  • Does the solution require customization for unique business requirements? If so, what are the costs and what is the maintenance associated with customization?
  • Does the solution support configurable data fields, groupings and financial categories to match your industry and organization?
  • Can the solution generate ad-hoc reports on the fly?

  Customer experience

  At the end of the day, your lease accounting solution relies on the people using it. Make sure you are properly set up and running with thorough, dedicated customer support from implementation and beyond.

  • Does the vendor provide in-house, dedicated implementation support?
  • Does the vendor offer ongoing customer support at no additional cost? What are their estimated response time SLAs?
  • Does the vendor provide ongoing trainings and helpful tools dedicated to various users?
  • Is the vendor committed to continuous product enhancements based on customer needs?

  Integrations

  Your lease accounting software should be able to handle even the most complex lease administration and accounting scenarios, including data imports and exports to various third-party solutions for a true return on investment.

  • Does the software integrate with your existing technology infrastructure, such as your ERP and financial systems?
  • Does the software offer flexible options to schedule, monitor, manage and automate data imports and exports between third-party applications?

  Ease of use

  Lease accounting is complex and requires constant adaptation from a variety of stakeholders. You need an easy way to view, track and manage all updates for full auditability.

  • Is the user interface intuitive and easy to use?
  • Does the solution support the ability to view changes made by various users?

  Security

  There is a lot of money – and risk – in most lease portfolios. Make sure you feel confident in your solution’s ability to keep your information safe and generate accurate calculations.

  • Are there tools for administering individual and group users for system access, roles and permissions?
  • Is the solution and calculations backed by a SOC I Type II audit?

  Selecting the right lease accounting solution for your business is critical to your success. Evaluating various tools is a necessary part of the process to ensure you are equipped with what is needed to meet ASC 842, GASB 87 or IFRS 16 compliance.

  If you’re in search of an all-encompassing lease accounting management software that ensures you’re achieving and maintaining compliance, Visual Lease is the solution you’ve been looking for. Schedule a demo with our team to see if we’re a match.

  The post Identifying the right lease accounting solution for your business first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-pulse-check-how-two-healthcare-organizations-successfully-transitioned-to-asc-842/ Tue, 04 May 2021 19:05:06 +0000 https://visuallease.com/?p=5703 Lease accounting (ASC 842, IFRS 16 or GASB 87) is not your average one-and-done disclosure. This whole new approach to accounting requires you to account for lease changes throughout the year with a higher level of scrutiny.   A...
  The post Lease accounting pulse check: How two healthcare organizations successfully transitioned to ASC 842 first appeared on Visual Lease.]]> Lease accounting (ASC 842, IFRS 16 or GASB 87) is not your average one-and-done disclosure. This whole new approach to accounting requires you to account for lease changes throughout the year with a higher level of scrutiny.  

  A daunting process for many healthcare organizations, lease accounting is a large project that demands cross-functional effort. But with the right preparation, it doesn’t have to be intimidating. 

  In this blog, we share an excerpt from a recent presentation featuring two major healthcare organizations, Penn State Health and Montefiore Health System, where they share how they transitioned to ASC 842 and maintained lease accounting compliance throughout the year. 

  Featured Speakers:

  

  Joe Fitzgerald, Visual Lease: 

  Leases are inherently cross functional. There are many stakeholders involved with leasing, each with their own processes, systems and silos – (such as brokers, procurement, legal operations, accounting, tax, IT, you name it). 

  You need to make sure you’re maintaining an accurate audit trail and implementing guardrails so the changes being made by everybody are by the book. 

  What are some of Penn State Health’s considerations regarding cross–functional changes that affect accounting? 

  James Rogers, Penn State Health: 

  A lot of times, we found it’s believed that [lease accounting] is just a finance function. But finance relies heavily on supply chain, real estate and other departments when identifying leases. 

  To successfully work cross-functionally, we’ve set in place processes and policies, including ongoing communication between the real estate lease coordinators and finance – built around our Visual Lease solution. 

  You really have to take some time determining those policies and procedures because the process flow or the workflow will inevitably change with this new guidance, and you will as a finance department be leaning on this to help you stay compliant. 

  Joe Fitzgerald: 

  Two words come to mind, they both start with C – cooperation and collaboration. How about at Montefiore? 

  Fred Berardinone, Montefiore Health System: 

  Exactly, very similar to James. The importance of us leveraging automated lease accounting software was to have a centralized lease management system that we can build workflows according to our policies.  

  Similar to James, it’s all really finance’s domain, we would say liaison in this. But once again, this goes back to all the parties involved. 

  It’s really building the automation from the front end, from the data abstraction to Visual Lease or whatever software that whoever goes with, and into the general ledger and into accounts payable, and it’s all really getting blessed through least admin and finance.  

  So just as James mentioned, it’s really building that workflow, building those policies and procedures, and we still go back and test them, we’ll go back. We had internal audit actually take a look at our policies too, just verify that that’s how the system was working.  

  Joe Fitzgerald: 

  It sounds like what you both did at the start of the project in terms of working with the other folks has really paid off as you move forward in terms of cooperation and collaboration, that’s great. 

   

  To hear more about how Penn State Health and Montefiore Health System successfully use software to get and maintain audit-ready with lease accounting requirements, check out the full panel session here.

  

  The post Lease accounting pulse check: How two healthcare organizations successfully transitioned to ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/incremental-borrowing-rate-what-you-need-to-know-for-lease-accounting/ Mon, 22 Mar 2021 14:00:21 +0000 https://visuallease.com/?p=5631 Among the many different calculations used in lease accounting, the incremental borrowing rate may be one of the most misunderstood. The incremental borrowing rate (IBR) is the interest rate a lessee would...
  The post Incremental borrowing rate: what you need to know for lease accounting first appeared on Visual Lease.]]>

  Among the many different calculations used in lease accounting, the incremental borrowing rate may be one of the most misunderstood. The incremental borrowing rate (IBR) is the interest rate a lessee would have to pay to borrow funds to finance an asset similar to the lease’s ROU asset in value, over a similar term and in a similar economic environment. 

  And according to FASB ASC 842, lessees are now allowed to use the incremental borrowing rate to determine the discount rate used to measure their leases. 

  Let’s take a closer look at when and how to use the incremental borrowing rate in lease accounting. 

  When is the incremental borrowing rate used in lease accounting? 

  All the latest lease accounting standards, including ASC 842, require lessees to determine a reasonable discount rate for establishing the Net Present Value (NPV) of all their future lease payments. Lessees then use the NPV as the basis for determining the different components of lease schedules, including lease liabilities, ROU assets and amortization. 

  However, the accounting board also acknowledges the discount rate is not always easy to determine. In many leases, the rate is not clearly spelled out (explicit) or the information that could be used to determine the (implicit) discount rate may be missing or incomplete. 

  For instance, a lease might not specify an interest rate used to calculate the payments or the residual value at the end of the lease might be subject to change. 

  Therefore, ASC 842 guidelines allow lessees to use the incremental borrowing rate as an alternative method for determining the discount rate when they don’t have access to all the information (explicit or implicit) used to determine lease payments. 

  Why is IBR so important in lease accounting? 

  The incremental borrowing rate is used to discount future cash flows to reflect the impact of time on the remaining lease obligation. 

  For instance, on a lease with payments of $1,000 a month for five years, the organization’s lease accounting needs to recognize not only current payments but also what will be paid in the future, using the IBR to reflect the timing of individual cash flows. 

  Using the IBR as the discount rate has a tremendous impact on an organization’s balance sheet. That is because every piece of data in a lease schedule is generated off the NPV, which is determined by the discount rate — in this case, IBR — and the date and amount of each lease payment. 

  How is the incremental borrowing rate determined? 

  An organization’s incremental borrowing rate is generally a reflection of its creditworthiness based on two components: 

  • The risk-free rate, determined by the current rate on Treasury bills (T-bills) 
  • The individual organization’s specific credit rating

  The current risk-free rate for different term lengths can be found in trusted sources such as the Treasury Department website or publications such as Bloomberg or the Wall Street Journal.  

  Ideally, the IBR should also consider an organization’s current credit rating, including its debt structure and capital. This is especially true with real estate and other high-value leases. 

  For instance, a small startup company may pose more of a credit risk and therefore pay a higher IBR on real estate leases compared to a larger and more established company. 

  In addition, determining the incremental borrowing rate is often more difficult for a private organization than for a public company. 

  How is IBR different for public and private companies? 

  Public companies typically know what their IBR is, due to the ongoing financial tracking and reporting required from publicly traded companies. By necessity, these organizations usually know their average cost to capital, borrowing interest rates and other factors that affect their credit. 

  Private companies are less likely to know those factors and may not have up-to-date credit information readily available. Instead, they may have to pick a theoretical IBR based on a wide range of issues such as: 

  • The interest rate paid the last time they borrowed money 
  • How much above the risk-free rate they are likely to pay 
  • The type of asset — for example, the interest on financing a vehicle vs. financing a building 
  • Whether the asset will depreciate or appreciate 
  • The length of time over which payments will be made 
  • The organization’s borrowing activity and credit risk 
  • Market conditions and borrowing costs 

  Therefore, for simplicity, private companies often opt to use the risk-free rate as their IBR — for example, basing the IBR for a five-year lease on the rate at which five-year T-bills are currently trading.  

  What is the impact of using the risk-free rate as your IBR? 

  Looking up the risk-free rate and using it as an organization’s incremental borrowing rate is certainly easy. However, it will inflate the organization’s liabilities. 

  The risk-free rate is always the lowest borrowing rate, minus the inflation expectation. But when factored over time, the lower the interest rate is, the higher the NPV will be. That means the risk-free rate has a larger impact on the balance sheet. 

  Therefore, while it is less work to use the risk-free rate, it may not be as advantageous as determining your actual incremental borrowing rate. 

  When must the incremental borrowing rate be updated? 

  The good news is ASC 842 says once a lease schedule is established, you don’t need to recalculate the discount rate unless you need to remeasure future lease obligations due to changes such as: 

  • Renewals or options that add time and payments to a lease 
  • Abatements or other modification of existing leases 

  For example, if you decide to exercise an option for a new five-year term on an existing lease, you will want to calculate the additional time and payments at a current rate rather than use the rate established at the start of the original lease. 

  However, it is important to stay up to date on inflation expectations and market rates, as well as the organization’s current credit standing. That way, if and when lease remeasurements are needed, the organization will be prepared to recalculate its IBR. 

  IBR is simpler with lease accounting technology. 

  To the extent you can determine the discount rates used to calculate lease payments, you should use those rates in your lease accounting. But when you cannot reasonably determine a discount rate, the incremental borrowing rate is a quick and easy alternative allowed by ASC 842. 

  Determining the incremental borrowing rate is a complex issue, and there is no simple formula. However, a lease technology solution like Visual Lease makes it easy to manage and track borrowing rates. 

  For instance, the platform’s Borrowing Rate table lets you establish a series of IBRs based on type of asset, organization credit rating, country, currency and the remaining lease term. 

  With all the necessary values in one place, you can easily track and modify the data points as needed. In addition, when you create a lease schedule, the Visual Lease platform will automatically select the appropriate rate based on the parameters you set up in the table. 

  To learn more, contact us at (888) 876-6500 or request a demo to see Visual Lease in action. 

  The post Incremental borrowing rate: what you need to know for lease accounting first appeared on Visual Lease.]]> https://visuallease.com/deferred-rent-accounting-101-for-asc-842-and-asc-840/ Wed, 10 Mar 2021 14:05:54 +0000 https://visuallease.com/?p=5645
  

  What is Deferred Rent Under ASC 842? 

  In lease accounting, deferred rent happens when the cash rental payment varies from its expense recognized on the financial statements and occurs when the tenant is provided free rent in one or more periods, or if there are escalating rent payments. Here is everything you need to know about deferred rent under ASC 840 and ASC 842 rules. 

  Is Deferred Rent an Asset or Liability? 

  Deferred rent is a balance sheet account traditionally used in legacy accounting standards as defined in ASC 840. Deferred rent arises when the amount expensed exceeds the amount paid. A balance will build up and then burn off when the cash paid exceeds the amount expensed.

  ASC 842 requires the total rent expense to be recognized on a straight-line basis during the lease period even if rent payments differ. The debiting or crediting of the deferred rent account monthly allows the lessee to record the rent expense using the straight-line basis and catch whatever difference is between the amount paid and the expense recognized in this account. The cumulative balance of the deferred rent when the lease is terminated has to be equal to zero. 

  Where is Deferred Rent on the Balance Sheet? 
  Deferred rent journal entries are liabilities on the balance sheet and occur when rent payments are lower than the straight-line rent expense. 
  What is the Accounting for Deferred Rent? 

  Accounting for the free rent period and subsequent periods are as follows: 

  Add the total cost of the rent payments for the entire lease period. Then divide this total amount of payments by the total number of periods in the lease, including any early access period. So although the first month was technically “free,” we still have a payment that appears on our balance sheets.

  ASC 842 Deferred Rent Example

  If the lease term is one year with the first-month rental being free and the rental rate for the coming months being $1,000, then the total rental cost will be $11,000 .

  Divide the total rental cost by the total number of periods in the lease contract including the free rental month. In our example, we will divide $11,000 by 12 months and get $917. 

  Each month of the lease, the average monthly rate should be charged as an expense, regardless of whether there was an actual payment made. In our example, the expense for the first month is $917 even if there is no actual payment since the tenant did not pay for the first month. This means that the $917 debited to expenses is offset by a credit to the deferred rent account. 

  For the remaining months of the lease, the same average amount should be charged as an expense. This is $917 in our example. Should there be an offsetting of the rental payment and if the payment and expense don’t match, then the difference should be applied to the deferred rent account. 

  In our example, the monthly payment for the remaining period after the free month has lapsed is still $1,000, an amount that’s higher by $83 than the amount charged as rent expense, which is $917. This difference should be used to reduce the amount of the deferred rent liability during the remaining months of the rental period until it becomes zero. 

  The same accounting approach should be used even if the rental amount changes throughout the lease period. For example, if the lease rate increases in the succeeding months, then the average rent expense should be charged in all months with a portion of it forming part of the deferred rent liability. 

  What is the Difference Between Prepaid Rent and Deferred Rent? 

  There’s a difference between deferred rent vs. prepaid rent. The former is a liability and occurs when the lessor provides free rent, usually at the start of the lease term, or there are escalating rent payments. Prepaid rent is rent paid up front that is to be expensed in a future period. 

  How ASC 842 Transition Affects Deferred Rent Accounting 

  The concept of straight-line rent expense on operating leases was retained despite the transition to the ASC 842. But under the new mechanics, the deferred rent should be replaced by the Right of Use (ROU) asset and lease liability accounts. The ASC 842 guidelines are much more complicated than its predecessor, ASC 840. Thus, any lease accounting software must have ROU Asset functionality in place. It is best to go for trusted accounting software such as ours. 

  At Visual Lease, we make compliance to ASC 842 and other standards a breeze
   To learn more about how Visual Lease can help your business contact us now.
  Learn More
  
  The post Deferred rent accounting 101 for ASC 842 and ASC 840 first appeared on Visual Lease.]]> https://visuallease.com/accounting-for-long-term-short-term-and-month-to-month-leases-under-asc-842/ Fri, 12 Feb 2021 15:32:10 +0000 https://visuallease.com/?p=5618 Table of Contents What is a lease term? Lease lengths defined under ASC 842 Long-term leases under ASC 842 Short-term leases under ASC 842 Month-to-month leases under ASC 842 ASC...
  The post ASC 842 Long-term, Short-term & Month-to-month Leases Optimizations first appeared on Visual Lease.]]>

  Table of Contents

  • What is a lease term?
  • Lease lengths defined under ASC 842
    • Long-term leases under ASC 842
    • Short-term leases under ASC 842
    • Month-to-month leases under ASC 842
  • ASC 842 Long-term Lease Accounting
    • Best practices for long-term lease renewals
  • ASC 842 Short-term Lease Accounting
    • Short-term lease renewal challenges
  • ASC 842 Month-to-Month Lease Accounting

  Organizations are increasingly seeking flexible lease options, with short-term leases becoming more popular. Lease accounting standards treat different lease lengths differently. This blog explains the ASC 842 requirements for accounting for long-term, short-term, and month-to-month leases.

  What is a lease term?

  A lease term refers to the specific duration for which a lease agreement is in effect. It is the period of time during which a tenant has the legal right to occupy and use the leased property, as outlined in the terms and conditions of the lease contract. Lease terms can vary widely depending on the type of property, the landlord’s preferences, and the negotiation between the parties involved. Lease terms are typically stated in months or years, and they establish the start date and the end date of the lease agreement. At the end of the lease term, the parties may choose to renew the lease, negotiate new terms, or vacate the property, as specified in the lease agreement.

  Lease lengths defined under ASC 842

  For organizations that must comply with ASC 842, long-term, short-term and month-to-month leases are defined as follows.

  Long-term leases under ASC 842

  Long-term leases are at least one year and one day in duration or longer. Note: Long-term leases are defined the same way across all three major accounting standards (ASC, IFRS and GASB).

  Short-term leases under ASC 842

  Short-term leases are a duration of one year or less. Note: Under ASC 842, the short-term lease classification is a practical expedient you can choose to apply to an entire asset class. (Read more about the practical expedient for short-term leases below.)

  Month-to-month leases under ASC 842

  Month-to-month leases are a legal status that varies across different leases and different states. For accounting purposes, the key criteria of these leases are there is no set expiration date and they can be canceled by either party.

  ASC 842 Long-term Lease Accounting

  Long-term leases have a greater impact on financials, given they remain on the balance sheet for an extended period of time. When making contract renewal decisions for long-term leases, you may find yourself examining their impact on your balance sheet.

  Generally, lease renewals involve exercising an option in a current contract or negotiating a new contract. When a contract includes a renewal option, you do not have to exercise it; instead, you can seek to renew the lease with new terms.

  For example, you might choose to not exercise an upcoming renewal option on an existing long-term lease with a new five-year term and higher rent than the current market rate. Instead, you could try to negotiate a lower price or a shorter lease term that will limit your commitment to the higher rent.

  Lately, more organizations have been negotiating their existing contracts to take advantage of lower market rates and/or shorten their lease term.

  Best practices for long-term lease renewals

  By starting the lease renewal process early — ideally 9 to 12 months prior to lease expiration — you have enough time to explore alternative leases, see what is happening in the market and know what the best rates are. This puts you in a good position to possibly negotiate a new lease.

  This is especially true for real estate leases, which are often long-term. Finding a new location and planning a move takes a lot of time and money. If you wait too long, or too close to the lease expiration, you could end up exercising an option you don’t want or changing to a month-to-month lease because there is too little time to move or to negotiate a new contract.

  To avoid this, lease management software like Visual Lease can alert you about upcoming renewal deadlines and other critical dates. This is incredibly useful when planning next steps and making timely decisions.

  ASC 842 Short-term Lease Accounting

  Under ASC 842, the “short-term” lease designation can be applied to an entire class of leases rather than on a lease-by-lease basis. By electing this practical expedient, short-term leases do not need to be reported on the balance sheet. This and other practical expedients simplify the lease classification process and help organizations more easily adhere to the new lease standard.

  That means when you are first classifying and entering your leases into a lease management system, you should decide up front whether all leases of a particular asset class will be designated as short-term leases. For example, you might decide to treat all real estate leases or all equipment leases (or a particular type of equipment, such as copiers) of one year or less as short-term leases.

  If you elect to apply the short-term designation, all leases that are one year or less in duration will be handled as short-term leases, with no exceptions. If you choose not to elect the practical expedient, then all leases will be considered long-term regardless of their duration.

  Lease management software such as Visual Lease makes it easy to set up fields for different asset classes (such as real estate and equipment) and select which (if any) should be treated as short-term leases. With all your lease information in the system, the Visual Lease platform can then automatically determine which leases meet the short-term lease criteria based on the designated asset classes and contract dates and properly report the expense.

  Short-term lease renewal challenges

  Just like long-term leases, short-term leases can be renewed by exercising an option or negotiating a new contract. However, exercising an option or extending the length of a short-term lease is tricky because it can affect the “short-term” classification.

  As an example: Suppose you have a one-year short-term lease with a renewal option, and you decide 3 months before the end of the current term that you’re going to exercise the option and extend the lease for one more year. With the remaining 3 months of the existing lease term plus the 12 months of the renewal term, you now have extended the contract to 15 months — exceeding the short-term lease criteria of one year (12 months) or less in duration.

  In this case, the contract would now be considered a long-term lease, and you would need to identify the lease asset and determine the liability for accounting purposes.

  But suppose instead you wait until the very end of a lease term before deciding to renew a short-term lease for another year. In this case, is adding a year to the existing term considered a lease extension, requiring the lease to be reclassified as long term?

  Although ASC 842 does not provide explicit guidance for this situation, the feedback from the major auditing firms indicates that the one-year renewal could be treated as a distinct short-term lease. So, theoretically, you could be in a space for multiple years but only commit to one year at a time at the very end of each year, resulting in successive short-term leases.

  ASC 842 Month-to-Month Lease Accounting

  Sometimes organizations allow existing leases to become month-to-month to delay decisions about long-term commitments. Ideally, an organization would have a minimum number of these leases and manage them strategically — making a conscious decision to go month-to-month for a limited time only.

  However, organizations may have month-to-month leases because renewals were not completed on time. Or sometimes the organization does not have a good strategy for replacing month-to-month leases and ends up continuing them “by default” rather than by choice.

  Regardless, to maintain accurate lease accounting financial data, you should have an easy way to manage month-to-month leases. With Visual Lease software, you can change the status of a month-to-month lease at any time. Lease management and accounting software lets you easily modify lease information, change the commencement date and add a forecasted expiration date and other data to create a new schedule and calculations for month-to-month tenancy.

  Visual Lease also makes it easy to track the dollars associated with a month-to-month lease, including any rent that applies during a holdover as well as straight-line rent expenses. The system can even identify month-to-month leases and show them as short-term lease expenses in disclosure reports.

  Use lease lengths to your advantage

  By understanding how the different lease terms are defined, you can more simply manage them in a strategic way.

  Using a lease management software platform like Visual Lease allows your organization to strategically manage lease terms by:

  ● Applying consistent treatment to leases according to classification, asset class and any practical expedients that are elected

  ● Providing tools for creating, tracking, reporting and analyzing lease terms and costs

  ● Alerting decision makers about critical lease dates and deadlines for exercising lease options and renewals

  Learn more about how to account for different lease terms from one of Visual Lease’s in-house experts. Check out our on-demand webinar Managing Short-Term, Long-Term and Month-to-Month Leases (and Everything in Between).

  The post ASC 842 Long-term, Short-term & Month-to-month Leases Optimizations first appeared on Visual Lease.]]> https://visuallease.com/how-to-handle-lease-concessions-deferrals-abatements-and-other-modifications/ Thu, 28 Jan 2021 18:53:24 +0000 https://visuallease.com/?p=5441   What are rent concessions? Rent concessions are discounts, incentives, or other benefits provided by landlords to tenants. Landlords sometimes offer rent concessions to entice tenants to sign a new...
  The post How to handle lease concessions: deferrals, abatements and other modifications first appeared on Visual Lease.]]>

   

  What are rent concessions?

  Rent concessions are discounts, incentives, or other benefits provided by landlords to tenants. Landlords sometimes offer rent concessions to entice tenants to sign a new lease — or concessions may come up as part of lease negotiations. For instance, due to the impact COVID-19 had on businesses, many companies asked for concessions from their landlords in 2020 to ease costs related to real estate leases. 

  Under the lease accounting standards, any lease concession must be captured and accounted for on the balance sheet. While FASB and IFRS offer some flexibility in how to account for rent concessions, including abatements and deferrals, their unpredictable nature presents an ongoing challenge to lease accounting and compliance.  

  In this blog, we identify some common lease concessions and offer some helpful advice for handling them. 

  What are some common rent concessions?

  Common types of rent concessions include abatements, deferrals, short pays, impairments and early terminations. 

  What is rent abatement?

  An abatement is a temporary decrease in the rental rate. When this option is elected, a landlord and tenant often negotiate a short-term abatement so that the payment reduction applies for a defined period, such as three or six months. 

  Therefore, a rent abatement typically changes the total amount of rent the tenant will pay over the full lease term. 

  What is a lease deferral? 

  A deferral is a temporary reduction in rent that requires repayment of the balance later. This does not change the total amount of the payments the tenant will make but defers the timing of the payments. 

  Landlords may be more willing to work with tenants on a rent deferral than an abatement. However, they may agree to an abatement in exchange for some trade-off of rights and obligations, such as extending the lease term.

  What are short payments? 

  A short pay is a partial payment. A landlord might agree to accept a short pay until the tenant can repay the remaining amount of the lease payments.  

  A short or partial payment results in a liability. In addition, since a short pay is considered a late payment (even if it is paid on time), it may be subject to late fees unless both parties agree otherwise. 

  What is a lease impairment? 

  An impairment is when the current value of a leased asset (such as real estate, vehicles, or equipment) is lower than the balance due according to the lease. The result is the impairment of the ROU asset, which may require a different amortization calculation for operating leases. 

  From the lease holder’s point of view, assets may be impaired if the demand for those assets decreases or if rental rates drop significantly.

  What are early terminations? 

  An early termination is when a tenant decides to end a lease before its expiration date. But unless a lease includes an early termination clause, companies face serious repercussions when they terminate a commercial lease early. 

  For instance, if a company decides to terminate a lease early, it may still have to pay some or all the rent due through the end of the lease term. In addition, the landlord might sue for monetary damages. 

  Even if a lease does include an early termination clause, it generally imposes a termination fee and may include some restrictions or other reimbursements to the landlord. 

  (Learn more about the costs of early terminations and other lease obligations.)

  What are best practices for handling rent concessions?

  Treat similar leases the same way. 

  Both FASB and IASB allow you to choose to treat all lease concessions as either variable payments or a lease modification. This means you can treat similar leases the same way. (Read the FASB Q&A on lease concessions here.)  

  In other words, you do not have to comb through the terms of every contract to determine whether it meets the guidance for a lease modification or a variable payment treatment. This is a practical expedient that saves time and simplifies decision-making.  

  There are two important things to keep in mind:  

  • You should disclose that you elected to treat similar leases the same way, as well as the treatment you chose to apply to lease concessions — variable payment vs. lease modification. (See more on disclosures below.) 
  • If a deferral, abatement or other concession requires you to exercise a renewal option that results in a significant change, you may have to account for the concession as a modification. 

  There is some flexibility in lease abatement accounting. 

  Both FASB and IASB allow you to treat rent abatements as either existing lease obligations or as negotiated modifications to the lease terms. However, if the lease concession materially increases the landlord’s rights or the tenant’s obligations, it must be treated as a modification.  

  • If an abatement is considered a variable lease payment, no remeasurement is required and the abatement flows through to any disclosure reporting.  
  • If an abatement is considered a negotiated modification, a remeasurement should be run when the abatement term is agreed on and continue through the rest of the lease term. 

  For example, a large manufacturing company that reports under IFRS 16 handled a three-month rent abatement by reducing its short-term and long-term liabilities for those months while still showing activity from a balancing perspective. From a P&L perspective, the company showed the benefit of no rent expense for those three months.

  Accounting for Rent abatement under ASC 840 and ASC 842

  ASC 840

  Under ASC 840, lease abatement is treated as a reduction in the cost of the lease over the lease term. The following are some examples of how lease abatement is accounted for under ASC 840:

  If a company receives a rent abatement for the first 6 months of a 10-year lease, the rent abatement is treated as a reduction in the cost of the lease. The cost of the lease is reduced by $300,000 (6 months * $50,000 per month). The rent expense is reduced by $50,000 per month over the remaining 9 years of the lease.

  ASC 842

  Under ASC 842, lease abatement is treated as a lease modification. Lease modifications are changes to the terms of a lease that are made after the lease has been entered into. Lease modifications can be either beneficial or onerous to the lessee.

  If a lease abatement is beneficial to the lessee, it is recognized as a reduction in the lease liability over the lease term. If a lease abatement is onerous to the lessee, it is recognized as a lease liability over the lease term.

  For example: 

  If a company receives a rent abatement for the first 6 months of a 10-year lease, the rent abatement is treated as a beneficial lease modification. The lease liability is reduced by $300,000 (6 months * $50,000 per month). The rent expense is reduced by $50,000 per month over the remaining 9 years of the lease.

  Financial statement impact of rent abatement and rent-free periods under ASC 840

  The financial statement impact of lease abatement under ASC 840 can vary depending on the specific terms of the lease and the amount of the lease abatement. However, in general, lease abatement can have the following financial statement impacts:

  • Reduced cost of goods sold: If the lease abatement is treated as a reduction in the cost of the lease, it will reduce the cost of goods sold on the income statement. This can improve the company’s gross profit margin and net income.
  • Reduced rent expense: If the lease abatement is treated as a reduction in rent expense, it will reduce the rent expense on the income statement. This can also improve the company’s gross profit margin and net income.
  • Increased right-of-use asset: If the lease abatement is treated as a lease modification, it will increase the right-of-use asset on the balance sheet. This can have a negative impact on the company’s debt-to-equity ratio and financial leverage.
  • Reduced lease liability: If the lease abatement is treated as a beneficial lease modification, it will reduce the lease liability on the balance sheet. This can have a positive impact on the company’s debt-to-equity ratio and financial leverage.

  Financial statement impact of lease abatement under ASC 842

  The financial statement impact of lease abatement under ASC 842 can vary depending on the specific terms of the lease and the amount of the lease abatement. However, in general, lease abatement can have the following financial statement impacts:

  • Reduced rent expense: If the lease abatement is treated as a reduction in rent expense, it will reduce the rent expense on the income statement. This can improve the company’s gross profit margin and net income.
  • Increased right-of-use asset: If the lease abatement is treated as a lease modification, it will increase the right-of-use asset on the balance sheet. This can have a negative impact on the company’s debt-to-equity ratio and financial leverage.
  • Reduced lease liability: If the lease abatement is treated as a beneficial lease modification, it will reduce the lease liability on the balance sheet. This can have a positive impact on the company’s debt-to-equity ratio and financial leverage.

  Think ahead when planning for deferred lease payments. 

  With a lease deferral, your organization needs to consider a number of variables and make decisions based on how it will impact your company’s P&L statement.  

  • If you choose to report a deferral as a variable expense, you will book the benefit of the lease concession today and the expense of the repayment at a future point in time.  
  • If you choose to treat the deferral as a lease modification, the immediate impact will be less, but the expense will be spread out and extend into future periods. 

  For some companies, it might make sense to push the expense of deferred rent off to next year rather than inflate payments for FY2020. For instance, suppose a company that received a 3-month rent deferral in 2020 wants to defer payment as far into 2021 as possible. If the company treated the deferral as a variable payment, it would have to recognize the rent expense in 2020 even if the payments are made in 2021. 

  Be sure to provide disclosures. 

  As with much of lease accounting under the new standards, there are a lot of decisions to make. Providing lease accounting disclosures will help auditors and understand your financial statements, including:  

  •  Any abatements, deferrals or other lease concessions received 
  • Whether all leases (or similar leases) are treated the same way 
  • Which practical expedients were chosen 

  By providing disclosures, you can clarify decisions you’ve made and demonstrate that you have treated lease concessions consistently. 

  Look ahead for ongoing compliance 

  During a Visual Lease webinar, a quick survey of the attendees showed roughly half received some sort of rent concession. These and any other companies that receive lease concessions must account for and disclose those concessions if they are going to maintain FASB and IFRS compliance.  

  As you plan for lease accounting, keep these key takeaways in mind: 

  • You can take advantage of a practical expedient that allows you to treat similar lease concessions the same way. 
  • Look ahead to plan whether you should book expenses now or later, and choose a lease concession treatment accordingly (variable payment vs. lease modification). 
  • Provide disclosures to clarify your accounting decisions and demonstrate that you’ve applied lease treatment options consistently. 
  The post How to handle lease concessions: deferrals, abatements and other modifications first appeared on Visual Lease.]]> https://visuallease.com/tenant-improvement-allowance-accounting-for-landlords/ Fri, 01 Jan 2021 19:30:43 +0000 https://visuallease.com/?p=2908
  

  Cell phone companies offer new phones to entice clients to renew their contracts. Retailers slash their prices to draw consumers to purchase. Car dealerships hand out freebies and discounts. In the world of consumption, who would refuse attractive incentives?

  Landlords also entice prospective tenants with alluring offers, especially when the real estate market is in a slump. One of the popular incentives is a commercial tenant improvement allowance (TI allowance or TIA for short). But what exactly is it and how is tenant improvement allowance accounting handled? Here are the basics:

  What is a tenant improvement allowance?

  A TI allowance is money provided by the landlord to a tenant to help fund any improvements to space. Fast tenant improvement allowances can also be used to pay for costs associated with moving to the rented property.

  What qualifies as a tenant improvement?

  Normally, a landlord allows the TI to be used on hard and soft costs of a renovation project.

  Hard costs pertain to improvements that can be left behind after the tenant leaves the property. Such improvements are beneficial to the landlord.

  On the other hand, soft costs barely provide any direct benefits to the landlord but, are required components of the renovation like construction management fees.

  Below are some examples of hard costs:
  • Electric
  • HVAC
  • Plumbing
  • Walls
  • Framing
  • Windows
  • Doors
  • Carpet
  What is typically not covered by a Tenant Improvement Allowance?

  Most landlords do not allow the TI allowance to be used for miscellaneous expenses incurred to cater to the specific needs of the client or improvements that do not provide any value to the landlord. Improvements that can be removed once the tenant leaves are not covered by the TI allowance either. However, in some cases, landlords would be willing to contribute a small share of the TI allowance for some expenses to secure a rental contract.

  Below are some examples of costs normally not covered by a TI allowance:
  • Data cabling
  • Furniture
  • Fixtures
  • Equipment
  • Electronic equipment
  • Moving expenses
  How were tenant improvement allowances accounted for under ASC 840?

  Under ASC 840, tenant improvement allowances (TIAs) were treated as lease incentives. Lease incentives are payments made by a lessor to a lessee to induce the lessee to enter into a lease. Under ASC 840, lease incentives were recognized as reductions to rent expenses by the lessee on a straight-line basis over the term of the lease.

  The lease incentive obligation liability was then amortized over the term of the lease, with a corresponding reduction to rent expense.

  It is important to note that TIAs should not be netted against leasehold improvements. Leasehold improvements are improvements made by a lessee to leased property, and they are accounted for as fixed assets. TIAs are simply payments made by a lessor to a lessee, and they are accounted for separately.

  How to account for tenant improvement allowances under ASC 842

  Under ASC 842, tenant improvement allowances (TIAs) are still classified as incentives, but they are no longer reported as a lease incentive obligation liability to be amortized over the life of the lease. Instead, they are reflected in the initial measurement of the right-of-use asset (ROU asset) and sometimes the lease liability at the inception of the lease, depending on when the allowance is received.

  When initially adopting ASC 842, any unamortized lease incentive obligation liabilities are eliminated and reclassified to the new ROU asset’s opening balance. After initial implementation of the new standard, TIAs will continue to be recognized in the ROU asset and potentially lease liabilities.

  ASC 842 describes lease incentives as “paid” or “payable” depending on the timing of their receipt. This article uses the same terminology and describes how to account for both types.

  How much is the typical tenant improvement allowance?

  Prospective tenants should provide a detailed and accurate cost projection of the planned renovation. Otherwise, they would be seeing a TI allowance of $10 to $20 for every square foot, amounts that would barely cover the costs of plumbing, electricity, or carpeting. The excess amount needed for the renovations not covered by the TI allowance would be paid for by the tenant.

  It is the landlord who will decide how much he or she is willing to spend on the TI allowance. The amount the landlord spends depends on the real estate market conditions, the value of the tenant and the value-added of the proposed commercial lease build out clause.

  Is a tenant improvement allowance a loan?

  The typical TI allowance is not a loan that has to be paid back by the tenant. However, there is an amortized TI allowance, which is a combination of a TI and a loan provided by the landlord.

  The tenant improvement allowance amortization is a provision in the contract that has to be negotiated between the tenant and the landlord.

  An amortized TI provides for additional funds needed to complete the renovations. It allows the tenant to borrow money with interest from the landlord. The loan is like a bank loan where tenants have to pay the amortization over the term of the lease.

  How is tenant improvement allowances accounting done?

  Tenant improvement allowance accounting depends on who initially funds the improvement and oversees the renovation work. Different scenarios impact the accounting for TI allowance:

  Landlord
  owns the improvements

  Tenant
  owns the improvements

  Flow-through
  arrangement

  The journal entries depend on which of the above scenarios are chosen.

  Landlord owns the improvements

  When the landlord pays for the renovation and tenants supervise the work or when the landlord pays and oversees the improvement, then it is the landlord who owns the improvements.

  In this scenario, the landlord is required to record the improvements as a fixed asset and then depreciate the value of the improvements over a specified period.

  For example, if the improvement costs a total of $10,000, the landlord will use this figure and divide it throughout the lease. The figure from this division would be subtracted from the rental income annually.

  The length of time depends on the classification of the rental property: residential or non-residential. Generally, residential property is depreciated for 27.5 years and a non-residential property is depreciated over 39 years. However, costs that are not covered by the TI allowance such as fixtures, furniture, and equipment are depreciated over 7 years.

  The landlords will be depreciating the cost of the improvements over the lease period. If there is a new tenant who doesn’t require any improvements to the property, then the landlord can simply carry on with the depreciation schedule until the value of the improvements has been exhausted.

  If the property was damaged or destroyed, then the landlord has to write off the remaining undepreciated balance of the asset that will appear as a loss in the income statement.

  Tenant owns the improvements

  If the tenants provided the funds for the majority of improvements, then it is the tenant who owns the improvements. In this scenario, the tenant will record the TI allowance received as an incentive. The amount spent on improvement will be amortized over the period of the rental term.

  In cases when the amortization period is longer than the rental period, then the tenant is required to write off the remaining amount.

  Flow-through arrangement

  In this scenario, tenants have to declare the deductions from rent as income. For the landlord, the rent will be treated as a cash payment but the cost of the improvements will be depreciated.

   

  Tenant improvement allowances paid at or before commencement of the lease

  TIAs can be paid at or before the commencement of the lease.

   

  Event
  TIA paid at or before commencement of the lease
  Transition to ASC 842
  TIA received at lease commencement

  Accounting Treatment
  Reduces the ROU asset’s opening balance
  Any unamortized balance of a TIA is debited and reclassed to the ROU asset’s opening balance
  Debit to cash and adjust the initial ROU asset recognized

  Under ASC 842, TIAs are accounted for as a direct adjustment to the right-of-use (ROU) asset’s opening balance. The ROU asset is the asset that a lessee obtains by entering into a lease. It is calculated as the present value of the lease payments.

  When a TIA is paid at or before the commencement of the lease, it reduces the ROU asset’s opening balance. This is because the lessee is essentially receiving a payment from the landlord that reduces the amount of money that they will have to pay over the life of the lease.

  In the month/period of transition to ASC 842, any unamortized balance of a TIA is debited to remove the lease incentive liability from the balance sheet and reclassed to the ROU asset’s opening balance with a credit. This journal entry ensures that the ROU asset is accurately reflected on the balance sheet after the transition to ASC 842.

  After the transition, TIAs received at lease commencement are recognized as a debit to cash and adjust the initial ROU asset recognized. The remaining line items to record a new lease are a credit to the lease liability and a debit to the ROU asset, adjusted to equal the initial liability balance less the TIA received.

  Tenant improvement allowances payable after the commencement of the lease

  When TIAs are paid after the commencement of the lease, they are factored into both the lease liability and right-of-use (ROU) asset measurement. The lease liability is calculated as the present value of all future payments, including those received for the allowance. The ROU asset is the asset that a lessee obtains by entering into a lease. It is calculated as the present value of the lease payments.

  The payments for improvements will be reflected in the periods they are expected to be received during the lease term and netted with the rent payments for that period. This means that the lease liability will be lower due to factoring in the expected cash receipts, and subsequently, the ROU asset balance will also be lower.

  Tenant improvement allowances neither paid nor payable at the commencement of the lease

  ASC 842 does not provide specific guidance on how to account for tenant improvement allowances (TIAs) that are neither paid nor payable at the commencement of the lease. This can make it difficult for lessees to determine how to properly record these allowances in their financial statements.

  Here are two approaches to accounting for TIAs that are not paid or payable at the commencement of the lease:

  1. Maximum reimbursement approach: This approach assumes that the lessee is reasonably certain to incur the maximum amount of reimbursable costs under the lease. The maximum amount of the TIA is then treated as an incentive payable, which is recognized through a reduction of the lease liability and right-of-use (ROU) asset.
  2. Actual reimbursement approach: This approach waits until the reimbursable costs have actually been incurred before reducing the ROU asset and lease liability. The reduction of the ROU asset is then recognized prospectively over the remainder of the lease term.

  The best approach to accounting for TIAs that are not paid or payable at the commencement of the lease will depend on the specific facts and circumstances of the lease. However, the maximum reimbursement approach is generally considered to be the most conservative and straightforward approach.

  Tenant improvement allowance accounting made easier

  The TI allowance is a concession with outstanding benefits both for the landlords and tenants. It helps landlords in securing lease contracts while allowing tenants to improve the space.

  However, tenant improvement allowance accounting isn’t always easy, since who pays and oversees the improvements affects how the allowance should be accounted for. Fortunately, there is reliable lease accounting and lease administration software like Visual Lease that can help.

  For more information on how Visual Lease can help your business evaluate your leases, reach out to us today.
  Learn More
  
  The post Tenant improvement allowance accounting for landlords first appeared on Visual Lease.]]> https://visuallease.com/2020-guide-to-ifrs-16-lease-accounting-software/ Fri, 01 Jan 2021 14:00:00 +0000 https://visuallease.com/?p=3021 Changes in accounting standards have made lease accounting more difficult. Adopting IFRS 16 lease accounting, for example, has made compliance cumbersome as it involves adjusting to new policies, systems and...
  The post 2021 Guide to IFRS Compliant Lease Accounting Software first appeared on Visual Lease.]]> Changes in accounting standards have made lease accounting more difficult. Adopting IFRS 16 lease accounting, for example, has made compliance cumbersome as it involves adjusting to new policies, systems and processes. But with IFRS lease accounting software, a firm’s compliance with new standards can be a breeze.

  While the January 1, 2019 deadline for IFRS 16 compliance has passed, research shows that many firms are still lagging in their transition to the new standard. This is probably because some are still practicing IFRS 16 illustrative examples using Excel sheets, while others are using accounting software that doesn’t deliver on its promises.

  If compliance with the new standard remains a problem, then it’s time to find a reliable software solution. Here’s a basic guide to the new standard and how a reliable IFRS 16 software solution can help your business.

  How are IFRS 16 leases calculated?

  Under IFRS 16, lessees must recognize their assets and liabilities coming from a lease. After all, the standard’s goal is to report information that offers a basis for companies to determine the timing, amount and uncertainty of cash flows arising from rentals, as well as a faithful representation of lease transactions.

  IFRS 16 mandates that lessees recognize the assets and liabilities for all short-term rentals, or those with a lease term of 12 months or below, except in cases where the asset value is low. Lessees must also recognize the right-of-use asset that represents the underlying rented asset, as well as the lease liability that represents the obligation to make rental payments.

  What is IFRS Compliant Accounting Software?

  Lease accounting software is an application designed specially to automate the report processing for the new standards — GASB 87, ASC 842, SFFAS 54 and IFRS 16. The software gathers information about a rental contract, such as payment frequencies, rent formulas and discount rates, then does the necessary calculations to generate the required journal entries for financial statements.

  IFRS 16 Software Key Features & Benefits

  There are plenty of software solutions promising quick and easy compliance with the IFRS 16 standard. However, since not all software is created equal, businesses should look for the following key features.

  Configured to meet All IFRS 16 disclosure requirements

  The new standard contains plenty of changes when it comes to disclosures. There are now more disclosures needed, including the total outflow of leases, right-of-use assets and interest expenses for lease liabilities.

  A reliable IFRS 16 software solution should have the proper configurations to generate all the disclosure reports the business needs.

  Data intelligence

  The accounting software should be designed to handle all the complexities of IFRS 16 to ensure accuracy and save the business a lot of time. Some of the data features that the software should have include borrowing rate charts, practical expedient elections and useful life charts.

  Full support for all internal controls

  Reflecting the bulk of the lease contracts into the balance sheets highlights the company’s lease accounting controls. It is essential, then, to opt for IFRS 16 software that can provide support to internal controls. 

  This means choosing a software solution offering features like data entry validation and role-based access.

  Cloud-Based SaaS system

  A centralized location and availability of data are some of the primary benefits of having a SaaS tool for lease accounting. 

  A SaaS system allows the accounting department staff to access lease documents anywhere as long the person has access to the internet. A centralized location and easily accessible information save companies time and space, eliminating the need for hordes of files in hard copies. 

  In addition, users in accounting and other departments can have custom access levels for lease contract data. This feature allows the company to provide access to those who need it without compromising data security. 

  Automated critical alerts

  Missed, late or over payment of leases can happen if companies stick to the manual way of doing things. Fortunately, these can all be avoided with a stable IFRS 16 software solution. Automated alerts that are sent via email every time an important date is coming up prevents missed or late lease payments.

  Does IFRS 16 apply to software licenses?

  There are also software leases in lease accounting, entertaining the right-to-use for the software once the lease contract starts. The software should be treated as an intangible asset in compliance with IAS 38. However, accounting for software leases is outside the scope of IFRS 16.

  IFRS 16 software can ease the transition

  Transitioning to new accounting standards, including IFRS 16, will always be complicated. Businesses would do well to invest in a reliable lease accounting software to manage the changes and help the accounting department adopt IFRS 16. 

  At Visual Lease, we ensure a smooth transition to the new standards with our reliable software.

  The post 2021 Guide to IFRS Compliant Lease Accounting Software first appeared on Visual Lease.]]> https://visuallease.com/key-difference-gaap-ifrs-new-lease-standards/ Thu, 31 Dec 2020 16:00:21 +0000 https://visuallease.com/?p=798

  

  Beginning in 2006, there was a concerted effort by the two accounting standard bodies (FASB and IASB) to synchronize their respective standards on leasing to assure consistency and uniformity. The effort culminated last year with the release of the two new standards: IASB’s international standard (IFRS 16, Leases) and the U.S. GAAP standard (FASB’s Accounting Standard Update (ASU) No. 2016-02 Leases, Topic 842).

  The new IFRS 16 lease accounting standard went into effect in 2019, along with U.S. GAAP lease accounting for public companies. Private companies have until December 15, 2021 to adopt the new GAAP standard (ASC 842).

  While the two standards are closely aligned, particularly relating to putting lease assets and liabilities on the balance sheet, there are significant differences between IFRS and GAAP.

  In this article, we’ll explore the key difference between GAAP and IFRS when it comes to lease accounting under the new standards.

  How is a lease defined under IFRS lease accounting vs. GAAP

  Perhaps the most significant difference between the GAAP and IFRS lease standards is the definition of a lease. While the IFRS standard considers all leases as financial leases, the FASB/U.S. GAAP standard differentiates between an operating lease and a finance lease.

  Under the new FASB standard, both types of leases require a lessee to put a right-of-use asset and a lease liability on the balance sheet. However, in the case of a finance lease, interest on the lease liability is recognized separately from the amortization of the right-of-use asset in the income statement.

  For an operating lease, a single lease cost, generally allocated on a straight-line basis over the lease term, is presented in the income statement.

  Materiality of assets

  Another key difference between the GAAP and IFRS standards is the issue of materiality. The IFRS standard maintains an exemption for low value assets such as telephones and computers. A threshold of $5,000 was cited by the IASB as a parameter to use to assess materiality.

  The US GAAP standard doesn’t specify a cost level but allows that lease assets that are considered immaterial, need not be capitalized.

  Sublease accounting classifications

  Another key difference between the GAAP and IFRS standards relates to the classification of a sublease:

  • FASB’s ASU No. 2016-02 requires an initial lessee that subleases the underlying asset, therefore becoming a sub-lessor, to determine the classification of the sublease by referencing the leased asset in the original lease.
  • IFRS 16 requires that the sub-lessor determine the sublease classification by referencing the right-of-use asset that arose from the original lease.

  Variable lease payments

  Yet another key difference between the GAAP and IFRS standards centers on the question of variable lease payments.

  Lessees are required to measure these variable lease payments initially at the index or rate on the lease commencement date. The remeasurement of these payments, however, differs under the two bases of accounting:

  • Under US GAAP, a lessee remeasures the payments only when it is required to reassess the lease obligation for other purposes.
  • IFRS, however, requires an entity to remeasure these payments every time an adjustment to the lease payments takes effect.

  How to define a lease term under IFRS vs. GAAP lease accounting

  Both standards permit a lessee to apply a short-term lease exemption for a lease with a term of 12 months or less. However, there’s a difference between GAAP and IFRS when it comes to the definition of a lease term.

  In determining the lease term, a lessee excludes purchase options that it is reasonably certain to exercise under US GAAP. A lessee excludes all purchase options from this determination under IFRS.

  Sale leaseback transactions

  Another key difference between GAAP and IFRS is related to sale leaseback transactions.

  A sale and leaseback transaction is not a sale under US GAAP if it does not satisfy the sale requirements in Topic 606, Revenue from Contracts with Customers. If the transaction is a sale, the seller-lessee can recognize the entire gain on the transaction.

  Under IFRS, a sale and leaseback transaction is not a sale if it does not meet the requirements for determining when a performance obligation is satisfied in IFRS 15, Revenue from Contracts with Customers (similar to Topic 606 under US GAAP). If the transaction is a sale, the seller-lessee can only recognize a gain for the amount that relates to the buyer-lessor’s residual interest in the leased asset at the end of the leaseback.

  Learn more: Sale Leaseback and the New Lease Accounting Standards

  Difference between GAAP and IFRS lease standards: Good news and bad news

  In summary, the good news is that the IFRS and GAAP leasing standards are quite similar and address the primary objective of the new standards: to make the leverage effect of leasing more transparent.

  But the bad news is that there are differences between the GAAP and IFRS standards requiring careful analysis of the lease portfolio, particularly for US based companies with international operations and leases.

  Are you ready to implement the new lease accounting standards? Our Lease Accounting Software can help you implement these new lease accounting standards and keep you IFRS & GAAP compliant. Still not sure, find out what you need in lease accounting software.

   

  The post Lease accounting: The key difference between the GAAP and IFRS new lease standards first appeared on Visual Lease.]]> https://visuallease.com/what-you-need-to-get-compliant-with-gasb-87/ Sun, 20 Dec 2020 13:15:23 +0000 https://visuallease.com/?p=2684
  

  As you probably know, all government entities must comply with GASB 87, the latest lease accounting standard issued by the Governmental Accounting Standards Board, with reporting for the period beginning June 15, 2021. 

  The new standard affects state, local and municipal governments, along with many organizations in areas of the public sector such as higher education, healthcare and utilities.

  The process for ensuring compliance with GASB 87 is a long and complex one, which means there is not a moment to waste between now and the deadline. To ensure success, organizations are advised to be compliant before their reporting deadline.

  Why a sense of urgency about GASB 87 compliance?

  As we discussed in our blog on 4 things you need to know about GASB 87, many organizations are still largely unprepared for everything they need to do to meet the compliance requirements.

  In fact, our research shows that not long ago, 74% of organizations interested in a GASB 87 lease accounting software solution were only in the initial phases of planning. These organizations have a daunting task ahead of them, with challenges including:

  • Understanding the full extent of their lease portfolios, often across many different departments and locations across the organization
  • Determining what kinds of leases they have and whether those leases must appear on the balance sheet
  • Identifying and collecting all the data points needed for lease calculations and footnotes disclosures — often, originating from different systems and in different formats
  • Implementing the new required accounting methodology, such as the new rules for calculating lease liabilities/assets and receivables/deferments

  Our research also found that more than half (59%) of organizations preparing for GASB 87 were focused on lease inventory — a critically important yet preliminary step in achieving compliance. 

  However, organizations must also consider the tremendous effort that is involved in preparation after they’ve identified all their leases. Any organizations that have not yet prioritized this crucial step must do so before it’s too late.

  When and how to move toward GASB 87 compliance

  As our accounting partner Baker Tilly advises, now is the time to start planning for implementation. Whether you are just getting started — or already doing a lease inventory —  you need to think about a software solution for managing the data, performing the necessary calculations and generating reports according to GASB 87 standards.

  That’s where lease accounting and management software can help you not only meet GASB 87 requirements, but also maintain compliance beyond the initial reporting period.

  Know what to look for in GASB 87 compliant software

  When evaluating lease accounting software, naturally you’ll want to look for a solution that specifically supports GASB 87, which requires all contracts that meet the definition of a lease to be recognized in financial statements and classified as a finance lease.

  In addition, to ease the transition to GASB 87 and streamline the lease accounting process, you’ll want to look for a solution with the following capabilities and benefits.

  Intuitive and easy to use

  • Streamline lease data collection with other business applications, such as ERPs and accounts receivable
  • Enable automated calculations and financial reports
  • Support configurable data fields and reports to match your compliance requirements and organizational needs
  • Centralize all your lease information within one system

  Robust, best-in-breed functionality

  • Incorporate years of lease financial management experience built within each feature and functionality
  • Prioritize future-readiness with ongoing investments in R&D
  • Focus on data security and privacy

  Lease portfolio accuracy 

  • Provide data visualization for visibility into lease details and costs, enabling more informed business decisions
  • Streamline lease detail management via system alerts for lease events and changes that could impact your ongoing financial reporting

  Put your multitasking skills to work on GASB 87

  With no time to spare, meeting the initial compliance deadline requires going to work immediately on gathering lease portfolio data — and at the same time, evaluating lease accounting software solutions so you can implement a solution as soon as possible.

  To learn more about the requirements of GASB 87 and how your organization can better prepare for compliance, download our free white paper Get Ready for GASB 87 Lease Accounting. 

  The post What You Need to Get Compliant With GASB 87 first appeared on Visual Lease.]]> https://visuallease.com/why-roll-forward-reports-are-essential-for-lease-accounting/ Tue, 15 Dec 2020 20:16:10 +0000 https://visuallease.com/?p=3746   Table of Contents What is a roll-forward report? The importance of roll-forward reports Roll-Forward Reports: Meeting Lease Accounting Standards The advantages of roll-forward reports Creating Comprehensive Roll-Forward Reports Why...
  The post Why roll-forward reports are essential for lease accounting first appeared on Visual Lease.]]>

   

  Table of Contents

  • What is a roll-forward report?
  • The importance of roll-forward reports
  • Roll-Forward Reports: Meeting Lease Accounting Standards
  • The advantages of roll-forward reports
  • Creating Comprehensive Roll-Forward Reports
  • Why use roll-forward reports?

  The new lease accounting standards include a variety of disclosure reports to give financial auditors visibility into an organization’s leasing activities. Although the standards do not explicitly mention roll-forward reporting, they do require companies to explain changes to leases on the balance sheet disclosing not only amounts gained or lost, but also why those gains or losses occurred.

  What is a roll-forward report?

  Roll-forward reports are a valuable tool for meeting this lease accounting requirement. They provide a detailed explanation of lease financials including period over period changes to right-of-use (ROU) assets, as well as short-term and long-term liabilities.
  What makes roll-forward reports so valuable for lease accounting and compliance?

  The importance of roll-forward reports

  If lease activity remained the same over time ,it would besimple to show amortization of ROU assets and liabilities , with schedules specifying asset and liability reductions in each period.

  The challenge is that ,in reality, a company’s leases and liabilities are always changing due to events such as:

  • New leases or transitions
  • Modifications
  • Impairments
  • Terminations
  • Regular amortization

  Roll-Forward Reports: Meeting Lease Accounting Standards

  To comply with the latest lease accounting standards, accounting must accurately and thoroughly report all those changes, including lease additions or subtractions as well as the reasons why those changes occurred.

  Forexample:

  • If a company needs to book a loss onan impaired asset ,the lease accounting is required to show the details including the corresponding reduction in the ROU asset.
  • If a company received rent abatements and decided to treat them as remeasurement events rather than variable rent expenses, the lease accounting must clearly reflect the resulting amounts and how and why the company calculated them.

  Roll-forward reports are an effective method for disclosing these and other changes that occur in the life of company’s leases.

  The advantages of roll-forward reports

  Theroll-forwardreport ingconcept issimilar toa statement of cash flows, which reconcile the differences between the cash position on the balance sheet and on the P&L statement.

  A roll-forward report does the same thing, but forleases—provid inga window into an organization’s lease portfolio, activities and business decisions, including why there are additions or subtractions in lease financials. For instance, a report may show a large change in liability but also reveal it is offset by additional lease assets.

  In addition, r oll-forward report sare a vehicle for separating finance lease s fromoperating leasesas required forASC 842compliance. The reports can also segregate and report lease information according to asset classes.

  Creating Comprehensive Roll-Forward Reports

  1. Data Accuracy

  Roll-forward reports outline the changes in your balance sheet period over period. Therefore, the first step to a roll-forward report is to ensure your lease information is accurate, up tod ate andc omplete .

  2. Multiple Data Sources and Locations

  Roll-forward reports ofteninclude leaseinformationcollectedfrom multiple sources ,such as the different departments responsible for real estate, office and IT equipment, vehicles and other assets. Data gathering may also involve individual locations in different cities, states, regions or countries.

  3. Tailoring Reports to Fit Your Needs

  The information with in roll-forward reports will vary depending on company structure, assets, and accounting and reporting needs. An example, you might create a report for the entire lease portfolio — or fora single asset, a particular department within the company, a sub-organization within a multi-national corporation or an asset class(such as real estate or equipment).

  4. Elements of an Informative Roll-Forward Report

  To be truly beneficial, the report must explain why changes happened in lease financials, as well as the amounts. Therefore, roll-forward reports for a ROU asset or a short- or long-term liability typically include the following:

  • Beginning balance
  • Additions—including new leases, transitions and modifications
  • Deductions—including modifications, impairments, terminations and amortizations
  • Recalculatede ndingb alance— including the mathematical formula
  • Ending balance comparison for the period
  • Total liability balance

  5. Transaction Classification

  The roll-forward report should classify each transaction by asset type and include payments, amortization and interest. Where companies have a classified balance sheet, they should report bothshort-term and long-term liabilities, including monthly reclassifications or, if payments are not monthly, interest accruals.

  Why use roll-forward reports?

  Roll-forward reports are an important tool for both lease accounting compliance and ongoing lease visibility. They enable financial statement users to easily view lease changes, the reasons behind themand their impact, all in one report.

  By implementing a technology platform that automates roll-forward reporting, organization scan streamline information gathering, calculations and reporting while ensuring that the process meets compliance requirements.

  Visual Lease’s industry-leading lease accounting platform supports roll-forward reporting for better validation and transparency . The platform ’s roll-forward report capabilities provide userswithaclearunderstanding of lease changes and how they impact the business . Users may easilyviewall the supporting data and leaseactivity right within the platform. Visual Lease canalsoautomatically separate financeandoperating leases for compliance with ASC 842 .

  To learn more, watch our on-demand webinar Roll-Forward Reports: When to Do it, How to Do it, and How to Automate It .

  The post Why roll-forward reports are essential for lease accounting first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-launches-the-integrations-hub-providing-powerful-flexible-open-access-to-lease-data/ Thu, 10 Dec 2020 21:24:33 +0000 https://visuallease.com/?p=3733 Lease portfolios often account for a massive portion of a company’s risk exposure and overhead. And yet, most businesses lack visibility into their leases to understand their obligations and options – and...
  The post Visual Lease launches the integrations hub, providing powerful, flexible & open access to lease data first appeared on Visual Lease.]]> Lease portfolios often account for a massive portion of a company’s risk exposure and overhead. And yet, most businesses lack visibility into their leases to understand their obligations and options – and make agile decisions as their businesses grow.

  There are several reasons for this:

  Leases are complex, constantly evolving agreements with high-stakes terms often buried in the contracts. Managing leases can be difficult due to data silos and distributed responsibilities across operations, real estate and accounting teams. This means there’s a lot of room for crossed wires, missed deadlines and costly mistakes.

  Lease accounting compliance brought the pressing need for lease portfolio management to light. When FASB announced ASC 842, several solutions flooded the market to solve this problem. However, not all of them could.

  Technology that attempts to do it all (lease administration, business intelligence, accounts payable, etc.) generally does not. Often, efficiencies promised within all-in-one solutions are lost to mediocre functionality and execution. This is especially true in a software category as new as lease accounting.

  The stakes are too high to take chances. Companies require specialized lease administration and accounting tools, and they need those tools to seamlessly integrate into their processes and technology stacks at each stage of the lease lifecycle.

  How to Optimize the Lease Lifecycle

  From sourcing to contract negotiation to termination, there’s a lot that goes into the lifecycle of the lease – and each stage is dependent on the last.

  • Procurement decisions are better when you have informed analytics on asset utility.
  • Lease accounting reports are better when you have all your lease management information centralized and accessible.
  • It’s easier to manage your leases when you can easily reference important clauses and deadlines embedded in contracts.

   

  

  There are countless software and service providers dedicated to streamlining every stage of a lease. But they can only maintain accuracy if data flows between them securely, automatically and asynchronously.

  

   

   

  With the right solution for each facet of your business and a secure, flexible tech stack, companies can leverage their leased properties and equipment as strategic financial assets vs. overhead expenses.

  Integrations are the key to connect those solutions, drive efficiency and unlock insights and financial opportunity.

  Introducing the Integrations Hub, a powerful new way to automate workflows, unlock insights and achieve end-to-end compliance across your lease portfolio and your business.

  The Integrations Hub offers flexible, open platform access to any third-party application. Users can simply schedule, monitor, manage and automate data imports and exports to and from Visual Lease at any time. (Think of it as a lease lifecycle electrical socket, allowing you to supercharge your tech stack with a simple plug-in.)

  Given the complexity and often customized configurations in accounting technology, a one-size-fits-all API isn’t enough. We believe there is no such thing as a silver bullet integration – whether it’s built by us or anyone else.

  With the Integrations Hub you’ve got more options to leverage your lease data, including:

  • Low-maintenance Managed File Transfers for schedule automated data imports and exports
  • An accessible Developer Portal with a comprehensive REST API Library enabling customized, real-time data connectors. With just a few lines of code, a developer can access accurate data along with powerful and complex processes in a repeatable way.
  • Track every transfer in real-time with the integrations hub Dashboard to cat ensure data integrity and auditability.

  It’s all backed by the industry’s most informed and experienced professional services team.

  Imagine the possibilities:

  • Align every line in your general ledger by connecting journal entries from Visual Lease or tracking payment information in accounts payable.
  • Convert currencies across continents by plugging in currency rate tables to Visual Lease for always-accurate calculations, no matter the location.
  • Inform Business Intelligence by surfacing the right data at the right time in the system and format where it’s most helpful.

  The technology team at Newmark was instrumental in helping us build and test this new technology, and they’re already using the Integrations Hub to leverage lease data across their tech stack.

  Newmark is a Visual Lease customer and a leading commercial real estate firm that provides a fully integrated platform of services to prominent multinational corporations and institutional investors across the globe.

  The technology team at Newmark was instrumental in helping us build and test this new technology, and they’re already using the Integrations Hub to connect lease data to their Business Intelligence tool, NavigatorCRE.

  According to Carla Hinson, Newmark’s Executive Managing Director, Global Technology, this opens up possibilities.

  

  At our live launch event, Hinson sat down with Bobby Paulus, Visual Lease’s Director of Strategic Alliances, to talk through her experience getting Newmark’s integrations set up, the value they’re are already experiencing and what’s next on their roadmap. To listen to the full conversation, watch the event recording.

  If you’re ready to supercharge your tech stack– and integrate your lease data across systems, we’re excited to help you get you plugged in. Check out this page on our website for more information.

  The post Visual Lease launches the integrations hub, providing powerful, flexible & open access to lease data first appeared on Visual Lease.]]> https://visuallease.com/embedded-leases-accounting-do-your-contracts-contain-leases/ Thu, 10 Dec 2020 15:00:00 +0000 https://visuallease.com/?p=859 What is an embedded lease? Simply put, embedded leases are components within contracts that entail the use of a particular asset, where the user has control over that asset. You...
  The post Embedded Leases Accounting: Do your contracts contain leases? first appeared on Visual Lease.]]>

  What is an embedded lease?

  Simply put, embedded leases are components within contracts that entail the use of a particular asset, where the user has control over that asset. You might be surprised at some of the types of contracts that often contain embedded leases, even though the contract may not contain the word “lease.”

  Accounting for Embedded Leases represents one of the trickier aspects of implementing the new FASB and IASB lease accounting standards.

  In this article, we’ll review the definition of embedded leases for ASC 842 and IFRS 16. Then we’ll go over guidelines for determining if an embedded lease exists, clarifying with an embedded lease example.

  The impact of embedded leases under the new standards

  For organizations with hundreds to thousands of leases, the need to be ready to comply with ASC 842 and/or IFRS 16 is keeping accounting teams busy. And private companies that have not yet adopted ASC 842 and must do so by December 15, 2021, still have a big task ahead, including:

  • Gathering all the necessary data about property and equipment leases
  • Implementing technology to do all the calculations and create journal entries
  • Deciding how to amend your policies and procedures

  Complicating the problem still further is the requirement to report on embedded leases that may be found in other types of contracts, especially those with service providers.

  Although you may have done some embedded leases accounting in the past, it’s now a much bigger issue because the new standards bring operating leases, and even some types of service contracts, onto the balance sheet.

  That means embedded leases accounting has a much bigger impact on your income statement under the new rules. Streamline this tedious process by utilizing our lease accounting software to save time and ensure embedded leases meet the new lease accounting standards

  Common areas for Embedded Leases

  • Service agreements: Contracts for services may include the use of specific assets. For example, a maintenance agreement that includes the use of equipment or a service contract for the use of a photocopier.
  • Supply agreements: Contracts for the supply of goods may include the use of assets. For instance, a contract to purchase goods that includes the right to use storage or warehousing facilities.
  • Construction contracts: Contracts for construction or infrastructure projects may involve the use of equipment or other assets. The contract may grant the lessee the right to use specific machinery or vehicles during the construction period.
  • IT contracts: Contracts for software licenses or IT services may include the use of underlying hardware assets. For example, a software license agreement that also provides the right to use specific servers or computer equipment.
  • Franchise agreements: Franchise agreements often involve the use of leased premises, such as a retail store or restaurant, as well as the use of other assets, such as equipment or vehicles.
  • Licensing agreements: Agreements for the licensing of intellectual property rights may include the use of assets. For instance, a licensing agreement that grants the right to use specific manufacturing equipment to produce licensed products.
  • Marketing or sponsorship agreements: Contracts for marketing or sponsorship activities may involve the use of assets. For example, an agreement that provides the right to use certain advertising displays or event equipment.

  Embedded leases accounting: 3 questions for identifying embedded leases

  In preparation for the new lease accounting standards, you’ll need to review the content of all your existing contracts to determine if they include embedded leases.

  As you review those contracts, ask the following questions to decide if they contain embedded leases and make judgments on a case by case basis with the assistance of your advisory partners.

  1. Does the agreement entail the use of one or more specific assets?
  If no assets are specified, then no lease can exist within the contract. However, if an asset is explicitly or implicitly identified within an agreement, then a lease may exist.

  Keep in mind that a lease may exist even if not specifically labeled as a lease within the contract. For example, power purchase agreements may include the use of a specified plant. Oil and gas drilling contracts may specify the use of equipment and pipelines.

  2. Does the supplier have the practical ability to substitute a different asset?
  If your agreement does specify the use of an asset, can the supplier easily substitute a different asset? And would the supplier benefit economically by doing so?

  On the other hand, if the asset is an office copier, it’s not likely that the supplier can easily swap out one machine for another. And it’s also not likely that the supplier would benefit financially from doing that even if they could. In that case, a lease may be present.

  In an example related to real estate, today’s corporate property portfolios often include the use of co-working space. If a co-working agreement doesn’t guarantee the use of a specific space within a building (such as hot desking), then the agreement may not be considered a lease.

  3. Do you have control over use of the asset?
  If you have physical control and decision making authority over the use of the asset, then a lease may be present.

  Real World Examples of Embedded Leases

  • Office Space in a Service Contract: A company enters into a service contract with a facility management company for various services, such as cleaning, maintenance, and security. The contract also includes the use of specific office space within the facility. The right to use the office space would be considered an embedded lease.
  • Equipment in a Software License Agreement: A company purchases software licenses from a vendor, and the agreement also grants the right to use specific hardware equipment required to run the software. The use of the equipment within the software license agreement would be considered an embedded lease.
  • Vehicles in a Franchise Agreement: A franchisor grants a franchisee the right to operate a fast-food restaurant under their brand. The franchise agreement also includes the use of specific vehicles for delivery purposes. The right to use the vehicles within the franchise agreement would be considered an embedded lease.
  • Storage Space in a Distribution Agreement: A company enters into a distribution agreement with a logistics provider to store and distribute its products. The agreement also includes the use of specific storage space within the logistics provider’s warehouse. The right to use the storage space would be considered an embedded lease.
  • Manufacturing Equipment in a Licensing Agreement: A company licenses a patented manufacturing process from another company. The licensing agreement includes the right to use specific manufacturing equipment required to implement the process. The right to use the equipment within the licensing agreement would be considered an embedded lease.

  Embedded leases accounting: next steps

  Once you have determined which contracts do contain embedded leases according to the new lease accounting standards, what’s your next step? You’ll need to extract and get that data into a lease accounting software solution.

  Learn more:
  Data Collection Tips for ASC 842 Transition and IFRS 16 Compliance
  Can You Trust AI for Lease Abstraction?

  When implementing the new FASB and IFRS lease accounting standards, it’s easy to overlook the ongoing maintenance of your lease data. To avoid an unexpected burden on Day 2, be sure to choose lease accounting software that will make it easy to accommodate changes to existing leases and automatically update your accounting accordingly.

  Questions? Let us show you how easy it is to manage your lease data and accounting in Visual Lease.

  

  The post Embedded Leases Accounting: Do your contracts contain leases? first appeared on Visual Lease.]]> https://visuallease.com/how-to-solve-for-the-top-asc-842-lease-accounting-challenges/ Mon, 23 Nov 2020 19:25:02 +0000 https://visuallease.com/?p=3680 How to Abstract, Manage and Report on Lease Data  When FASB issued its update to the lease accounting standard, the main goal was to increase the transparency and comparability of financial reporting.  ...
  The post How to solve for the top ASC 842 lease accounting challenges first appeared on Visual Lease.]]>

  How to Abstract, Manage and Report on Lease Data 

  When FASB issued its update to the lease accounting standard, the main goal was to increase the transparency and comparability of financial reporting.  

  Unfortunately, there are many complex decisions and actions required to successfully achieve compliance. You’ll want to make sure to provide yourself with enough time and resources to get it done right. 

  Fortunately, you’re not alone – and hundreds of public and private companies have already gone through this process. With proper insight into common potential obstacles, you can more clearly navigate through the process and achieve success. 

  While there is certainly no shortage of difficult tasks to achieve compliance, we’ve narrowed down the top 4 common lease accounting challenges experienced by public companies – and how to solve them.  

   

  Challenge 1: Centralizing all leases in one place   

  A crucial first step in the transition to ASC 842 is to identify all leases held by an organization and enter the pertinent information in one location. 

  To do so, you will need to start by gathering each lease within your organization, including any leases that may be part of a contract, such as an embedded lease. This effort requires careful analysis and judgment – and typically involves extensive coordination across departments and business units to ensure all leases are included.  

  Often a time-consuming and cumbersome exercise, it is crucial to provide your organization with ample time to complete this step. (For help with your project timeline, request a customized milestone planner to outline when to begin).  

  Once all the leases within your company have been identified, you’ll need to import important lease information into a centralized location to help you view all your leases in one place and access lease information at any time. 

  This step often contains a high volume of labor-intensive work. Extracting lease data (also known as abstracting) from complicated contracts is a complex task that will need to be done for every lease – and any time your company signs new leases and modifies existing lease contracts.  

  Depending on the size of your company and resources available, you may need to assess whether it is better to perform this this task in-house or with external professional abstracting resources.

   

  Challenge 2: Identifying technology that does more than calculate  

  Your chosen lease accounting technology is just as critical to the lease accounting standard transition and will greatly impact your ongoing ASC 842 compliance.  

  While some solutions may sound similar on paper, only a select few are able to provide you with the proper tools to ensure your company’s lease information is accurate at the get-go, and remains up-to-date over time with minimal effort. 

  If you are in the market for a system, don’t settle for any solution that promises to produce accounting calculations. You’ll need to make sure it also makes it easy to facilitate ongoing, long-term compliance by properly tracking lease updates. 

  From the start, look for a tool that can deliver the following: 

  • System Integration Capabilities: Lease accounting data should be able to easily integrate into necessary third-party applications to further automate of journal entries, financial disclosures and accounts payable information. Previously, many companies did not pay attention to integrating their leases within their accounts payable system, but with the advent of the new standard, your business may benefit from re-examining its payment processes through a solution that facilitates integration between accounts payable and the lease information. 
  • Lease Management Features: Ensure up-to-date lease information with a tool that makes it easy to track and manage leases on an ongoing basis. With lease information that is searchable and available at a glance, your business can stay on top of payments, renewals and options, as well as compliance requirements. 
  • Modern Software Updates: Don’t get stuck using a system that doesn’t prioritize developing new features and capabilities. To keep up with the most current trends in lease accounting, you’ll want to make sure your chosen system is dedicated to helping you achieve your goals and saving you time by releasing new innovative features and functionality. 

  Save yourself the trouble and inefficiencies of a tool that under–promises its ability to deliver what you need – and more importantly, consider the long-term impact of lease accounting software to avoid having to start all over again after you’ve already done the hard work of preparing for the lease accounting deadline. 

   

  Challenge 3: Making critical decisions that impact business financials 

  In the early stages of transitioning to ASC 842, there are a number of essential, albeit challenging decisions that companies are responsible for, which impact overall lease accounting and reports. 

  • Applying the ASC 842 Guidance: When transitioning to the new standard, companies can elect one of two approaches to apply the guidance: 
  • • Most commonly, you can retrospectively apply the guidance at the beginning of the period of adoption through a cumulative-effect adjustment, known as the modified retrospective approach. In this approach, you no longer are responsible for capturing leases you no longer hold. However, this option presents its own challenges, requiring all lease data to be current and up to date. 
  • • Uncommonly, you can retrospectively apply the guidance to each prior reporting period presented in your financial statements along with the cumulative effect of the initial application, to the earliest period presented. In this approach, you are restating prior periods as the standard had applied to them, which presents an enormous challenge to recalculate and apply the current standard to leases you no longer hold. 
  • Determining Discount Rates: Companies need to exercise judgment when determining their discount rates. The elected discount rate can have a substantial impact on your balance sheet. 
  • • For lessees, if the discount rate is clearly stated within a lease – called an explicit rate – the lessee is required to use that. However, it is rare for a lease to include this – and nearly impossible to calculate without it. To do so, the lessor would need the lessor’s financial information to determine this discount rate. 
  • • If that rate cannot be easily determined, companies can use the incremental borrowing rate (IBR). The IBR is the rate you would have to pay or borrow on a collateralized basis over a similar term. While this is a more common option to select, it also presents its own challenges. IBRs are often easier for big companies, but more difficult for private companies. However, it’s common for private companies to pick a risk–free rate.  
  • Payments and Allocations: When calculating lease liability, companies must decide whether to consider renewal periods and termination periods, which ultimately impact the length of liability (and financial obligation) in financial reports.  
  • • You may also choose to allocate lease payments between lease components and non-lease components, depending on what practical expedients (see below) your company has elected.  
  • Policy Elections: When choosing policy elections, it’s important to consider the current policies and types of lease contracts.  
  • • Selecting policy elections help to determine the broader impact, rather than just the immediate impact on your financials.  
  • Disclosure Requirements: While the new standard includes quantitative and qualitative disclosure requirements, companies are responsible for more than the minimum reports documented in the guidelines. 
  • • Company management needs to consider the disclosure requirements within existing lease contracts and plan how to gather the relevant disclosure information. Organizations must be able to explain the changes made within their balance sheet period–over–period – and may do so through a roll-forward report. 
  • Practical Expedients: FASB allows certain practical expedients to facilitate transition accounting and general lease accounting.  
  • • You should select the practical expedients carefully after considering your current accounting policies and the broader impact of these practical expedients.  
    • You may need to choose some of these elections as a package, as described in ASC 842 Practical Expedients and Transition Requirements.  

  Challenge 4: Meeting ongoing auditing, risk management and tax accounting needs 

  Early coordination with auditing, risk management and tax functions of your company is another important element of planning that commonly presents challenges for companies while adopting ASC 842. 

  • Auditing – This standard is brand new – and there’s flexibility in the guidelines, which leaves some areas open to interpretation. Meet with your auditors early in the adoption process to help substantiate your decisions – which will only save you time when it comes for the time of the audit. This helps ensure that any questions about system controls are addressed prior to transition to ASC 842, including: 
  • • The overall control environment surrounding leases 
    • Automated versus manual controls 
    • System implementation requirements 
  • Risk Management – There are now higher stakes to having an accurate balance sheet with up-to-date lease information. Therefore, effective risk management includes a high level of interaction between lease accounting and administration to keep accurate lease financials and ensure payments are made on time. To do this properly, a selected lease accounting system should include the ability to identify and maintain leases. 
  • Tax Accounting – While tax accounting is often separate and distinct from financial accounting, recognition of deferred taxes may be a component of lease accounting. So, confer with your tax expert to make sure the general ledger and the lease accounting system properly consider deferred taxes. 

  Although there are various decisions ahead that require careful consideration for the lease accounting deadline, there are many resources available to help. Hundreds of public and private companies have already navigated the various requirements – and achieved success, which you can learn from.  

  By arming yourself with as much information as you can ahead of time, you too can be prepared to reach lease accounting compliance. Furthermore, a lease accounting system can provide you with an automated, easy transition to the new guidance – and result in significant savings for your business that you may have previously overlooked to help control, reduce or negotiate lease costs. 

    

   

  The post How to solve for the top ASC 842 lease accounting challenges first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-milestones-top-3-reasons-to-identify-internal-resources-early/ Fri, 13 Nov 2020 14:58:08 +0000 https://visuallease.com/?p=3658   Hundreds of private organizations have begun their journey towards lease accounting compliance. Although, many of them underestimate the amount of effort involved with preparation. In particular, assembling a team...
  The post Lease accounting milestones: Top 3 reasons to identify internal resources early first appeared on Visual Lease.]]>

   

  Hundreds of private organizations have begun their journey towards lease accounting compliance. Although, many of them underestimate the amount of effort involved with preparation. In particular, assembling a team of internal resources – and identifying their responsibilities – is one of the most important steps to a successful implementation.

  In this blog, we explore 3 critical ways your lease accounting and management team can help you achieve success – and why you should get started now.

  1) Lease inventory demands cross-departmental effort.

  Identifying all leases held by an organization is a complex and time-consuming task that the accounting team cannot do alone.

  To gather a full scope of all leases, accounting must engage with different areas of the business, including real estate and finance. You may also find it necessary to also include representatives from lease administration, C-level management, legal, procurement and IT.

  Real estate or facilities teams are an efficient way to identify a company’s property leases. If a business has multiple locations, this may involve tracking down records from many different sites.

  Additionally, departments such as procurement, IT and legal are essential to search through records for equipment leases and other contracts classified as leases under the new standards. For example, procurement might use a spreadsheet or other tool to track assets such as office machines, IT equipment or vehicle fleets.

  By involving the necessary personnel early in the lease identification process, companies can feel confident that their lease inventory is thorough and accurate.

  Learn more: How to Assemble Your Readiness Team

   

  2) Lease information affects a variety of business decisions.

  A company’s chosen lease accounting technology affects more than just the accounting team. Centralizing lease information into one system can transform efficiencies and financial savings beyond lease accounting compliance.

  Therefore, when evaluating a lease accounting system, you will want to have a clear understanding of who will need to access lease information. The chosen solution should make it easy for them to make updates, run reports and export any data they may need. Thus, it may be necessary to include those representatives during the evaluation of the solution.

  For instance, any employees responsible for ongoing tracking and management of leased assets — including making changes and adding any new leases — should be identified to verify the system is intuitive and easy to use, and therefore will help them keep lease data accurate and up to date.

  You may want to also include various departments, including IT, to evaluate how lease technology can support your organization beyond just accounting compliance, including accounts payable, accounts receivable and other data-driven decisions. IT is integral to this process, to ensure the solution can properly meet your requirements for integration with various third-party systems.

  Furthermore, involving executives, real estate/facilities staff, and others in the preparation process can make sure the chosen solution meets their needs beyond accounting and compliance requirements.

   

  3) Teamwork is essential to lease accounting compliance.

  It clearly takes more than the accounting team to transition to the new lease accounting standards and achieve compliance.

  By identifying the roles and responsibilities of internal stakeholders early in the process, the compliance team can create a plan of action that ensures accountability throughout lease accounting implementation.

  A team approach improves the efficiency, thoroughness and accuracy of data abstraction, which ultimately helps to ensure the company will meet compliance requirements on time and on budget.

  Together, the transition team can make informed decisions that will make long-term impacts on the company’s lease investments.

  Long-term benefits for lease accounting and for the business

  Once a company successfully transitions to the new lease accounting standards, the identified team can continue to use lease technology to share information and make decisions that impact both financial reporting and business performance — empowering the company to both maintain ongoing compliance and maximize the return on leased asset investments.

  To create a plan for assembling your stakeholder team and other steps of lease accounting  implementation and compliance, use the Lease Accounting Milestone Planner.

   

  The post Lease accounting milestones: Top 3 reasons to identify internal resources early first appeared on Visual Lease.]]> https://visuallease.com/everything-you-need-to-plan-for-lease-accounting-compliance-in-one-free-tool/ Thu, 01 Oct 2020 16:20:07 +0000 https://visuallease.com/?p=3486 Buying technology for cross-functional teams can be notoriously nightmarish, especially as you dive in and realize you need to expand your scope, shorten your timelines, or overhaul your processes along...
  The post Everything you need to plan for lease accounting compliance in one free tool first appeared on Visual Lease.]]>
  Buying technology for cross-functional teams can be notoriously nightmarish, especially as you dive in and realize you need to expand your scope, shorten your timelines, or overhaul your processes along the way. It can be overwhelming, especially in lease management.  

  Real estate lease documents are complicated, convoluted, and constantly changing, with big implications for the bottom line (not to mention looming FASB and GASB compliance deadlines) if the process isn’t managed correctly. And yet, for most businesses, the lease portfolio is both the second largest cost center behind payroll and the area of their finances they have the least visibility into and control over.  

  The right lease management software won’t just spit out compliance calculations – it will transform your business and the way your team works together, surface insights to help you stay on top of timelines and obligations and save you money by making sure you’re leveraging your leased assets as efficiently as possible.  

  It starts with complete and correct lease portfolio data, and a team aligned on processes, budgets, responsibilities, and goals. It’s easier said than done, but we’ve built a free tool to help companies on the path to compliance manage expectations, timelines, requirements, and teams.

  
  Introducing the Lease Accounting Milestone Planner 

  We’ve helped more than 700 companies take control of their lease portfolios and achieve compliance with IFRS, FASB and GASB lease accounting standards, and we’ve seen first-hand how complicated (and time-consuming) that process can be for companies.    

  In everything we build, we aim to embed and automate industry best practices so our clients don’t miss any potential savings – and don’t have to think twice about it. Whether you choose Visual Lease or another solution, we thought it important to embed these learnings within a planner to help you understand what it takes to hit these deadlines – or even better, get ahead of the curve.   

  So, we tagged our lease management and accounting experts internally and teamed up with the lease accounting experts at RSM and Grant Thornton to create a convenient tool to help you plan for these important deadlines and map out your plan for success.   

  The Lease Accounting Milestone Planner is the industry’s most comprehensive tool to help companies plan for FASB and GASB lease accounting standard compliance. 

  Simply enter the compliance standard you need to comply with and the target date you’re aiming to finish by and we’ll lay out a timeline for you and your team complete with milestones you can easily add to your calendar and resources to help you nail every step in the process. 

  Get your Personalized Compliance Plan

  The post Everything you need to plan for lease accounting compliance in one free tool first appeared on Visual Lease.]]> https://visuallease.com/how-to-save-money-and-improve-roi-with-lease-accounting-technology/ Fri, 18 Sep 2020 13:00:32 +0000 https://visuallease.com/?p=3444 How to Save Money and Improve ROI with Lease Accounting Technology Leases are complex documents that can be challenging to interpret. Critically important details are often buried deep within a...
  The post How to save money and improve ROI with lease accounting technology first appeared on Visual Lease.]]>

  How to Save Money and Improve ROI with Lease Accounting Technology

  Leases are complex documents that can be challenging to interpret. Critically important details are often buried deep within a lease and can be (literally) hard to find. — Multiply that by hundreds of leases that companies often have, keeping up with all the different lease provisions is even more demanding.

  Yet, understanding lease obligations and options is a fundamental requirement of doing business and managing costs. A lack of insight into important lease details can put organizations at risk of unnecessary expenses — or of not meeting compliance requirements.

  With the new lease accounting standards, the penalty for not accurately reporting your lease obligations is now much higher and can include steep fines. These high stakes are what make a lease accounting and administration solution such a powerful tool — one that provides valuable insights that can help your business avoid unnecessary lease costs and maximize the return on your lease investments.

  Let’s take a closer look at how a lease accounting solution can help you identify cost savings and improve your ROI.

  1. Improved Visibility into Lease Obligations

  For public companies, lease obligations have implications for the balance sheet and compliance. For private companies, these obligations also have an impact on compliance, as well implications for bank covenants and for stakeholders who are concerned with assessing business risks.

  A lease accounting system should provide tools for not only automating vital accounting and disclosure reporting functions, but also ongoing tracking of all the leases in your portfolio.

  Technology should make leases more clearly defined and understandable — providing fixed fields of data that improve visibility into key aspects of leases such as:

  • Financials, including calculations and reports
  • Critical dates — and the consequences of missing those dates
  • Termination rights, like early termination, lease bailout (“sales kickout”), co-tenancy, exclusive use and sublet clauses

  This high level of transparency regarding lease obligations helps you mitigate risks and stay on top of important lease details that need your attention.

  For example, the system should alert you about an automatic renewal on a property lease you negotiated long ago — giving you the opportunity to determine whether the terms are still favorable or if they need to be renegotiated.

  Similarly, with visibility into equipment lease auto-renewals, you can compare the lease cost with the current market value of the asset to determine whether it makes more sense to purchase than to continue leasing the equipment. 

  Some systems can also alert you to events that you have to act on by a certain deadline, such as lease buyout opportunities.

  2. Additional Savings in Auditing Costs

  By improving lease transparency and automating the tracking and accounting process, lease accounting technology helps improve the accuracy and thoroughness of reporting. In turn, this reduces the amount of back and forth with auditors, which reduces costs overall. (For example, one customer saved tens of thousands of dollars in auditor fees by using Visual Lease’s lease accounting system.)

  Lease accounting software also should provide an audit trail, including a detailed log in which every lease change can be viewed. This helps to assure auditors that all lease information is up to date and accurate.

  3. Analyses That Help Lease Negotiations

  The reporting and analysis capabilities within lease accounting and administration systems should enable you to identify and capture information that is valuable to your business — information that can help you make decisions for the future.

  For example, in light of COVID-19, many businesses are now reevaluating boilerplate language within leases and abstracting clauses related to lease terms such as force majeure, business interruption insurance and termination options.

  A lease accounting and administration solution should enable you to search your leases for particular clauses that have been favorable to you — or, on the other hand, clauses that have not been beneficial — and use that knowledge when negotiating a new lease or a renewal.

  For instance, you might uncover that your monthly rent includes duplicate costs for services you were not aware of and are also paying for separately, such as cleaning, repairs or trash removal.

  Armed with this information, you may be able to renegotiate to have those costs removed from your lease agreement — or, you can cancel the services you have been paying for separately and take advantage of the services that the landlord provides.

  4. Automated Lease Accounting ROI

  For anything other than a small lease portfolio, manual accounting simply does not provide the tracking and analysis capabilities that a business needs to effectively manage leases on an ongoing basis. The alternative of outsourcing the task to an accounting firm can rack up thousands of billable hours in fees — a costly proposition for even a large company.

  Automating the lease accounting process brings a new level of efficiency into your business while helping you use your leased assets more effectively, for a greater return on those investments. The bigger your lease portfolio, the greater your opportunity for savings.

  How much can you save? Find out by using our simple ROI Calculator.

  Just plug in some numbers — including both real estate leases and equipment leases — for how many leases you have and your average annual spending per lease. 

  The ROI Calculator will not only show you the savings to be gained by automating your lease tracking and reporting functions, but also demonstrate the value that a lease accounting and administration solution delivers to your business.

  The post How to save money and improve ROI with lease accounting technology first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-lessons-from-a-public-company/ Thu, 03 Sep 2020 20:16:05 +0000 https://visuallease.com/?p=3370 Lease Accounting Compliance: Lessons from Public Companies Although private companies still have some time to adopt the new lease accounting standards, public companies have already had to meet their compliance...
  The post Lease accounting lessons from a public company first appeared on Visual Lease.]]>

  Lease Accounting Compliance: Lessons from Public Companies

  Although private companies still have some time to adopt the new lease accounting standards, public companies have already had to meet their compliance deadlines. In doing so, these companies have learned valuable lessons that can be applied to:

  • Private companies that are in the planning stages of lease accounting compliance
  • Public companies that rushed to select a tool and now see they need a better, long-term solution for their lease accounting needs

  What are some of the things that helped public companies be successful in implementing the new lease accounting standards? What areas could have been improved?

  Below, we share some helpful advice based on the experience of public companies that have already adopted new lease accounting standards.

  Challenges in Achieving Lease Accounting Compliance

  What lease accounting capabilities do you need for long-term reporting and compliance?

  Some public companies found out the hard way that the accounting solution they chose was missing key capabilities that they need to ensure accurate, ongoing lease financials. 

  For example, while some companies used a lease calculator tool to meet their initial compliance needs, they now realize it will not help them maintain compliance and do their reporting for the long term. 

  That’s because every time a lease changes (which is often), the pertinent information needs to be updated in the lease accounting system so that subsequent reporting will be accurate. However, a lease calculator simply does not provide the tools for updating and maintaining lease data.

  Public companies that chose a software-based solution with the following capabilities are better positioned for long-term compliance and accuracy:

  • A single source of truth for lease data
  • Automated calculations and financial reporting, including disclosure reports
  • Tools for backup and verification of calculations and lease data

  What is the best way to manage a large and/or complex lease portfolio?

  Any public company with multiple locations or a large lease portfolio — including equipment and real estate — quickly learned that manually searching for and reporting on those leases would be a time-consuming and inefficient process.

  To save hundreds of hours in time finding and verifying lease information, select a solution that provides a central repository for recording and tracking lease data. Once your leases are entered in the system, you can easily generate the reports needed for compliance — plus use the solution for ongoing updates and to view lease details on demand.

  Advice for Successful Lease Accounting Audits

  How long does it take to implement lease accounting?

  Time and again, public companies learned that lease accounting implementation is a complex and time-consuming project, with high stakes and stakeholders across the business. 

  While a lease accounting software solution can be implemented in weeks, the work required before solution implementation can take many, many months. So, it is mission-critical to invest  time up front in both auditing your lease portfolio and evaluating the technology you will use for lease accounting.

  For help in planning your lease accounting compliance project, use our Lease Accounting Milestone Planner. 

  What are some best practices to satisfy auditors? 

  Leases can change fast and it can be hard to stay on top of them. To provide auditors with accurate and thorough lease financials, it is recommended to have checks and balances in place. To do so, you can use a lease accounting system to provide a full audit trail of updates to your changing leases. This helps provide auditors with a clear and complete picture of your business’s finances.

  Strategies for Maintaining Compliance

  How do you maintain accurate lease financials beyond compliance?

  Look at the new lease accounting requirements as an opportunity to get the best solution for the long term — one that will continue to meet your business needs and satisfy auditors year after year.

  For example, a technology solution that provides both lease accounting and lease administration capabilities helps public companies:

  • Achieve compliance and meet ongoing lease accounting requirements
  • Ensure that lease data is always accurate and up to date
  • Save time by making lease information searchable and available at a glance
  • Control costs by staying on top of all payments and transactions
  • Meet important dates for renewals, renegotiations and options

  How can you account for a growing or changing lease portfolio?

  With the time and cost required to implement lease accounting, it makes sense to choose a solution that does more than just help you achieve compliance. Successful public companies opted for technology that will scale to accommodate any changes that might occur in their lease portfolio and provide ongoing lease management capabilities.

  A cloud-based software solution can not only automate and streamline lease accounting and reporting, but also provide tools for making changes to financials, adding documents and clauses, searching for lease clauses and editing existing leases.

  The Simple But Important Lessons Learned

  As the experience of public companies are shown, there are some fundamental lessons that can help you to achieve lease accounting success:

  • Get started now — start planning for your lease inventory and your lease accounting technology ASAP
  • Do your research — get input from across the business, and perhaps consult an accounting firm, to identify leases and reporting requirements
  • Think ahead to your lease management needs beyond compliance — to get maximum ROI from your lease accounting technology
  • Set yourself up for success — choose a comprehensive lease accounting and lease management technology solution, such as Visual Lease

  Want to hear directly from a public company about their experience preparing for and managing ongoing lease accounting compliance? View our on-demand panel discussion.

  The post Lease accounting lessons from a public company first appeared on Visual Lease.]]> https://visuallease.com/asc-842-deadline-extension-how-to-plan-for-success/ Mon, 10 Aug 2020 13:31:09 +0000 https://visuallease.com/?p=3205 Many private companies breathed a sigh of relief when the deadline for transitioning to FASB’s newest lease accounting standard was once again extended — this time, until 2022. But make...
  The post ASC 842 Deadline extension: How to plan for success first appeared on Visual Lease.]]>

  Many private companies breathed a sigh of relief when the deadline for transitioning to FASB’s newest lease accounting standard was once again extended — this time, until 2022. But make no mistake, it would be a serious miscalculation to put aside the task of preparing for ASC 842 compliance.

  The smart approach is to not see the latest lease accounting deadline extension as a reprieve, but instead look at it as an opportunity to get the ASC 842 adoption process on track and where it should be.

  Why make the lease accounting deadline a top priority?

  A lot of time and effort goes into preparing for lease accounting compliance. Just the labor-intensive and complex task of gathering all your leases and identifying critical lease information before implementation can take a year or even 18 months for some companies.

  Just ask Apex Tool Group (ATG), a company that implemented Visual Lease to streamline its ASC 842 compliance process. 

  “We began compiling data about a year prior to our targeted implementation with Visual Lease,” said Nick DeNichilo, Director of Financial Reporting and Technical Accounting at ATG. “We knew it would be a daunting task to gather all our lease information, considering our vast entities located throughout the world and robust number of leases — including multiple complex leaseback real estate agreements.”

  That’s why, despite the lease accounting deadline extension, it is still critically important to prioritize preparing for the transition — and to get started by completing the tasks below as quickly, efficiently, and thoroughly as possible.

  Inventory your leases ASAP.

  Depending on your company, you might have hundreds or even thousands of leases in different departments and different locations. While real estate leases are generally the more costly contract that a business holds, most companies have a higher number of leases for equipment such as:

  • Office tools including computers, printers, copiers, phones, servers, and routers
  • Vehicles ranging from automobiles, vans, and trucks to equipment used for farming, construction, or product transport
  • Advertising resources such billboards, signage, and corporate sponsorships
  • Telecommunications, IT, or energy infrastructure

  In addition, you might have to account for some embedded leases — components within a contract that provide for the use of particular assets.

  Lease Inventory Tip: Be sure to check with the different departments in your organization —such as real estate, facilities, operations, procurement and IT — to ensure that you have a comprehensive list of all the leases throughout your company.

  To learn more, read our 5 Tips for Smooth Lease Data Collection.

  Compile and validate your lease accounting data.

  Gathering the specific lease information required for the compliance deadline is another time-consuming task. That’s why is it important to designate responsibilities and steps up front, including:

  • Who will review each lease and pull out the information you need to track?
  • What will your review process be?
  • How will you ensure that it is all accurate and up to date?

  Once your lease information is compiled and entered into a lease accounting system, you need to validate the data and make sure the reports that the system generates will:

  • Accurately reflect all your lease assets
  • Meet ASC 842 compliance requirements

  Lease Data Validation Tip: The right lease accounting software partner will work with you to validate your data and help to ensure that the system is capturing all the information you need.

  Track any lease changes and updates.

  Leases are not a stagnant thing. Especially when you have a large lease portfolio, you may have to deal with lease changes quite often. And as we have all seen, an unexpected event such as the COVID-19 pandemic can create disruptions that also have an impact on leases and therefore, lease accounting. 

  Implementing a system for ongoing lease accounting and management will allow you to track your leases and automatically update the data to reflect changes such as:

  • New leases
  • Terminations or amendments
  • Variable rent payments
  • Clauses that trigger lease modification
  • Deadlines for renewal, purchase or buy-out options

  Lease Tracking Tip: A lease accounting and management solution such as Visual Lease allows you to set reminders to alert you of lease events and deadlines, so that important changes don’t take you by surprise.

  Run lease accounting reports long before the compliance deadline.

  To have a successful audit, you need to be confident that your lease accounting, tracking, and reporting system is up and running well BEFORE the ASC 842 compliance deadline.

  So, as soon as your lease accounting system has been implemented, be sure to run your outputs and make sure your process works ahead of when it’s required. Running reports ahead of the deadline will help you determine if:

  • You are running the right reports
  • You are capturing all the right information 
  • You have configured all the fields that are important to accounting and to the business

  Test Report Tip: Allowing time to run reports ahead of the lease accounting deadline helps you wring out potential last-minute problems that could cost you your audit.

  Get ahead of the ASC 842 lease accounting deadline!

  Now is not the time to take your foot off the gas as you undertake the lengthy and complex process of adopting the ASC 842 lease accounting standard. Instead, you can take advantage of this much-needed “extra” time to gather the data needed for lease accounting and implement a technology solution that will help to ensure that your organization is ready for compliance.

  A combination lease accounting and administration software will help you manage your leases and also give you an important head start — enabling you to automate your lease accounting and reporting process to meet (or beat) the compliance deadline. When you select a software provider who prioritizes implementation, it can be complete in an average of 90 days.

  The post ASC 842 Deadline extension: How to plan for success first appeared on Visual Lease.]]> https://visuallease.com/survey-results-how-covid-19-has-impacted-corporate-real-estate-leases-and-decisions/ Mon, 27 Jul 2020 21:22:56 +0000 https://visuallease.com/?p=3164 We recently surveyed hundreds of companies, including 700 Visual Lease customers (see Fig. 2), about the impact COVID-19 has had on their corporate real estate leases. As seen in the...
  The post Survey Results: How COVID-19 has impacted corporate real estate leases and decisions first appeared on Visual Lease.]]> We recently surveyed hundreds of companies, including 700 Visual Lease customers (see Fig. 2), about the impact COVID-19 has had on their corporate real estate leases. As seen in the infographic images below, we found a wide range of companies that shifted the occupancy within physical office locations, which resulted in exploring rent relief options, payment deferment options, and varied other financial and operational decisions.

  

  Fig. 1: COVID-19 had a substantial impact on commercial real estate leases, causing a majority of surveyed companies to make critical decisions regarding lease payments and office locations.

   

   

  
  Fig. 2: Visual Lease customers, experienced significantly variable differences in office closures due to COVID-19, although most companies continued to pay rent without any additional relief.

  The post Survey Results: How COVID-19 has impacted corporate real estate leases and decisions first appeared on Visual Lease.]]> https://visuallease.com/3-ways-lease-administration-helps-reduce-risks-related-to-covid-19/ Thu, 02 Jul 2020 13:52:46 +0000 https://visuallease.com/?p=2993 Recently, we have talked a lot about ways that companies can understand their lease obligations and reduce costs  in light of COVID-19. What many businesses have discovered during this time...
  The post 3 ways lease administration helps reduce risks related to COVID-19 first appeared on Visual Lease.]]>

  Recently, we have talked a lot about ways that companies can understand their lease obligations and reduce costs  in light of COVID-19. What many businesses have discovered during this time is that a lack of insight into these responsibilities and costs has huge implications — not just for lease accounting, but also for day-to-day business decisions and ongoing cost management.

  As companies look ahead to recovery from the economic impacts of COVID-19, it is more important than ever to have a technology solution in place to help avoid financial issues and better manage the obligations associated with leases.

  That is where a robust lease administration solution can help businesses avoid risk and realize benefits beyond lease accounting in three crucial ways.

  1. Gain Greater Visibility into Leases with Lease Administration Software

  As many companies have recently learned, the ability to find leases and uncover the important details buried within them — including clauses, due dates, and options that have an effect on lease obligations and costs — can be a complex and time-consuming task. This is especially true for organizations with multiple locations and, potentially, hundreds of leases to manage.

  A lease management solution such as Visual Lease, which combines lease administration and lease accounting capabilities, makes it easy to manage lease data and determine your rights and responsibilities. The software provides the ability to search for specific lease parameters and gather the information you need to:

  • Track payments and analyze costs
  • Identify overpayments or opportunities to cut costs
  • Get a complete picture of leases as part of the company’s bigger financial picture
  • Make informed business decisions related to lease obligations and overall costs

  2. Keep Track of and Manage Changes Related to COVID-19

  With the closures, disruptions, and cut-backs to businesses related to the COVID-19 pandemic, many companies are coping with another new challenge — the need to keep track of any changes made to their leases during this time, such as:

  • Lease modifications
  • Lease terminations
  • Lease impairments
  • Variable payments
  • Operating expense pass-throughs

  Finding every affected lease and manually updating each one is cumbersome and time-consuming. Plus, it opens your business up to the risk of manual errors.

  Lease administration software makes it easy to change lease information when you need to — providing the tools to find the pertinent leases and quickly update them with changes to payments, terms, options, and other information you will need later for lease accounting.

  3. Stay Current on All Leases with Lease Administration Tools

  A lease administration system also helps you stay current on critical dates and upcoming events within your leases — including opportunities to make changes and save money.

  Lease administration software provides tools for tracking changes, alerting you to important  dates and events, and keeping your critical lease data up to date at all times. For instance, you can have the solution automatically alert you to deadlines for exercising lease options.

  Find More ROI in Your Leased Assets

  A combination lease accounting–lease administration software solution not only helps you organize, track, and report on lease data in accordance with the latest lease accounting standards. It also provides ready access to accurate, up-to-date information that can help you get the most value from your leased assets.

  So, while some lease accounting deadlines have been pushed back, it makes sense to implement and use a lease management solution now. It will empower you to not only handle lease issues related to COVID-19 lease, but also manage lease financials in a way that can help you maximize lease ROI, improve liquidity, and plan for the future

  Ready to get started ASAP? Request a demo of Visual Lease today!

  The post 3 ways lease administration helps reduce risks related to COVID-19 first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-software-3-ways-to-use-it-to-save-during-covid-19/ Thu, 18 Jun 2020 17:14:00 +0000 https://visuallease.com/?p=2992 Across industries, sectors and organizations of different sizes, the COVID-19 outbreak has touched virtually every business in some way. Between stay-at-home orders, emergency closures, and supply chain disruptions, companies are...
  The post Lease accounting software: 3 ways to use It to save during COVID-19 first appeared on Visual Lease.]]>

  Across industries, sectors and organizations of different sizes, the COVID-19 outbreak has touched virtually every business in some way. Between stay-at-home orders, emergency closures, and supply chain disruptions, companies are coping with a lot of operational and financial challenges posed by the crisis. 

  In the middle of all this uncertainty, the deadlines for compliance with the latest lease accounting standards have once again been extended. That means: 

  • Private companies have an additional year to adopt new lease accounting standards in their financial statements. 
  • Public not-for-profit companies that have not yet issued financial statements also get an extension. 
  • Government entities that comply with GASB 87 postponed the effective date and subsequent reporting deadlines for 18 months.  

  That’s good news for businesses that have yet to fully implement the new lease accounting standards or are still in the process of updating their accounting practices. But just because there has been a reprieve does not mean you should delay implementing a lease accounting software. Furthermore, implementing a tool to track your leases can be incredibly helpful.  

  Stay Ahead of Compliance with Lease Accounting Software 

  Like we’ve been saying, getting ready for compliance with the new lease accounting standards is a time-consuming and intensive process. That’s because the reliability of your financial reporting depends on doing a thorough lease inventory and accurately consolidating all your lease data. 

  Our advice is to continue moving forward as quickly and efficiently as possible on these compliance efforts. That includes implementing lease accounting software to help you organize and report on your lease data in support of the new standards. 

  Having access to accurate lease data is also crucial to business and accounting decisions related to the pandemic. 

  That means lease accounting software will not only help you meet the compliance deadline down the road. It will also enable you to search for and manage critical lease information right now — and even find ways to save money in circumstances related to COVID-19. 

  Leverage the System to Save Time and Money  

  Now more than ever, companies need to understand their lease obligations and rights so they can manage costs and find areas where they might have some flexibility. (Read more in our blog COVID-19 and Lease Accounting: Understanding Your Lease Obligations and Costs.) 

  A lease accounting and management solution such as Visual Lease can help your company save time and money by providing greater control over your leases. It provides the tools to search for and view important information needed to stay on top of your lease requirements in three crucial areas: 

  Better Manage Your Financial Responsibilities 

  Visual Lease tracks the relevant language of all your leases, to help you determine what rights and options you have regarding rent and other payments. For example: 

  • What are your monthly payments obligations across all your leases? 
  • Are you paying for assets that the business no longer uses or needs? 
  • Do the leases include a grace period before any late fees apply? 
  • Do any leases allow you to defer payment and if so, for how long? 
  • Is the company overpaying for services that it is not receiving during a business closure? 

  Having this and other lease information readily available can help you better manage costs and cash flow. It can also save valuable time when you are looking for lease clauses and other helpful information you need to effectively negotiate with landlords (or with tenants, if you are a landlord). 

  Understand Your Legal Responsibilities 

  Are there any lease clauses that protect your business from potential casualty, force majeure, or even bankruptcy? 

  Without a lease accounting and management solution, you would have to look for that type of information by manually reviewing all of your leases. But with a solution such as Visual Lease, you can easily search for pertinent clauses to help determine what the business’s legal rights and responsibilities are. 

  Keep Track of Lease Options and Notices 

  You can also use Visual Lease to find options that will help you improve liquidity and reduce expenses during a business closure or slowdown. For example, you can search leases to find out what options you may have for downsizing or relocating a space — or for rent abatements or lease renewals, impairments, or terminations. 

  You can even set up the lease management solution to automatically alert you to important events, such as: 

  • Options that must be exercised by a certain date 
  • Notifications that must be sent about upcoming lease options 

  The alerts will continue to be important as companies reassess how they do business, the resources they need, and the options they will exercise moving forward in what may be a very different, post-COVID environment. 

  Lease Accounting Software: Beyond Compliance 

  How leases address defaults, terminations, options, rent abatements, and other issues can have a big impact on the decisions that a business must make, under all sorts of circumstances. 

  Having lease accounting technology that puts these and other lease details at your fingertips will not only prepare you for lease accounting compliance — it will also empower the business to make more informed and timely decisions, both during the COVID-19 pandemic and in the days, weeks, and months to follow. 

  In addition, lease accounting software provides the tools a business will need to calculate and report on lease modifications, deferrals, and other changes post-COVID. 

  The post Lease accounting software: 3 ways to use It to save during COVID-19 first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-during-and-after-covid-19-what-you-need-to-know/ Wed, 03 Jun 2020 13:02:51 +0000 https://visuallease.com/?p=2851 With all the business closures and cutbacks due to the COVID-19 pandemic, a lot of companies are worried about not only managing their lease expenses now, but also accounting for...
  The post Lease accounting during and after COVID-19: What you need to know first appeared on Visual Lease.]]>

  With all the business closures and cutbacks due to the COVID-19 pandemic, a lot of companies are worried about not only managing their lease expenses now, but also accounting for changes to payments and other lease obligations later. 

  As the COVID-19 emergency continues, more companies are faced with making critical decisions on lease issues, which in turn have an impact on lease accounting.  

  How will lease concessions and other changes that occur in the wake of the COVID-19 crisis affect your lease accounting? 

  How to Handle Lease Changes Related to COVID-19 

  While there are not any additional lease accounting processes or rules to learn for handling concessions due to circumstances surrounding COVID-19, you may elect the method of selecting practical expedients, instead of performing a lease–by–lease analysis of the legal language. This change currently applies to both FASB guidelines (whether 842 or 840) and IASB, but only for lessee schedules. Other lease accounting issues will continue to be guided by the specific terms of your lease contracts and your lease accounting standards (i.e. ASC 842, IFRS 16, GASB 87). 

  While you should always consult with your accounting advisory partner regarding your specific situation, the following guidelines can help as you consider the different concessions that may apply to your lease accounting during and after COVID-19: 

  • Rent Abatement  

  The COVID-19 pandemic is causing companies to ask how to account for rent abatements. The FASB and IASB have provided the ability to elect to treat rent abatements as either existing lease obligations, or as negotiated amendments to the terms. However, there are limitations on this ability to choose. For example, modifications which materially increase the lessor’s rights or the lessee’s obligations must be treated as modifications.  

  If a company elects to not take the expedient of not determining if the lessor is obligated to provide a rent concession, or if the lease is not eligible for such election, the treatment will be dictated by the terms of the lease: 

  • If the landlord is obligated, the concession is considered a variable lease payment. No remeasurement is required, and the abatement will flow through to any disclosure reporting. 
  • If the landlord is not obligated, the concession is considered a negotiated modification. A remeasurement should be run when the abatement term is agreed on and continue through the lease term. 
  • In the event there is not an agreement to abate rent, this is considered a short payment. The payment is recorded in Visual Lease as if made, but as in the normal course of events, the cash transaction books to Accounts Payable. Therefore, while the Ending Liability is reduced on schedule, it is replaced by an Accounts Payable liability until the payment is made. 

  COVID-19 presents such an unforeseen and disruptive impact upon operations, therefore, many companies are electing to keep related costs and abatements distinct from normal operating expenses. As a result, we suggest creating distinct financial categories in this situation. 

  • Accounting for Changing Discount Rates 

  Lower interest rates in response to COVID-19 may affect the Incremental Borrowing Rate (IBR) that lessees typically use as their “discount rate” for lease accounting. The IBR may also be affected if borrowing costs change — for example, because of a declining credit rating. 

  A lower interest rate increases the calculated amount of a lessee’s right-of-use (ROU) assets and lease liabilities. This in turn affects balance sheets when lessees enter new leases, remeasure existing leases, or transition to new lease accounting guidance. 

  • Partial Termination  

  With more people working from home, some businesses may invoke a lease clause or negotiate a lease modification to reduce their square footage and the related costs.  

  Referring to your lease accounting guidance can help you identify what options you may have for recording a partial termination or other modification that reduces the scope of a lease. For example, under ASC 842, you have the choice of reducing the ROU asset proportionate to either the reduction in the lease liability or the reduction in the leased space. 

  • Impairment  

  In an economic downturn, leased assets such as property, plants and equipment may be valued below their current balance. The result is the impairment of ROU assets, which may require a different amortization calculation for operating leases. 

  From the lease holder’s/lessor’s point of view, some assets held for lease may be impaired if demand for those assets decreases or if rental rates drop significantly. 

  For either party, a lease accounting software solution with automated impairment processing helps to simplify the complex process of recording these types of lease impairments. 

  Handle It All with Good Communication, and Intuitive Software 

  In any still-evolving situation like the COVID-19 pandemic, it is always a good idea to consult with your legal counsel and accounting advisory partner as needed to make sure you understand all your rights, obligations and expenses regarding your leases. 

  Maintaining good communication among all parties in a lease is extremely important to help you from avoiding potential high-risk misunderstandings and mitigate conflict. For example, a landlord may misinterpret a tenant’s need to shutter the doors for the short term as abandonment. Or, a tenant could have difficulty getting a concession for unused office space if the business closure is not documented and the landlord is not notified according to the lease terms. 

  Additionally, taking advantage of tracking your leases clauses and financials within a reliable lease accounting and administration software, such as Visual Lease, is incredibly helpful to save your organization significant time and money during and after COVID-19. For more information to see how Visual Lease can help your business evaluate your leases as it relates to COVID-19, visit here or reach out to us today to learn more about our COVID-19 lease impact service. 

  The post Lease accounting during and after COVID-19: What you need to know first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-qa-lease-provisions-and-covid-19/ Tue, 12 May 2020 16:15:27 +0000 https://visuallease.com/?p=2806 Deciphering financial and contractual obligations of a lease can be a challenge. And that is especially true during an unprecedented event, such as the COVID-19 pandemic. All you really want...
  The post Lease accounting Q&A: Lease provisions and COVID-19 first appeared on Visual Lease.]]>

  Deciphering financial and contractual obligations of a lease can be a challenge. And that is especially true during an unprecedented event, such as the COVID-19 pandemic. All you really want to know is, what are you responsible for?

  Below, we answer questions about some of the common lease provisions that may pertain to COVID-19 and how they could affect your lease obligations — and ultimately, your lease accounting.

  Provisions That May Pertain to COVID-19 and Lease Accounting

  Since every lease has different language, obligations and consequences, we always recommend talking to your legal counsel to get help interpreting lease provisions and determining if and how they pertain to your business.

  Regardless, the common lease clauses below may include language that will have an impact on tenant/lessee or landlord/lessor responsibilities during unusual situations such as the COVID-19 crisis.

  What is a Force Majeure provision?

  Force Majeure is a clause excusing nonperformance by the landlord/lessor or tenant/lessee, with specific lease language that defines what events trigger an exclusion. This lease provision typically also defines whether or not specific types of performances are covered — for example, a landlord’s obligation to perform certain maintenance and repairs.

  The lease language might provide different definitions of “Force Majeure” events, but they may include acts of God, terrorism, natural disaster, governmental action, riots, or more generally, events out of the party’s reasonable control. The more specific the language is, the less likely you can rely on the clause to postpone or cancel obligations under the lease.

  What does Force Majeure excuse or not excuse?

  The Force Majeure clause may excuse things such as a landlord’s requirement to make repairs or a tenant’s requirement to maintain janitorial services within the premises. Note that the payment of rent is often not excused.

  What is an example of a Force Majeure clause under which rent payment is not excused under COVID-19? 

  “This Lease and the obligation of Tenant to pay the due rent hereunder and perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease . . . if Landlord is prevented or delayed from so doing by reason of strikes or labor troubles or by accident, or by any cause whatsoever beyond Landlord’s control, including, but not limited to, laws, governmental preemption in connection with a national emergency or by reason of any Requirements of any Governmental Authority.”

  What is a casualty provision?

  Most leases have a provision regarding what happens when the building, premises, or property is damaged by a casualty such as a fire, flood, hurricane, earthquake, and similar events.

  What does a casualty provision mean in a pandemic like COVID-19?

  Casualty provisions rarely cover government shutdowns or pandemics. Usually the only events covered are those that would physically damage or destroy a building or asset in some way.

  What kind of obligations are included in leases regarding landlord vs. tenant responsibilities?

  Generally, leases may include obligations such as maintenance and repairs, how common areas are handled, building hours, base-building cleaning, and extra cleaning. Specific lease language will differentiate what responsibilities fall on the landlord/lessor versus on the tenant/lessee for tasks such as:

  • Maintaining the building
  • Maintaining the specific tenant space
  • Emergency repairs/maintenance
  • Common area maintenance (CAM) and use

  Are there specific lease obligations that may be more relevant during the COVID-19 pandemic?

  Due to the nature of the virus, any lease clause concerning maintenance and cleaning of the building and tenant’s premises is relevant. Additionally, clauses concerning any “above and beyond” maintenance and cleaning are relevant.

  For instance, specific lease language may include expenses that the landlord can choose to undertake but then pass on to the tenant — such as extra deep-cleaning that might be required during the pandemic (or at other times).

  Are there any third-party agreements that should be reviewed?

  Depending on the specific lease language requiring tenants to maintain and clean their own premises, any third-party agreements concerning the “Supplemental Cleaning of Tenant’s Premises” would be relevant. Other obligations with third-party contracts may include construction or renovations and other premises maintenance.

  Most supplemental cleaning contracts can be terminated with 30 days’ notice, which means a tenant can potentially renegotiate scope and pricing changes depending on how the current situation develops.

  What insurance provisions are included in leases?

  Most leases contain requirements for both the landlord/lessor and the tenant/lessee to obtain and maintain certain insurance policies. While not all are applicable during the COVID-19 pandemic, some may be, depending on the exact policy and what coverage it includes.

  Some policies — such as business interruption insurance — may help with rent, operational costs, lost profits, and similar issues. However, the policies must have been put in place prior to the current COVID-19 pandemic.

  What is a business interruption insurance policy?

  This is usually an add-on to a business’s property/casualty insurance policy to cover loss of business income in a disaster that is covered by the main property/casualty policy. However, since it is usually applicable to a natural disaster or fire, the policy would have to be reviewed and interpreted to determine if the current COVID-19 situation is covered.

  Do government orders, regulations, or laws concerning COVID-19 take precedence over lease provisions?

  Any government order, regulation, or law issued concerning the pandemic may take precedence over any lease provision. This could include anything from the payment of rent and the status of evictions to the physical use of buildings.

  For example, the governor of New Jersey issued a lockdown order for nonessential businesses, requiring them to close to the public. But whether this action cancels lease performance or obligations would depend on the specific Force Majeure language contained in the lease.

  As time goes on, there may be additional government actions that supersede any lease language to allow for delayed performance and even delayed evictions. New York, for instance, delayed all commercial lease evictions until at least June 20, 2020, and there are proposals to consider delaying rental payment obligations for 90 days.

  What is a Continuous Operations clause?

  A Continuous Operations clause is lease language that requires a retail tenant to be open and operational for a certain number of hours per day and/or days per week. This provision generally applies to retail tenants, although it does not necessarily appear in all retail tenant leases. The provision is rarely found in other commercial tenant leases.

  Are there exceptions to a Continuous Operations clause?

  Specific lease language may give exceptions, such as Force Majeure events, that allow for not continuously operating. But again, this depends on the specific language in the lease. In most cases, Continuous Operation provisions still require payment of rent.

  What are some other lease provisions that may be relevant during COVID-19?

  • Notice provisions provide guidance for ensuring that notices between tenant and landlord are legal and binding — for example, regarding lease renewal, lease termination, lease options, and general requirements for providing official notice of any action to the other party.
  • Gross-up provisions state that if a building is shut down for an extended period, landlords must credit back the costs of any unprovided services when issuing their year-end reconciliations. Tenants should keep an eye on this issue when reviewing their year-end statements.
  • Percentage or profit-sharing rent provisions specify a rent charge based on the gross income of the tenant rather than a fixed monthly or annual value.

  Get Help from the Experts

  Your legal advisor and accounting advisory partner can both help you understand how lease provisions may pertain to COVID-19 and result in lease concessions and other changes that will affect your lease accounting.

  In addition, a lease accounting and administration software solution such as Visual Lease can help during this process — providing abstracted clauses and tools for organizing your lease data.

  Visual Lease is providing the information above for informational purposes only and should not be construed as legal or accounting advice.

  The post Lease accounting Q&A: Lease provisions and COVID-19 first appeared on Visual Lease.]]> https://visuallease.com/covid-19-and-lease-accounting-understanding-your-lease-obligations-and-costs/ Tue, 05 May 2020 13:01:45 +0000 https://visuallease.com/?p=2772 The COVID-19 pandemic has impacted every company in some way. With “social distancing” and all the emergency regulations that are in place, many offices and nonessential businesses are shut down...
  The post COVID-19 and Lease accounting: Understanding your lease obligations and costs first appeared on Visual Lease.]]>

  The COVID-19 pandemic has impacted every company in some way. With “social distancing” and all the emergency regulations that are in place, many offices and nonessential businesses are shut down entirely — or at the very least, their brick and mortar locations are closed while employees work from home.

  One of the business effects of COVID-19 that does not get a lot of attention is its impact on leases and the related financial obligations. Whatever leases a company holds — not just for office, warehouse, manufacturing, or retail spaces, but also for equipment, vehicles, and other assets — the pandemic-related shutdowns complicate lease obligations and the associated lease accounting and administration.

  What should you look for in your leases to understand your obligations and manage costs?

  1. Review Your Leases to Know What You Owe, and When

  Although many companies are not using their leased assets while business is “on hold”, they may still be required to pay rent through the end of their lease terms, as well as any other costs spelled out in their lease agreements.

  That is why now more than ever, it is critical to understand exactly what is in each of your leases and make sure you don’t miss payments and important events during closures or cutbacks due to COVID-19. Otherwise, you could be subject to late fees or nonpayment penalties — or worse, face eviction and still have to pay the rent.

  What to Look for in Leases

  The table below shows some examples of categories, events, and obligations to look for and review in your leases — given there may be changes to how and if your business is using leased assets.

  Timing/Dates (often including notice procedures and deadlines)	Physical Space	Financial	Legal
  Delivery & Possession Payment/Default Build Out Time Vacate Date Lease Term Options Audit Rights	Alteration/Remodel Cleaning – Demised Premises & Common Areas Common Area Access Co-tenancy Holdover Restoration Sublet	Free Rent/Other Concessions Default OpEx & Sundries Tenant Improvement Allowance Late Fees Security Deposits Turnover Rent	Force Majeure Casualty Notice & Cure Provisions Break Clause Landlord Right to Enter/Recapture Surrender/Restoration Right to Go Dark/Abandonment Business Interruption Insurance Limitation of Damages/Exclusions  Material Adverse Effect (“MAE”) Provisions

   

  Every lease will have different language, obligations, and consequences for the lessee/tenant and for the lessor/lease holder — and few, if any, probably anticipated anything quite like COVID-19.

  2. Evaluate Your Lease Financials and Options Under COVID-19

  With the timetable to get “back to normal” still to be determined and so much that remains unsure, it is also important to conserve business spending wherever possible.

  For instance, now is a good time to print out a general ledger to date and review all of the recorded transactions to get an overview of your current expenses. You might even find some unnecessary or optional recurring charges you can cancel or put on hold.

  In addition, by understanding your leases and being clear about your rights and obligations, you may be able to find areas where your company can avoid overpaying or incurring additional fees during this time.

  Where You Might Save

  For example, part of your monthly rent may go toward front-desk/lobby security or other services you are no longer receiving because the building is closed. If so, you may be able to negotiate with the lease holder for a lower monthly payment.

  Or, your building may be reopening with some restrictions and now requires more intensive cleaning and sanitation in all public areas. Are you obligated to pay that additional cost under the term of your current lease? You’ll want to check before you agree to pay anything extra.

  Does your lease include any language around rent abatements or what happens if the space cannot be used due to circumstances beyond anyone’s control (Force Majeure)? Ideally, your leases are clear and thorough — though, of course, even the best lease cannot include every “what if” scenario.

  When an area of cost concern is not covered in a lease, having a good relationship with the lease holder will improve your chances of being able to negotiate a term that will satisfy both parties.

  Reflecting Changes in Your Lease Accounting

  If you cannot get out of a lease and must abandon an asset, you will need to write down its value over a short period of time while still retaining the liability and making the payments. If the landlord will let you out of the lease, you will need to account for any termination fee you pay, as well as write down the asset and the liability in your lease accounting.

  In these and other circumstances,you can account for changes in lease payments, such as the remeasurement requirements for abandoned or terminated leases.

  Next Up: How These Changes Will Affect Your Lease Accounting

  In this series of blogs, we will talk about the impact of COVID-19 on lease obligations and your lease accounting practices moving forward.

  In the meantime, if you have a lease accounting system already in place — or better yet, a lease management solution that combines lease accounting and administration functions in one system — you have tools that will make it easier to identify your current lease obligations and understand their financial implications.

  The post COVID-19 and Lease accounting: Understanding your lease obligations and costs first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-supports-proposed-fasb-lease-accounting-delays-due-to-covid-19/ Tue, 28 Apr 2020 13:36:44 +0000 https://visuallease.com/?p=2768 In an act of relief for companies during the coronavirus pandemic, the Financial Accounting Standards Board (FASB) recently voted to propose a one-year deferral of major accounting standards, including ASC...
  The post Visual Lease supports proposed FASB lease accounting delays due to COVID-19 first appeared on Visual Lease.]]>

  In an act of relief for companies during the coronavirus pandemic, the Financial Accounting Standards Board (FASB) recently voted to propose a one-year deferral of major accounting standards, including ASC 842 (Leases). This proposal would allow private companies an additional year, on top of the initial delay that went into effect October 2019, to adopt the lease accounting standard in their financial statements. Public not-for-profit companies who have not yet issued financial statements would also be granted an extension.

  In light of the coronavirus outbreak and its impact on the global financial market, we support FASB’s decision to defer compliance for this additional year.  Organizations are reeling from the impact of COVID-19, and this deferral would relieve pressure regarding ASC 842 compliance and give them time to focus on the operational and financial challenges posed by the crisis.

  COVID-19 Has Exposed Inadequate Lease Controls

  Delaying the compliance deadline will also give organizations needed time to pull together the information needed to meet ASC 842 as well as provide them with much-needed control over their lease obligations. COVID-19 has brought to light significant inadequacies of existing controls surrounding lease agreements. In an effort to find liquidity and reduce expenses, companies have been examining their leases to understand their options. What they are finding is that they cannot get clear-cut answers about their rights and obligations. How their leases address defaults, terminations, options, rent abatements and other issues can make a huge difference in how companies pivot in this environment.

  Extra Time Is Needed to Gather Information

  If the ASC 842 deadline is pushed out, companies should take advantage of the extra time to collect, organize and summarize their lease information as well as schedule out their rental obligations.  Figuring out lease rights and obligations across a real estate or equipment portfolio is incredibly time-consuming, and is best done when resources are available. Public companies had a difficult time gathering needed lease information as their ASC 842 deadline approached at the end of 2018, and had to rely on expensive consulting firms to get it done. In fact, the difficulty public companies experienced was the primary reason FASB decided to push the deadline last October. Private companies, who have fewer resources and smaller budgets, should take heed and avoid that trouble.

  Tighter Lease Controls Provide Liquidity and a Strong ROI

  Furthermore, organizing leases now will give them earlier control and reduce costs along the way. Especially for companies utilizing lease management software solutions like Visual Lease, adopting tighter lease controls has an exceptional ROI. Through tight management of leases, customers are able to avoid costly penalties, act in time to exercise options, prevent rent overpayments, aggregate and refinance leases and optimize their portfolios. As we have seen over the years, given the expensive nature of real estate and equipment leases, any one of these benefits can save thousands to millions of dollars.

  Compliance with ASC 842 is no small undertaking, and continued action and momentum towards compliance is best practice. Our recommendation is to not look at a deadline deferral as another reason to push the work further down the road. Instead, companies should work diligently, taking advantage of the additional time to gather their lease information, better manage their portfolio and reduce costs.

  The post Visual Lease supports proposed FASB lease accounting delays due to COVID-19 first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-business-continuity-plan-and-temporary-policies-in-response-to-covid-19/ Wed, 11 Mar 2020 21:17:32 +0000 https://visuallease.com/?p=2646 Visual Lease is committed to the health and safety of our employees and the community, as well as to providing your organization with the highest levels of uninterrupted service and...
  The post Visual Lease business continuity plan and temporary policies in response to COVID-19 first appeared on Visual Lease.]]>

  Visual Lease is committed to the health and safety of our employees and the community, as well as to providing your organization with the highest levels of uninterrupted service and support throughout the Coronavirus (COVID-19) crisis.

  The following are Visual Lease’s business continuity plans relating to the crisis with respect to employees, clients, vendors and visitors. These may be changed or updated at any time as we learn more.

  Visual Lease’s Temporary Policies in Light of COVID-19

  1. All employees must work from home.  Visual Lease’s physical office is closed until further notice.
  2. All non-essential work travel prohibited.  This includes to/from client sites, conferences and trade shows.
  3. No office visitors or in-person meetings. In-person meetings with clients, partners, remote employees and candidates are to be substituted with phone calls or video-based conferencing.

  Visual Lease closely monitors the updates from the CDC, other government agencies and news outlets for updates related to COVID-19. Additional temporary policies may be implemented during this outbreak.

  The post Visual Lease business continuity plan and temporary policies in response to COVID-19 first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-recognized-as-one-of-the-best-places-to-work-in-new-jersey/ Tue, 03 Mar 2020 20:13:51 +0000 https://visuallease.com/?p=2624 Visual Lease, the leader in lease accounting and management software, today announced it has been selected as a 2020 “Best Place to Work in New Jersey”. The annual NJBiz “Best...
  The post Visual Lease recognized as one of the best places to work in New Jersey first appeared on Visual Lease.]]>

  Visual Lease, the leader in lease accounting and management software, today announced it has been selected as a 2020 “Best Place to Work in New Jersey”.

  The annual NJBiz “Best Places to Work in New Jersey” award recognizes and honors top employers in the state based on company culture, employee satisfaction, opportunity for growth and strength of leadership. The “Best Places to Work in New Jersey” awards ceremony will be held on Tuesday, April 21, 2020 at iPlay America’s Event Center in Freehold, NJ.

  This year marks Visual Lease’s first time being recognized on the prestigious list for mid-sized companies. Over the past 2 years, Visual Lease has experienced significant growth and expansion, growing 168% in 2018 and an additional 63% in 2019.

  Some of the many reasons Visual Lease stands out from other mid-sized companies in New Jersey is its dedication to employee satisfaction and company perks. Visual Lease offers its employees a positive work environment, company-wide team building and wellness events, free daily healthy snacks and beverages, employee appreciation days and more.

  Interested in working at Visual Lease? Visit www.visuallease.com/careers to learn more.

  The post Visual Lease recognized as one of the best places to work in New Jersey first appeared on Visual Lease.]]> https://visuallease.com/lease-vs-buy-analysis-under-asc-842-ifrs-16-and-gasb-87/ Fri, 28 Feb 2020 10:54:42 +0000 https://visuallease.com/?p=3071 Leasing vs buying is not an easy decision to make regardless of the asset involved. While there are lease vs buy analysis Excel sheets, choosing one over the other is...
  The post Lease vs buy analysis under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> Leasing vs buying is not an easy decision to make regardless of the asset involved. While there are lease vs buy analysis Excel sheets, choosing one over the other is still no walk in the park. After all, several factors must be considered such as how the purchase will affect the company’s financial health over time, the asset’s fair market value, and the current capital of the business, to name a few.

  Are Leases a Waste of Money?

  Many companies choose to buy property or equipment for a variety of reasons. For one, purchasing is usually considered a valuable long-term investment especially since rental payments often increase each year. Businesses that intend to lease for a long-time and will have a high fixed overhead are better off purchasing the asset. This is especially true for real estate properties and for stable enterprises that intend to stay in the same place for years.

  When Should Leasing be Preferred Over Purchase?

  There are many cases where leasing is a better option than purchasing. Leasing, after all, lets the business have the advantages of ownership without shouldering the asset-related risks. For example, in leasing vs buying a car, a company can use the vehicle but maintenance costs will be shouldered by the lessor. 

  Leasing property or equipment also helps improve a company’s liquidity. This is because buying an asset means tying up resources that enterprises might need in the future.

  When Should a Leasing Be Preferred Over Purchase?

  Businesses who are working on their lease vs buy analysis must ask the following questions:

  1. How much is the asset worth and how long does the business need it?

  Regardless of the industry, the company is in, the business will need specific equipment to get their work done. Some equipment like laptops or computers and mobile gadgets will need updating regularly. Having a lease lets the business stay up-to-date. Plus, equipment such as golf carts, forklifts, and other tools can be quite pricey. Renting them instead means being able to use them without paying for their high price.

  2. What fits the company’s budget?

  Leasing property or equipment is often cheaper than purchasing it. However, businesses must be fully aware of the terms of the lease. This means that companies must ensure that their lease ends at the same time they will be moving into a different space or when they are already finished using the equipment. Companies must also keep in mind that some equipment may be sold off when they’re no longer needed.

  3. Will the property or equipment need customization?

  It’s not enough to look at the lease price vs purchase price since some assets may need to be customized to fit the business’s requirements. For example, with a real estate property, the need to renovate the space the company will be moving into can be part of the contract. Sometimes, the lessor may offer a tenant improvement allowance (TIA) to make the lease contract more attractive. 

  4. What about depreciation?

  Real estate and equipment depreciate over time. Leasing means not having to worry about the depreciation in the equipment or property’s value. However, companies will enjoy tax breaks either in the near or long-term future if they buy the equipment. Under Section 179, enterprises can deduct 100 percent of the qualified item if it uses the asset or equipment within the first year from purchase. The Bonus Depreciation lets companies recover their expenses over time.

  5. How’s the business income statement looking?

  Businesses that lease instead of buy won’t have to worry about their tied up money or capital especially if they are relatively new. Before shelling out money for equipment or property, it is essential to determine whether the business can shoulder the cost of the loan or lease. Enterprises should remember that rental payments usually increase over time and that there are related costs in owning the real estate or equipment such as maintenance, taxes, and insurance, to name a few.

  What are the Effects of the New Lease Accounting Standards ASC 842, IFRS 16 and GASB 87?

  Accounting standards such as IFRS or US GAAP, require all leases to be reflected on the balance sheet. This means that the company’s ability to avoid the lease classification is no longer a consideration when choosing between buying or leasing. Thus, the decision on whether to lease or purchases should be based on the asset and cost as well as the cost change over time.

  There are no easy answers in the buy vs lease debate. For some businesses, it’s better to purchase a property but for others, it makes more business sense to either enter a lease or renegotiate one. Thus, enterprises should take the time to conduct their lease vs buy analysis before signing a lease or sales contract.

  The post Lease vs buy analysis under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> https://visuallease.com/3-things-to-consider-when-generating-lease-accounting-disclosure-reports/ Tue, 25 Feb 2020 19:36:17 +0000 https://visuallease.com/?p=2620 With all the new lease accounting rules you have to contend with — whether you follow ASC 842, IFRS 16, or GASB 87 — the prospect of generating lease accounting...
  The post 3 things to consider when generating lease accounting disclosure reports first appeared on Visual Lease.]]>

  With all the new lease accounting rules you have to contend with — whether you follow ASC 842, IFRS 16, or GASB 87 — the prospect of generating lease accounting disclosure reports can be intimidating. In this blog, we look at three simple but vital things to keep in mind as you gather lease data and think about how you will comply with the latest lease disclosure reporting requirements.

  1. Lease accounting disclosure reports now require more detailed data.

  The Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), and Governmental Accounting Standards Board (GASB) created ASC 842, IFRS 16, and GASB 87 respectively with the same goal: to provide insight into an organization’s leasing activities and greater visibility into its assets and liabilities.

  Where leases previously were mostly on the income statement or just a footnote, today’s lease accounting standards require those assets and liabilities to be brought onto the balance sheet — creating a far more thorough picture of an organization’s finances. Under ASC 842, IFRS 16, and GASB 87, an organization’s lease accounting disclosure reports must now provide:

  • More detailed qualitative and quantitative information about leases, such as cash outflows and values of right-of-use assets
  • Significant judgments made in measuring leases
  • The amounts recognized in the financial statements 

  These new standards require you to gather a large amount of data to generate quantitative lease accounting disclosure reports related to real estate, equipment, vehicles, land, and any other leases your organization might hold.

  Among other things, you will need the various inputs that are created by your amortization schedules and right-of-use (ROU) or leased asset and liability balances. You will also need access to the data points in those schedules, as well as the ability to pull out relevant values on liability and cash flows.

  Lease accounting disclosure reports may also require qualitative information such as the terms and conditions of leases, assumptions used in applying the lease standards, and certain elements outside of the lease liability.

  Trying to input all the pertinent lease information and track it using a spreadsheet or other manual method is no match for the kind of reporting requirements these new standards require. Thankfully, that is where lease accounting technology plays a vital role in disclosure reporting.

  2. Accurate lease accounting disclosure reporting depends on software.

  Lease accounting software streamlines the disclosure reporting process by providing a secure and efficient system for organizing lease data, to make sure that key information is properly compiled and disclosed. 

  The right lease accounting software solution helps you capture all the necessary data, track changes, and report lease costs in accordance with both your accounting policies and procedures and the latest accounting standards.

  In addition, a lease accounting solution further streamlines this very complex process by providing automated calculations and workflows that improve lease accounting disclosure reporting in several crucial ways:

  • Ensuring the accuracy of disclosure reports by providing a single-source, centralized system for inputting, storing, tracking, and managing all lease data
  • Properly accounting for nuances within leases through configurable reporting and calculations, ensuring that assets are consistently accounted for
  • Eliminating human error and reliance on formulas to further ensure accuracy by having all your data points and calculations already in the system
  • Integrating to the balance sheet, allowing each type of lease and related information, including ROU assets, interest expenses, and liabilities, to be brought into the balance sheet
  • Providing visibility into important qualitative lease details such as terms, changes and dates

  Beyond achieving compliance with lease accounting disclosure reporting requirements, you can also opt for an all-in-one lease management system that combines lease accounting and administration. Such a system provides full lease accounting capabilities along with administration functions for day-to-day, ongoing lease management.

  To learn more about what to look for in a lease accounting solution, read A Complete Guide to Lease Accounting.

  3. Disclosure reporting requirements depend on which standards you must follow.

  While ASC 842, IFRS 16, and GASB 87 differ in the types of organizations they apply to, there are some similarities in their disclosure requirements. For example, GASB 87 was created for use by state and local governments in the United States, while ASC 842 is for public and private organizations in the United States and IFRS is for international organizations.

  However, across all three standards — ASC 842 disclosure reporting, IFRS 16 disclosure reporting, and GASB 87 disclosure reporting — the key requirements include the following:

  • Information about the nature of an organization’s leases (including subleases)
  • Leases that have not yet commenced
  • Significant assumptions and judgments
  • Amounts recognized in the financial statements
  • Maturity analysis of liabilities
  • Lease transactions with related parties

  While ASC 842 makes U.S. financial reporting more consistent with the international requirements, and ASC 842 and IFRS 16 disclosure reports are very similar in format and content, there are also some important differences to keep in mind.

  For example, where ASC 842 classifies leases as either operating or finance, all leases must be accounted for as finance lease under IFRS 16. In addition, ASC 842 and IFRS differ in how a short-term lease — one with a term of 12 months or less — is defined when transitioning an existing lease to the new standards.

  Under ASC 842, the lease’s term is determined by the original commencement date. So, for example, a 10-year lease that has only 6 months left on it at the time of transition would still be considered a long-term lease.

  However, under IFRS, an existing lease’s term is based on how much time remains when the transition occurs. Therefore, a 10-year lease with only 6 months remaining at the time of transition could be categorized as a short-term lease for purposes of disclosure reporting. Additionally, IFRS 16 provides guidance for so-called low value leases, allowing them to be grouped and treated similarly on the disclosure report.

  Unlike GASB 87, where practical expedients are not optional, both ASC 842 and IFRS 16 require disclosure reporting to include which practical expedients an organization has elected to apply to its lease accounting, including:

  • Practical expedients related to short-term leases
  • Those related to separating lease components
  • Election of transition-related practical expedients
  • Election not to restate comparative periods upon adoption

  With more comprehensive and complex requirements for lease accounting disclosure reporting, ASC 842, IFRS 16, and GASB 87 certainly present new challenges to accounting teams. However, with the implementation of lease accounting software and more efficient accounting practices, these new disclosure standards promise to deliver clearer, more accurate, and more useful financial statements.

  The post 3 things to consider when generating lease accounting disclosure reports first appeared on Visual Lease.]]> https://visuallease.com/gasb-87-compliance-4-things-you-need-to-know/ Tue, 11 Feb 2020 19:32:11 +0000 https://visuallease.com/?p=2617 As of the beginning of this year, GASB 87 lease changes have gone into effect. These new lease accounting rules have a substantial impact on government entities and public institutions...
  The post GASB 87 compliance: 4 things you need to know first appeared on Visual Lease.]]>

  As of the beginning of this year, GASB 87 lease changes have gone into effect. These new lease accounting rules have a substantial impact on government entities and public institutions in higher education, healthcare, and more. 

  Many organizations, however, are woefully underprepared for GASB 87 compliance. Accounting departments need to understand the extent of their lease portfolio, the data they need for lease calculations, the new accounting methodology required, and how to stay on top of any future lease account changes.

  If your organization is impacted by GASB 87 lease accounting changes, here are four crucial things to consider while you work towards compliance.

  1. Understand your lease portfolio

  For many organizations, getting an accurate picture of the leases they’ve accumulated over the years is a massive burden. Often times, companies have leases across all departments — from IT equipment to office spaces and company vehicles — that are tracked and managed amongst a disparate set of systems. That means you’ll need collaboration across the entire organization to track down all possible sources of leases. Having a centralized view into all of your organization’s leases, however, is crucial for GASB 87 compliance. 

  When you’re organizing your lease data and documentation, you need to understand, not only what types of leases you have, but whether they’re required to appear on the balance sheet as well. That’s because GASB 87 differs from ASC 842 and IFRS 16 when it comes to short-term leases. For example, under GASB 87, if there is any option to extend a lease past 12 months, regardless of the likelihood to exercise, it is not able to be considered a short term lease. Luckily, GASB 87 lease accounting software can streamline the process of organizing your lease portfolio and understanding how this information needs to be reported on your financial statements.

  2. Know what lease data points to collect for GASB 87 compliance

  Along with changes to how leases appear within financial statements, GASB 87 lease accounting rules specify new requirements for lease calculations. In order to prepare these calculations, you’ll likely need to collect many different data points across various areas of your organization. Tracking down and extracting these additional data points requires careful planning and communication between many departments within the organization.

  In the longer term, capturing this data in a centralized software solution is crucial for minimizing the complexity of lease reporting and ongoing management. That’s why choosing a GASB 87 lease software solution that’s configurable for tracking data points specific to your needs and highly interoperable with other business applications can dramatically streamline lease data collection for your organization. The right lease management software should integrate with leading business systems that various departments within your organization are already using to share and aggregate relevant leasing data. When it comes time to prepare your financial statements, you’ll know exactly where to find the information you need to accurately report your leases under the new requirements.

  3. Understand the changes to the balance sheet

  The primary goal of the new GASB 87 lease accounting rules is to make leases more transparent within financial statements by including the majority of them on the balance sheet. 

  For lessees, that means recognizing a lease liability for the present value of the total expense commitment and an intangible asset equal to this lease liability as well as any payments made at the commencement of the lease. As payments are made towards the lease, the liability is reduced and interest expenses are recognized on the income statement. The amortization of the asset and interest expenses are front-loaded, meaning more is recognized in the beginning of the lease term. There are also additional disclosure reporting requirements, which includes lease descriptions, payment schedules, and the amount of total leased assets.

  Lessors must recognize a lease receivable equal to the present value of the lease payments expected to be received over the lease term, and a deferred inflow of resources equal to the lease receivable and any additional payments at or before the commencement of the lease. This deferred inflow is recognized as revenue over the life of the lease. As the lessee makes payments, the lease receivable is reduced, and interest income is recognized. Lessors must also include descriptions of leases, lease revenue recognized in the reporting period, and revenue from variable payment components in the disclosures as well.

  The GASB 87 lease accounting changes may sound complicated, but a lease management solution can automatically generate these journal entries and additional disclosure reports to simplify the preparation of financial statements. That means organizations that are impacted by GASB 87 can quickly meet the new ongoing accounting and financial reporting requirements.

  4. Stay on top of lease changes 

  When it comes to meeting the GASB 87 lease changes, it’s not just a one-time event. You’ll need to continually manage leases — and their relevant data points — as leases get added, renewed, or cancelled. In addition, payment amounts change with variable rent leases, and other events can impact lease calculations in the future. Managing these changes to your lease portfolio on a day-to-day basis is time-consuming without the proper systems and processes in place.

  Most organizations, therefore, need a way for the people who manage leases to modify this lease data from a centralized and intuitive lease management solution. The reality, however, is that many accounting and leasing systems can’t provide these capabilities out of the box. And those solutions that do meet today’s GASB 87 compliance needs aren’t innovating for the future. 

  If your organization will be impacted by the GASB 87 lease accounting changes, consider a solution like Visual Lease to make compliance straightforward for the long term. Visual Lease has the capabilities necessary for achieving lease compliance, streamlining monthly reporting, and maintaining your lease portfolio. That’s because it’s an intuitive lease management platform that provides seamless integrations with a variety of third-party business applications.

  But don’t take our word for it. If you want to see for yourself how Visual Lease can streamline your lease management and compliance requirements, schedule a free demo now.

  The post GASB 87 compliance: 4 things you need to know first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-for-service-contracts-under-new-lease-accounting-standards/ Thu, 06 Feb 2020 11:08:49 +0000 https://visuallease.com/?p=3073 There have been several major changes in the way businesses address service contracts in recent years given the new standards and updates on the existing standards.  For one, the new...
  The post Lease accounting for service contracts under new lease accounting standards first appeared on Visual Lease.]]> There have been several major changes in the way businesses address service contracts in recent years given the new standards and updates on the existing standards. 

  For one, the new lease accounting standards have made accounting for leases more complicated while the Accounting Standard Update or ASU 2018-15 has provided clarity and simplified cloud computing contracts accounting. Just what exactly are the changes in accounting for long-term service contracts? Here’s a rundown.

  Is a Service Contract an Asset?

  Before we get into a deep dive into service contract accounting journal entries, we must first discuss whether a service contract is an asset. Certain contracts like sales contracts, employment, affiliation, and advertising can be treated as intangible assets since they provide value to a business. For example, contracts like long-term leases with below-market rates offer a big overhead saving. Or subscription contracts for a cable company or other long-term service contracts that provide revenues for a firm are examples of intangible assets.

   

  What Happens When Leases Are Embedded in Service Contracts?

  IFRS 16 and ASC 842 mandates businesses to be more transparent when it comes to their lease obligations. Compliance with these two standards means evaluating service contracts to identify which have embedded leases. Unfortunately for companies, the determination of embedded leases is a tedious and time-consuming task. A survey by KPMG showed that identifying embedded leases was ranked as the fourth most difficult aspect of implementing the new standards.

   

  There are no shortcuts available to firms when it comes to determining embedded leases. Plus, one has to have a good grasp of what constitutes a lease given that contracts do not usually contain words like “rent” or “lease.”

  Below is an example of how to evaluate a contract.

  Company Y has a warehouse contract with AB Warehouse. AB warehouse provides the warehouse facility, monitors, and equipment for Company Y. The contract states that Company Y will have full usage of the facility, equipment, and monitors. The contract details each item that can be used by Company Y.

  Company Y has 100 percent control over the warehouse facility, equipment, and monitors and will gain substantial benefits from the warehouse. The equipment portion of this contract between Company Y and AB warehouse meets all the criteria of an embedded lease of the standards given the following:

   

  • The assets are identified
  • Company Y has full control of the identified assets
  • Company Y gains almost all of the economic benefits from the identified assets

  Generally, logistics, security, and warehousing contracts have embedded leases.

  How to Account for Software Leases and Cloud Computing Contracts?

  The FASB in 2018 released new guidelines on how firms must do the accounting for the upfront costs and implementation related to cloud computing contracts. The standard update, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement in ASU 2015-05 clarifies how businesses must treat software as service contracts.

  The new guidance says that the phrase “hosting arrangement” is now applicable or covers any arrangement that allows customers to use or have access to the software but without real possession. This means businesses have to account for implementation costs on cloud computing arrangements just like one accounts for the related internally-hosted software arrangements.

  The new guidance and new standards on accounting for service contracts can be too much for companies. The new standards may have clarified the processes but these simplification and clarification are offset by the tedious work in complying with new accounting guidance. After all, there’s too much legwork in determining whether contracts have embedded leases or not and businesses may need to implement new processes to identify which ones have embedded leases. Fortunately, there are reliable service providers like Visual Lease that can make the transition to new standards easier.

  The post Lease accounting for service contracts under new lease accounting standards first appeared on Visual Lease.]]> https://visuallease.com/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87/ Thu, 30 Jan 2020 11:05:02 +0000 https://visuallease.com/?p=3072 If you have signed an operating lease for space, built leasehold improvements, and determined that you are legally required to take out the leasehold improvement when the lease expires, then...
  The post Asset retirement obligation under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> If you have signed an operating lease for space, built leasehold improvements, and determined that you are legally required to take out the leasehold improvement when the lease expires, then you have already encountered an asset retirement obligation or ARO for short.

  What is Fixed Asset Retirement?

  Asset retirement occurs when either capitalized goods or property is removed from service either because of disposal, sale, or any kind of removal. When the asset has been retired, then it no longer has the utility for which it was originally either constructed, acquired, or developed.

  What is an Asset Retirement Obligation?

  An ARO pertains to the legal obligation related to retiring a long-lived, tangible asset where the firm is responsible for either cleaning up the hazardous materials or removing equipment or structure at a later date. Companies must account for AROs in their financial statement to reflect a holistic and more accurate picture of the enterprise’s overall value.

  Some examples of ARO are when a shop constructs on the rented space according to a specific design or layout to suit the business’ needs or when the business updates and paints the rented space for their branding. If the lease contract requires the lessee to take out the improvements or repaint the space to its original color, then the lessee has an ARO and is required to return the rented asset to its original condition the lessee found it. Likewise, a firm that leases a lot and installs water tanks on the property and is required to remove such a tank after the lease ends also has an asset retirement obligation.

   

  Is Asset Retirement an Obligations Debt?

  Asset retirement obligation is a liability, considered a common legal requirement to return an asset to its old condition according to asset retirement obligation accounting IFRS IAS 37 and the Accounting Standards Codification Statement No. 41- or FASB ASC 41.

  What is the Accounting Entry for Asset Retirement?

  During ARO accounting, business must recognize the fair value of the ARO upon incurring the liability if it can obtain a realistic estimate of the ARO’s fair value. But if the fair value is initially unobtainable, then the ARO must be recognized at a later date when the fair market value is already available.

  Our Lease Accounting software can ensure you that you are properly accounting for your ARO. Don’t believe it, request a demo to see for yourself. We provide our users with a time-saving, compliant ARO accounting solution.

  How Do You Calculate Asset Retirement Obligation?

  A firm that acquires a fixed asset with an ARO already attached should recognize the ARO’s liability as of the fixed acquisition date. There’s a benefit to recognizing the liability immediately as possible since it provides the readers of the firm’s financial statements a more realistic grasp of the company’s actual state of obligations given that ARO liabilities can be quite big.

  Generally, there’s only one way to identify the fair value of the ARO, which is by using an expected present value technique by using several possible outcomes. Those computing for the expected present value of the future cash flows must include the following into the calculation:

  Probability distribution– When there are only two outcomes possible when determining the ARO’s expected present value, one must assign a 50 percent probability to each one until the additional information altering the initial probability distribution becomes available. If not, one must spread the probability across all the possible scenarios.

  Discount rate– A risk-free, credit-adjusted rate must be used for discounting cash flows to their current value. Hence, the business’ credit standing will affect the discount rate to be used.

  The following steps must be followed when calculating the expected present value of an ARO:

   

  1. Estimate the amount and timing of the cash flows related to the retirement activities
  2. Determine the risk-free, credit adjusted rate
  3. Record the period-to-period increase, if any, in the carrying amount of the ARO’s liability as an accretion expense. This can be done by multiplying the starting liability by the risk-free, credit-adjusted rate from when the liability was initially measured
  4. The upward liability revisions must be recognized as a new liability layer, then discount the reduction using the rate used for the first recognition of the related liability layer

   

  When the ARO liability has been initially recognized, then the related asset retirement cost must be capitalized. It can be done by adding the related asset retirement cost and carrying amount of the related fixed asset.

   

  If ARO liability changes over time

  In many cases, the ARO liability will change over time. Thus, should the liability increase, then one must consider the incremental increase for every period so it becomes an additional layer of liability on top of any previous liability layers. The following points must be considered when recognizing these additional layers:

  1. Each layer must initially be recognized at its fair value
  2. Allocation of the ARO liability must be systematically be allocated to expense during the useful life of the asset
  3. The changes in the liability due to the passage of time must be measured using the risk-free, credit-adjusted rate when each layer was initially recognized. One must also record the cost of the liability’s increase. This should be classified as accretion expense when charged as an expense.
  4. When the ARO yet has to be realized and the time period has already shortened, then the amount, timing, and probabilities related to cash flows will improve. There might be changes in the ARO liability according to these changes in the estimate.

   

  AROs are just a sample of the complex nature of the new lease accounting standards. Fortunately, there’s Visual Lease accounting software designed by seasoned accountants that can help any comply with various accounting standards. Our software can improve a company’s lease accounting to ensure compliance.

  The post Asset retirement obligation under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> https://visuallease.com/8-key-lessons-from-asc-606-that-apply-to-asc-842/ Mon, 27 Jan 2020 20:11:26 +0000 https://visuallease.com/?p=2377 For many businesses and their accounting departments, the recent move to the new ASC 606 revenue recognition rules from the Federal Accounting Standards Board (FASB) was eye opening. The process...
  The post 8 key lessons from ASC 606 that Apply to ASC 842 first appeared on Visual Lease.]]>

  For many businesses and their accounting departments, the recent move to the new ASC 606 revenue recognition rules from the Federal Accounting Standards Board (FASB) was eye opening. The process of implementing these changes regarding when and how to report customer payments on income statements proved to be more difficult than a lot of people anticipated.

  And now, for private companies, the deadline for compliance with the new FASB lease accounting standard, ASC 842, is right around the corner.

  What lessons can these companies learn from the transition to ASC 606 and apply to ASC 842? We’ve put together 8 key tips that are applicable as you work on achieving ASC 842 compliance.

  1. There’s no time to waste.

  When the deadline for private companies to implement ASC 842 was extended to January 2021, some companies put the task on the back burner so they could concentrate on adoption of ASC 606. 

  But consider this: While ASC 606 was issued in May 2014, the rules did not go into effect until fiscal year 2018 for public companies and a year after that for private companies. That gave companies years to prepare — yet, many still found themselves scrambling to meet the implementation deadlines.

  The message for companies still getting ready for ASC 842 compliance is clear: It is critically important not to underestimate the time and effort that will be required to meet the new lease accounting deadline.

  Depending on the size of your business, simply finding the most current version of all leases can be a daunting task — and that’s before lease analysis, data input, and any software implementations get underway.

  So, if you have not already begun the ASC 842 compliance process, we can’t say it enough: You need to start right now. 

  2. Lease contracts are complex, so you’ll need more time than you think.

  For many companies, the move to the ASC 606 took more time than expected due to the intrinsic complexity of contracts. With differences in compensation plans, commissions, terms, and other details, no two contracts are exactly alike — which means it takes time to read through and identify all the pertinent details.

  The same is true of the lease contracts included under ASC 842. People often underestimate the task of accounting for all their leases, including facilities, IT and office equipment, vehicles, and other assets. 

  For example, although almost all leases must be capitalized on the balance sheet under ASC 842, you still need to classify them as either finance leases or operating leases, because they are calculated differently.

  In addition, once you start breaking down the details of a lease, you may be surprised at the level of complexity that is revealed. For instance, real estate leases often include common area maintenance (CAM) charges and additional items that must also be calculated and reported. 

  Therefore, go into the process knowing that some leases you thought would be easy to analyze might end up taking more steps or revealing unexpected details that will affect your accounting decisions. 

  3. Cast a wide net and enlist other departments to identify leases.

  Under ASC 606, organizations quickly discovered that a team approach was necessary to account for all contracts pertaining to customer revenue.

  With the vast amounts of data pertaining to leases across a business, the ASC 842 accounting team cannot go it alone either. It’s crucial to talk to many other departments within the company to track down all the possible sources of leases. 

  Working with a team made up of all the key stakeholders from areas including Facilities, Real Estate, Legal, IT, and Procurement staff, as well as Accounting experts, will help you:

  • Locate all the leases that the business holds
  • Make sure you have the most up-to-date and accurate records
  • Understand all elements of the contracts so that the standards can be applied correctly and consistently
  • Determine whether it is likely that renewal or purchasing options will be exercised
  • Find important related documentation, such as contract addendums, commencement letters, and interest rates

  4. Examine all contracts for embedded leases.

  With revenue streams often coming from many different sources and contract terms varying so greatly, ASC 606 adopters often found crucial details in surprising places.

  To avoid surprises in ASC 842 adoption, be sure your lease analysis includes reviewing all your contracts thoroughly to identify embedded leases — components within a contract that provide for the use of a particular asset. 

  For example, the portion of a service contract specifying the use of on-site equipment provided by the service vendor might be considered a lease, even if the word lease is not used.

  5. Create a process for collecting lease data.

  The need to review every contract for ASC 606 compliance made it clear that creating a data collection process in place helps to ensure all team members understand the task at hand.

  With an ASC 842 team including stakeholders from different areas of the business, not everyone will be an accountant or a lease expert or both. Providing a process for lease data collection and making sure all team members understand what they need to do will ultimately help to ensure the accuracy of your financial reporting.

  For example, you can create a process that includes guidelines such as:

  • The types of data points you need for calculations
  • Suggestions of where to find lease data in complex contracts
  • Any supporting documents you may need
  • The types of payments that need to be broken out, like base rent, CAM, taxes, and insurance

  6. Evaluate early to assess long-term potential impact.

  Another important reason to start analyzing your leases as soon as possible is that decisions you make now will affect your lease accounting practices for the long term.

  This does not just include deciding how all your leases should be classified and, accordingly, how they will be recorded on the balance sheet. It also includes decisions such as which ASC 842 practical expedients you will utilize and the impact they will have on your financial reporting. 

  Learn more: ASC 842 Practical Expedients and Transition Requirements

  Making these strategic decisions before you collect your lease data will save you from discovering later that you need to backtrack and search for additional information to complete your lease calculations.

  7. Implement new policies for leases moving forward.

  While evaluating their contracts for ASC 606, many organizations found ways to change the way they were doing things and improve how contracts are written moving forward.

  The same can be true of ASC 842 and lease accounting. By putting these standards in place, you have opportunities to make accounting decisions and create new practices that can help to ensure the best financial outcome for your company.

  This process can serve as a learning experience that can help you bring greater standardization to new contracts, avoid complexity wherever possible, and make lease accounting more efficient. In addition, a review of all your current leases can uncover opportunities to consolidate expenses, exercise purchasing options, or renegotiate prices to save the business money. 

  8. Get the help and tools you need.

  As with ASC 606, many companies will need assistance making the transition to ASC 842. This is especially true with the deadline fast approaching and the time to train an internal team slipping away.

  Perhaps you are short of staff who know how to interpret and extract data from complex lease documents. Maybe you are unsure how to weigh the time savings of practical expedients against their impact on your balance sheet. 

  An accounting advisor can help to guide you through the ASC 842 transition requirements and all the important decisions you need to make. In addition, you can take advantage of abstraction services, project management, and other third-party support for ASC 842 compliance.

  Most companies will also benefit from lease accounting software that serves as a central repository for lease data and performs lease accounting calculations. Or, you can opt for a lease management system — an all-in-one solution that provides full lease accounting plus lease administration capabilities for ongoing management of your lease portfolio.

   

  To learn more, download the guide Lease Accounting and Lease Administration Software: Why You Need Both. 

   

  The post 8 key lessons from ASC 606 that Apply to ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/what-is-the-definition-of-a-practical-expedient-under-asc-842-and-ifrs-16/ Thu, 23 Jan 2020 14:40:38 +0000 https://visuallease.com/?p=3020 The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are not blind to the tedious task facing firms once the new standards take effect. Hence, the creation...
  The post What is the definition of a practical expedient under ASC 842 and IFRS 16? first appeared on Visual Lease.]]> The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are not blind to the tedious task facing firms once the new standards take effect. Hence, the creation of practical expedients.

  What is a Practical Expedient?

  Practical expedients are considerations, or shortcuts companies can elect to lessen their burden in the adoption of ASC 842 and IFRS 16. They were designed to provide relief for companies during the transition to the new standards.

  The ASC 842 Transition Examples

  There are various practical expedients published by the boards shortly after the release of the new lease accounting standard.

  The ASC 842 Practical Expedient Package

  One of the practical expedients provided to ease the ASC 842 lessor accounting is the package deal where companies have the option of using all three lease portfolio practical expedients together or none at all. Electing this practical expedient package lease means applying them all consistently across all leases. Plus, according to the ASC 842 disclosure requirements, businesses must disclose that they have used all three expedients.

  The three all-or-nothing practical expedients are the following:

  • Businesses don’t have to reassess the lease classification for both expired or existing leases
  • Businesses don’t have to reevaluate if the expired or existing contracts have leases
  • Businesses don’t have to reassess already recorded initial direct costs of any of the existing leases

   

  These three practical expedients can reduce significantly the time spend on re-evaluating leases, thus also reducing the costs of preparing the financial statements to comply with the ASC 842 transition requirements.  Companies that choose not to use this package will have to deal with the following:

  • Reassessing initial direct costs also means dealing with an equity adjustment
  • Re-evaluating of all leases to determine whether each lease should be classified as a finance or operating lease following the new standards
  • Re-evaluating all existing expired leases

  Companies, however, might not want to use the package since they might benefit from reassessments of their leases. For example, if most of a business’s operating leases would qualify as finance leases following the ASC 842 standard, then reclassification would impact the EBITDA. Thus, businesses may decide not to use the practical expedient package.

  Learn about expedients now, choose your options early!

  The ASC 842 practical expedients you elect to use will have a huge impact on:

  • What lease data you need to collect
  • How you need to break the data down
  • How you will configure your lease accounting system

  While a practical expedient might save you time, your decision must also consider its potential impact on your financial reporting. So, although FASB has extended the compliance deadline — giving private companies until 2021 to report their leased assets on balance sheets — it’s important to understand the implications and make your decisions about ASC 842 practical expedients as soon as possible.

  If you are unsure what to do, speak with your accounting advisory partner, who can help to guide you through the ASC 842 transition requirements and your practical expedient decisions.

  The post What is the definition of a practical expedient under ASC 842 and IFRS 16? first appeared on Visual Lease.]]> https://visuallease.com/2020-lease-accounting-guide-for-private-companies-5-steps-to-asc-842-compliance/ Mon, 13 Jan 2020 22:58:27 +0000 https://visuallease.com/?p=2209 The start of the new year means planning for what you need to accomplish in 2020. For accounting teams in private companies, there’s a big task on your plate this...
  The post 2020 Lease accounting guide for private companies: 5 steps to ASC 842 compliance first appeared on Visual Lease.]]>

  The start of the new year means planning for what you need to accomplish in 2020. For accounting teams in private companies, there’s a big task on your plate this year: getting ready to comply with the new lease accounting standard, ASC 842.

  Last July, private companies got a reprieve when the Federal Accounting Standards Board (FASB) made the decision to extend the deadline for compliance to January 2021. Chances are, that was welcome news since you were likely immersed in preparing for adopting the revenue recognition standard. Now that’s done, and you have less than 12 months to prepare for becoming compliant with ASC 842.

  How are you going to utilize the upcoming year to become ready in time? Based on helping hundreds of public and private organizations through this process, you are going to need every bit of the months ahead. This process has repeatedly shown to take longer than companies expect, and the impact is much greater than originally anticipated.

  That’s why we’ve put together a lease accounting guide for 2020. With these 5 steps, you can better plan your compliance project, establish a timeline for the year, and effectively accomplish your goals across the upcoming months as the deadline approaches.

  This lease accounting guide is organized into 5 steps that encompass the major tasks and milestones required for ASC 842 compliance.

  1. Schedule the months ahead.

  With a complex project involving many stakeholders, it’s easy to get confused about what needs to be done – and when. Building a plan and a roadmap will guide you toward your goals.

  In the early months of 2020, start by developing a plan that documents exactly what you need to accomplish, the resources you will need, and the timelines for meeting each milestone. It’s smart to set a deadline ahead of your final deadline, in case of unexpected delays or setbacks.

  Part of developing that plan is making accounting decisions that will impact the scope of your effort. For example, what practical expedients do you plan to take? You’ll need to think through the pros and cons of saving time vs. the potential negative financial impact of electing certain expedients.
  It’s critical to make these decisions early on, since your choices will impact the lease data points that your team will need to collect for every lease in your portfolio.

  2. Determine who will be involved in the project.

  This step does not need to take place subsequent of other steps. In fact, you may already have an idea of who to involve in your lease accounting project. If not, preparing for the lease accounting changes must involve additional stakeholders within your organization (along with your accounting team).

  Any departments that may be responsible for leases within your lease portfolio, such as facilities, procurement, IT, and legal can help with gathering lease information. There will be users of any new technology you implement for tracking and reporting on lease data. And there will be whoever is responsible for changing their ongoing practices related to lease management in order to maintain compliance with the new lease accounting standard.

  Many organizations will also benefit from involving an accounting advisory partner early in their compliance project, to help evaluate the potential impact to financial statements and make accounting decisions accordingly.

  It’s smart to get your stakeholders involved from the outset, identify their roles and responsibilities with the project, and begin to work together on creating and implementing the remaining steps in your compliance project.

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

  3. Conduct a lease inventory and compile data points.

  The most time-consuming part of the process, you will want to get started on this as early as you can in 2020. Once you know what lease data you’ll need for lease accounting calculations, make an inventory of all your leases and extract the relevant data for each one.

  You will need the help from the various teams who work with your organization’s leases. They can help find any lease documents that may be more difficult to find – whether they are tucked away in drawers, or existing in various spreadsheets and databases.

  To do this step, you can also take advantage of lease abstraction services, which provides you with the added benefit of working with people who understand lease contracts.

  No matter who is doing the work, having a streamlined process will make sure everyone knows what to do with the lease data as they collect it.

  As you compile data from a variety of sources, you’ll need to reconcile lists, look for duplicates and investigate discrepancies. It will save a lot of time later if you make sure you’re working with data that’s complete and accurate BEFORE you begin the implementation of your lease accounting software.

  IMPORTANT: According to the new standards, it’s not only the typical property and equipment leases that must be brought into the balance sheet. You must also examine all your contracts for embedded leases, or portions of contracts that meet the definition of a lease and must be reported on.

  Learn more:
  5 Tips for Smooth Lease Data Collection in Preparation for ASC 842
  Embedded Leases Accounting: Do Your Contracts Contain Leases?

  4. Implement lease accounting software.

  Lease accounting software is a necessary part of successfully achieving compliance with ASC 842. The effort and the risks of managing all your lease data without it are simply too great.

  The process and amount of time advised by lease accounting software providers for implementation may vary, but you will want to ensure you leave enough time for your organization to work with the provider you select, so your information is accurate and organized in a way that works for you.

  This year, you should plan to begin implementation as soon as possible. It’s never too early to begin – and you will be very wise to not push this off until the very last minute, which could expose you to risking achieving compliance by the deadline.

  A Deloitte poll from June 2019 found that only a quarter of public companies report that their lease accounting implementation projects are complete. Since the deadline for public companies passed in January of 2019, that indicates a lot of failures.

  This is particularly concerning. At Visual Lease, we have not one failed implementation. Our dedicated team is committed to the success of your organization.

  Working with a trusted implementation partner is a large part of achieving success and can make all the difference in meeting your deadline. However, you also need to be sure you are giving you and your partner enough time to work through the implementation.

  5. Adjust policies and procedures.

  Lease accounting compliance is not a one-and-done exercise, but a new way of working with leases that will impact your business for the long-term. Adopting ASC 842 is a big change to not only accounting. There will be a ripple effect that will require changes to many internal policies and operating procedures related to leased assets. For example:

  • Leases can change during the course of a lease term. Variable payment amounts increase or decrease. Leases get renewed. Additional space is added to a lease contract. Specific underlying assets (such as computers or vehicles) may be removed from an umbrella contract. When these changes occur, the staff members involved with the change must alert the accounting team, because they will now impact your financial statements.
  • Prior to ASC 842, few organizations had standards and controls around lease management and leasing decisions. Now leases have a much bigger impact on finances. So it’s important to put standards in place to ensure the best financial outcome for the company.

  While you’re working toward gathering data and preparing to report under the new standards, take steps to create new practices and controls and train everyone involved, ideally before you go live with your new system.

  Learn more: How and Why to Improve Lease Management Practices

  The bottom line: don’t delay these crucial steps before the 2021 deadline. Everyday you delay starting your ASC 842 compliance effort, you’re increasing the chance that you won’t be ready in time to meet the deadline for reporting under the new standard.
  There is only so much time you have this year. By following the steps above, you can be on your way to being prepared for implementation.

  Need help? We’ve been through this process hundreds of times. We’re happy to talk through your questions.

  The post 2020 Lease accounting guide for private companies: 5 steps to ASC 842 compliance first appeared on Visual Lease.]]> https://visuallease.com/how-to-get-everything-you-want-in-a-lease-software-solution/ Fri, 20 Dec 2019 22:50:36 +0000 https://visuallease.com/?p=2160 How often do you have this experience when evaluating enterprise software? The vendor gives a demonstration of an amazing solution, walking you through complex tools that do exactly what you...
  The post How to get everything you want in a lease software solution first appeared on Visual Lease.]]>

  How often do you have this experience when evaluating enterprise software? The vendor gives a demonstration of an amazing solution, walking you through complex tools that do exactly what you need. You say, “This is perfect! Can you give me a price?”

  First, they give you pricing for the bare bones model. Then, you find out that what they showed you involves a lot of add-ons to the platform. None of it is standard and every extra thing – from fields that you need, to reports – is going to cost you. 

  That’s a common frustration to come across when evaluating software vendors. Systems that lack configurability are expensive, time-consuming to implement, and cumbersome to update when you need a small change.

  Wouldn’t you rather get everything you need right out of the box? When it comes to lease accounting and management software, you can, if you know what to look for. In this article, we’ve laid out desired configurable enterprise lease accounting software you need.

  What you see should be what you get

  Software customers shouldn’t have to jump through hoops to get a system to work how they need. A good lease accounting system should make your life easier – and be configurable to meet your needs. 

  When looking at different lease software providers, they all claim to be customizable. However, when you dig deeper, you’ll find out their system contains only surface-level customizations at best.

  At Visual Lease, our solution is designed to be flexible and scalable for all customers. Every customer coming to us from any industry can have a system that meets their unique needs without paying extra to get it.

  If you want a truly flexible system that works how you need it to, and will serve your business for many years to come, here are the specific features to look for:

  1. Look for a truly configurable database

  Every organization has different lease information that they need to track. Manufacturing companies with leased warehouses will need to track the number and height of bay doors. Retail franchise groups need to track the brand associated with each retail location. They may also have leased vehicles that need to be associated with a location and a manager. Hospital groups may want to track the originating parent company for each facility.

  These are just a few examples, but I’m sure your organization has similar necessities that are not part of the typical lease data tracked by “canned” lease software. When you think through everything you’re currently tracking (or would like to track all in one place), you’re going to need more than just a few uniquely tailored fields specifically to your business.  

  What you need is a software product that has been designed from the database level to be completely configurable. With that capability, there’s no need to give up what you are looking to track and try to force your business into a one-size-fits-all model.

  With Visual Lease, you not only get a flexible system, but you get one that is entirely configurable for no additional cost. Our implementation team helps you through the initial setup, but also teaches you how to tweak the system yourself when the inevitable changes happen in your business, so you can always have the data you need at your fingertips.

  2. The importance of ad-hoc reporting

  With any lease software, you’ll get what looks like an impressive collection of standard reports. But as you begin to use them, you’ll realize you need to make changes. You’ll want the reports to reflect your own terminology, your organizational structure, and your leasing policies and practices – not to mention the look and feel of your brand.

  The last thing you want is to have to go back to the vendor (or a consultant) and spend a lot of money on report customizations. Oftentimes, software companies will provide you custom reports – for a cost. Why would you want to pay for exporting your own data in a way that makes sense to your business? 

  Instead, look for lease software with an ad-hoc reporting tool that makes it quick and easy to create your own data visualizations and reports. 

  With Visual Lease, you can query ANY lease information that you’re tracking in the system and group, subgroup, and filter the data any way you choose. Even better, you can do it with a tool you already know: Excel. You can save reports, add to a dashboard, or export and format with templates to create a branded look. 

  3. Flexible user access & security 

  For comprehensive lease software that manages the entire lifecycle of your leases (including administration and accounting), you’ll likely need to provide different levels of access and control for people with different responsibilities.Some examples of user roles and access include:

  • Multiple levels of administrative access, rather than a single administrator
  • A separation of roles and associated access rights within the various parts of the lease system
  • The ability to create groups based on roles with pre-assigned permissions
  • The ability to control certain rights at an individual level

  You’ll also want to control login credentials and create passwords that match your corporate password policy. You might want the extra security of using multi-factor authentication, or you might want to tie into your organization’s existing Single Sign On (SSO) to authenticate users.

  4. Adaptable implementation services

  When you work with a vendor to implement software, how does the process begin? In most cases, you’ll hear about cloned steps they take with every customer.

  When you’re getting a more customizable product, the process will start with a conversation about your goals and how you want to use the system.

  For example, the implementation team should ask about the systems you’re using now. Obviously that conversation will include your AP/GL, but should go beyond that to discuss other systems that you need to integrate with, or tools that you’re replacing. What’s working well that you would like to replicate in your new comprehensive lease management system? 

  The team should work with you to create what we like to call your “blue sky vision” of your ideal solution.

  Accounting strings are a great example of an essential customization that your implementation team should set up for you. Every large organization has a unique coding system for invoices that allow the financial team to identify who owns that invoice, who is responsible for paying it, and where it belongs in the budget. That code should follow every lease-related expense and journal entry. 

  Your implementation team can work with you to concatenate information from various lease data fields (often including custom fields) to create custom accounting strings that match your coding system. 

  5. An all-inclusive price

  Let’s be realistic: even the easiest to use lease software requires implementation services to help you get your data into the system. You’ll need training for administrators. And you’ll need ongoing support when questions come up.

  Many (if not most) solution providers nickel and dime you for every service they provide on top of the product itself.

  Here at Visual Lease, we feel that “software as a service” means you should get the services you need included with the software. That means implementation services, training, and help desk support are all included in the price you pay for our product.

  People are always surprised when they ask about extra charges and we say, no, this is all included as part of the system.

  Want to see for yourself? You can be confident that what you see will be what you get, all at a reasonable and predictable price. Schedule a demo now!

  The post How to get everything you want in a lease software solution first appeared on Visual Lease.]]> https://visuallease.com/lease-faq-accounting-for-leasehold-improvements-real-estate-cam/ Thu, 14 Nov 2019 12:00:46 +0000 https://visuallease.com/?p=879 In attempt to become compliant with the new lease accounting standards, particularly ASC 842 and IFRS 16, there are many intricate details that accountants often have questions about. Today we’ll...
  The post ASC 842 FAQ: How to account for real estate CAM charges and leasehold improvements first appeared on Visual Lease.]]>

  In attempt to become compliant with the new lease accounting standards, particularly ASC 842 and IFRS 16, there are many intricate details that accountants often have questions about. Today we’ll address frequently asked questions regarding accounting for real estate CAM charges, and accounting for leasehold improvements.

  Real Estate CAM (common area maintenance) Accounting FAQs

  1. What are CAM expenses?

  Common area maintenance (CAM) fees are common charges in commercial real estate leases. Charged in addition to rent, average CAM fees cover the lessor’s operational expenses including maintenance, janitorial, repairs, snow removal, landscaping, etc.

  Tenants are charged their pro-rata share of these charges on an annual basis. Specifically, the tenant’s share would be the percentage of the tenant rentable space to the total rentable space of the property.

  Real estate CAM charges vary according to the type of real estate property. For example, retail property such as shopping centers will have different charges particularly relating to open areas, versus office space that will have minimal open areas.

  2. How do the new lease accounting standards affect CAM accounting?

  Under the new lease accounting standards, ASC 842 and IFRS 16, real estate CAM charges are treated differently. As a result, lessees must be crystal clear about what’s included in CAM, given it’s not always so cut and dry.

  Real estate CAM charges are not included in the asset value of the lease. Instead, they are expensed in the year they’re incurred. It’s important to scrutinize CAM charges to be sure that capital costs are not included in the expenses. This is a frequent error and thus tenants must be vigilant that capital costs are not included in the CAM charges.

  Another key factor in CAM charges is the issue of establishing a cap and floor to the charges. CAM charges can fluctuate and thus it’s important to establish limits on the degree by which the charges can extend.

  3. How should I handle CAM reconciliation?

  CAM reconciliation is the process of reconciling estimated charges with actuals. Typically, an audit of the CAM charges is made at the end of the fiscal year and the differences between estimated versus actual costs are calculated. Either the landlord or tenant are made “whole” through the reconciliation process.

  Accounting for Leasehold Improvements FAQs

  1. What are leasehold improvements?

  Leasehold improvements (LHI) are defined as capital improvements made to a tenant’s space such as dry wall, electrical, carpeting, lighting, etc. Most office leases offer what is called a “work letter”, which defines what the building owner will provide to the tenant in terms of basic improvements. These improvements can be offered as a credit in the rent or provided separately.

  Leasehold improvements are typically provided over and above the building allowance. The tenant will typically amortize the improvements over the term of the lease, and in most cases the improvements revert to the building owner upon lease termination.

  2. How are leasehold improvements impacted by the new lease accounting standards?

  Leasehold improvements are an asset, but are not included in the calculation of the tenant’s total lease asset per the new FASB lease standard.

  How do CAM and leasehold improvements impact my leasing strategy?

  CAM and LHI are two areas of lease management that require careful and diligent attention. Both areas are subject to negotiation, and your organization should strive to leverage these factors to their advantage during initial lease negotiations.

  Fortunately, the new lease standards will not affect CAM or LHI investments adversely, but careful attention to these factors could pay dividends over the term of the lease.

  Learn more: Lease Portfolio Management: Policies and Procedures to Reduce Risk

  The post ASC 842 FAQ: How to account for real estate CAM charges and leasehold improvements first appeared on Visual Lease.]]> https://visuallease.com/get-the-best-lease-accounting-software-by-comparing-price-value/ Tue, 05 Nov 2019 12:00:22 +0000 https://visuallease.com/?p=1077 Looking to select the best software for the new lease accounting standards? Due to the tight compliance timelines and complex lease information, this decision can be a difficult one to conquer....
  The post The best lease accounting software by comparing price & value first appeared on Visual Lease.]]>

  Looking to select the best software for the new lease accounting standards? Due to the tight compliance timelines and complex lease information, this decision can be a difficult one to conquer.

  To choose the right software for your business, you’ll have to evaluate the features, functionality, and capabilities offered by different lease accounting software providers. In addition, it’s equally important to take a look at the overall value you will receive for the cost.

  When you select the right (or wrong) software solution, it has a significant impact on your business. There are specific ROI benefits that you will receive. This article will cover what you should look for when evaluating the value and price of a lease accounting software solution.

  Not all software for the new lease accounting standards are created equally – and costs can vary pretty significantly. However, the best lease accounting software does not mean it is always the most expensive.

  Two main things you want your lease accounting software to support are:

  • To streamline your organization’s lease portfolio management, and
  • To seamlessly generate accurate financial calculations.

  Just about every lease accounting tool can perform calculations on your lease data and send journal entries to your GL. But how do you determine the value of that system?

  What is the value of lease accounting software?

  The immediate, necessary value of enterprise lease accounting software is having the ability to perform calculations on your lease data and send journal entries to your GL, which can get you to compliance.

  However, the entire lease accounting compliance effort (not just the software) can cost your company so much more than the cost of software. When you choose the best lease accounting software, you’ll get so much more for your money than a tool that can perform calculations to become compliant with the new lease accounting standards.

  Three ways you can benefit from a valuable lease accounting software are:

  • Improving efficiency and productivity
  • Mitigate costly errors and eliminate risks
  • Overall cost savings and better financial decisions

  Learn more: How Lease Accounting Software Can Pay For FASB & IFRS Compliance

  1.     How does lease accounting software improve efficiency and productivity?

  The best lease accounting software uses smart, intuitive system design to eliminate manual processes, therefore making it easy to accomplish tasks quickly.

  Improving employee productivity is a KPI for just about every organization, regardless of size or industry. If your lease accounting tool is cumbersome and complicated to use, it will slow people down and hinder their work.

  To test the time-saving value of a lease accounting software, consider the following:

  • Does the system allow you to enter data once and use it throughout the system (rather than entering the same thing in multiple places)?
  • Does the system support mass updates to different groups of assets, such as based on entity, country, brand, or asset class?
  • Does the system support configurable alerts based on asset profile, or based on user groups?
  • Does the system accept updates to master data in the administrative settings (such as GL codes), rather than having to pay for a vendor CR each time?

  These 4 areas are just some of the key areas that impact how quickly and easily you can accomplish what you need to within your lease accounting software.

  2.     How does lease accounting software mitigate costly errors and risks?

  The costly risks that lease accounting software should help reduce are two-fold. First, inaccurate financial reports can cause you to fail an audit, which in itself is a huge risk. Second, there’s a very high financial risk associated with a poorly managed leased portfolio.

  If you’re not getting integrated lease management capabilities along with your lease accounting tool, you’re missing an important opportunity to reduce costs – from an audit perspective, as well as in general for your leases. When you’re shopping for lease accounting software, it’s essential to include a lease administration software comparison as well.

  A couple of examples of how you can improve your lease portfolio management are:

  • Lease options. For real estate leases, renewal options are critical. If you miss the chance to renew at favorable terms, you could be on the hook for millions… for a period of several years. When important lease dates approach, the best enterprise lease accounting software will alert those who need to take action.
  • Validating payments. When accounting is not integrated with lease administration, leases expire and the payments keep going out. Or, variable payments are miscalculated. Or, lease options change and the payments don’t. All of these mistakes add up to more money than you might imagine. The best lease accounting software validates all payments according to the current lease terms in the system, and sends that information to AP to prevent overpayments.

  The best lease accounting software is a comprehensive lease management platform that helps you take control of your leased portfolio and ALL associated costs.

  3.     Does lease accounting software help you make better leasing decisions?

  With virtually all leases being brought onto the balance sheet, organizations (and their audit partners) are taking a much closer look at leasing decisions. Can the lease accounting tool you’re considering help you make the most cost-effective choices?

  For that, you need a central repository of ALL your lease data.

  That’s why the most valuable enterprise lease accounting software aggregates data for real estate, equipment, vehicles, land, and anything else your organization leases. It also should collect information used in the day-to-day administration of your leases, not just the payment amounts and dates.

  For data to inform your decision-making, you’ll also need powerful and flexible reporting and business intelligence tools. Look for the ability to roll up, drill down into the details, and produce ad-hoc reports that slice and dice your data exactly how you need it.

  Lease accounting tip: The ability to see side-by-side calculations for a lease according to the different standards (FASB ASC 840 vs ASC 842, for example) can be a valuable tool for decision making. Only the best lease accounting software offers this feature along with the ability to do hypothetical calculations.

  Once you understand the value you can expect to get from the best lease accounting software, the next question is, when can you expect to get that value? Some systems take much longer to implement and produce ROI than others.

  If you’ve implemented an IWMS, you know what we mean. It can take years to get the full leasing platform in place and operational. You can bolt on a lease accounting tool that just does the calculations more quickly, but then you’ll be missing out on the lease management value mentioned earlier.

  The best lease accounting software provides a complete, end-to-end solution with fast implementation: 30 days or less for software implementation and data migration.

  

  What’s the true cost of lease accounting software?

  Now that you understand how to compare value, it’s much easier to do a cost/benefit analysis of lease accounting solutions. However, there’s one more important point to consider: how are you calculating cost?

  Remember that cost includes more than the price of the software. Don’t forget to factor in additional costs such as:

  • Technology implementation: Does the vendor outsource software implementation and systems integration? How much extra will you have to pay for that if you need to hire consultants?
  • Lease abstraction: Getting lease data out of old systems and paper documents can be the most costly and time-consuming part of the FASB and IFRS compliance process. The best lease accounting software providers offer this service. If your software vendor doesn’t and you’re forced to use consultants, you may pay extra to migrate abstracted data into your new system.
  • Customizations: Have you ever bought software that worked just as you wanted right out of the box? Every organization needs customizations to adapt software to their terminology, processes and structure. Will you have to pay consultants to do that, too? Or it is easy to customize the software yourself?

  Now you’ve got a much more complete picture for comparing lease accounting tools. When you look at the true cost of software along with the value you can expect to get in return, choosing the best lease accounting software becomes a whole lot easier!

  The post The best lease accounting software by comparing price & value first appeared on Visual Lease.]]> https://visuallease.com/5-tips-for-smooth-lease-data-collection-in-preparation-of-asc-842/ Thu, 03 Oct 2019 12:00:06 +0000 https://visuallease.com/?p=1948 If you’ve been reading up on preparing for the transition to FASB’s new ASC 842 accounting standard, you may have heard that lease data collection is complex and time consuming....
  The post 5 tips for smooth lease data collection in preparation of ASC 842 first appeared on Visual Lease.]]>

  If you’ve been reading up on preparing for the transition to FASB’s new ASC 842 accounting standard, you may have heard that lease data collection is complex and time consuming. In fact, it’s common for those who have not done it before (most private companies) to underestimate the effort required. Visual Lease has helped more than 300 organizations through the lease accounting process so far, and has helped over 700 organizations in managing their lease data. We can tell you from experience that lease data collection will take longer than you expect.

  Here are some tips that can expedite the process, prevent mistakes, and save your sanity.

  1. Line up resources for lease data collection 

  The first thing to know is that lease data collection is not something your accounting team can handle on their own. This effort must involve other departments that work with leases (such as Real Estate and Procurement) to track down contracts and other documentation. You will also need help from your IT department to assist with technology implementation and systems integration.  

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

  Many companies will also need outside expertise to get the job done. For one thing, to extract the relevant data from your lease contracts, you will need people who understand how to read and interpret these complex documents. If you don’t have employees with this expertise, you may need lease abstraction services. Most companies will also need lease accounting software to serve as a central repository for lease data and perform lease accounting calculations.

  At the outset of your project, plan for the resources you will need (both internal and external) and get the necessary approvals in advance.

  2. Make accounting decisions early 

  We have seen too many companies make the mistake of doing lease data collection before choosing their practical expedients and making other strategic accounting decisions. Many of them had to scramble to collect additional data later and break it out into the components needed for calculations, putting their compliance readiness in jeopardy.

  You need to make these accounting decisions early so you know exactly what data you need to collect, and how you need the data broken down. You’ll also need that information to configure your lease accounting system and technology integration.

  It’s important to fully understand the standards and the implications of the decisions you need to make. For example, electing a practical expedient may save time, but it is important to understand the potential consequences for your financial reporting.

  We recommend consulting your accounting advisory partner, who can guide you through these decisions and might even be willing to lead your compliance effort.

  Learn more: Lease Accounting Decisions: Why It’s Smart to Partner With An Accounting Advisor

  3. Create a process to collect lease accounting data

  We can’t repeat it often enough: this is a big project with a lot of moving pieces and a great deal riding on the outcome — the accuracy of your financial reporting. Make sure you have an organized and well thought out plan for lease data collection. And make sure everyone involved understands the process, their role, and the deadlines.

  Be sure to include the following in your project plan:

  Documents and data points to collect for each lease. With your accounting decisions made, you can confidently decide exactly which data points you need for calculations. You may need to provide guidance about where to find them, especially for complex real estate leases with many associated documents such as addendums and commencement letters in addition to the master lease. Before beginning to extract data, make sure you have the most up-to-date and accurate records. You may need help understanding the links between the various documents, so you can tell which include the relevant data.

  Learn more: Data Points You Must Collect for FASB Calculations

  Plan to identify embedded leases. This is one of the trickier aspects of transitioning to ASC 842. In addition to lease contracts for property and equipment assets, there are other things that qualify as a lease that you may not be aware of. For example, if a service vendor provides equipment that you control (such as IT equipment or vehicles) as part of a service contract, that portion of the agreement may be considered a lease, even if the word “lease” never appears in the contract. So, your lease data collection plan must include reviewing all your contracts to find any embedded leases. 

  Learn more: Embedded Leases Accounting: Do Your Contracts Contain Leases

  How to get data points that aren’t in the contracts. Certain data points you need for accounting calculations can’t be found in the contracts. Interest rates are one example. Also, you need to know whether your company is “reasonably certain” to exercise renewal or purchase options. You’ll need to talk to the teams that manage those leases to get that information.

  How lease data needs to be broken out. For example, lump sum rent payments must be broken down to show base rent, CAM charges, and taxes and insurance. You might need to work with lessors to work out how to separate gross payments into their components.

  Process for getting data it into your lease accounting software. Make sure everyone understands what to do with lease data as they collect it. Here’s an article that explains several methods for centralizing and migrating lease data: How to Get Lease Data Into Your Lease Accounting Tool.

  4. Don’t overlook ongoing lease management

  Complying with the new lease accounting standard is something you are required to do; it’s not exactly a choice. But that doesn’t mean you can’t use this opportunity to your company’s benefit. 

  This effort can actually help you reduce leasing expenses. How? By providing the intelligence and the tools to better manage your leasing practices and make more cost-effective decisions. And also by giving you the tools to audit lease payments and find out where you are overpaying. Here are just a couple of examples:

  • Accounts payable continues to make monthly payments on outdated leases.
  • You pay for building repairs that are the landlord’s responsibility according to the terms of the lease.

  You’ll be surprised how easy it is to save millions of dollars with better lease management.

  So, while you are collecting the required data points for lease accounting calculations, collect additional lease details that can help you manage leases and cut costs. And be sure to choose a complete lease system that provides management and expense audit tools.

  5. Validate lease data quality

  Remember that your ultimate goal is to pass accounting audits with complete and accurate balance sheets and journal entries. That’s why your lease data collection process must include data validation.

  Chances are, your lease data currently lives in many different places and is managed by many different people, all with their own way of doing things. In some cases, you might have the same data in multiple places (and inconsistencies between different sources). 

  As you work on lease data collection and aggregation, you need to make sure your data is complete and accurate. If you skip this step, you may have an unpleasant surprise as you begin running your numbers for the first time.

  Learn more: Lease Data Validation Steps for FASB/IFRS Accounting & Reporting 

  Now is the time to get prepared for lease accounting implementation

  As you can see, just collecting your lease data is going to be a big job. And there are many other aspects of transitioning to the new standard that you need to understand and prepare for. Watch our webinar to find out what you need to know.

  The post 5 tips for smooth lease data collection in preparation of ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/everything-you-need-for-compliance-and-more/ Thu, 01 Aug 2019 18:00:36 +0000 https://visuallease.com/?p=2240 As the standard for lease accounting software, Visual Lease provides the tools you need to achieve compliance. We make it easy to track, report, and manage your lease finances within...
  The post Everything you need for compliance (and more) first appeared on Visual Lease.]]>

  As the standard for lease accounting software, Visual Lease provides the tools you need to achieve compliance. We make it easy to track, report, and manage your lease finances within our system – and we’re extremely passionate about delivering an incredible user experience.

  It’s our mission to simplify how companies manage their leases and associated finances, but there’s so much more to gain as a Visual Lease customer – from saving time, to simplifying difficult tasks and jobs, eliminating stress and headaches, and providing answers when they’re needed.

  Our newest campaign, Compliance Plus, represents the many extra benefits of using Visual Lease, and demonstrates our promise to give you confidence, efficiency, and flexibility, which are just as important when doing your job.

  Confidence

  Wouldn’t you want to feel more confident knowing you have all of your leases properly accounted for, organized, and identified within one location?

  The strength of consolidating all real estate, equipment, vehicle and other leased assets makes all the financial reporting and compliance requirements much more reliable.

  

  Efficiency

  Our lease accounting capabilities consistently classifies leases, runs calculations, and computes right of use (ROU) asset values, along with liability schedules, so you can more easily achieve accurate results, saving you time and frustration of performing tasks manually.

  

  Flexibility

  Every field within the platform is configurable, allowing your platform to reflect your unique needs. We recognize the need to capture various data points in different ways, and have made it simple for you to do so, while avoiding costly customizations.

  

  These benefits of our software go beyond compliance, and are all time-savers and cost-savers for your business. With Visual Lease, you will not need to worry about maintaining confident, efficient, and flexible. We take the complexities out of lease accounting, so you can get back to focus on what you need to do to do your job.

  The post Everything you need for compliance (and more) first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-supports-asc-842-deadline-extension-to-2021/ Fri, 19 Jul 2019 20:58:20 +0000 https://visuallease.com/?p=1820 This week, U.S. accounting rulemakers voted in support of giving private companies an extra year to comply with the recently-adopted lease accounting rules. Companies now would have until 2021 to...
  The post Visual Lease supports ASC 842 deadline extension to 2021 first appeared on Visual Lease.]]> This week, U.S. accounting rulemakers voted in support of giving private companies an extra year to comply with the recently-adopted lease accounting rules. Companies now would have until 2021 to report their leased assets on balance sheets. This deadline change was proposed by the AICPA and was unanimously supported by the Financial Accounting Standards Board (FASB) at a meeting on July 17, 2019.

  Extending the deadline makes sense. Many private companies expressed concerns about adopting 842 standards by the originally-proposed 2020 deadline. ASC 842 came on the heels of another FASB rule change, ASC 606, which required companies to change the way they recognized revenue. ASC 606 placed a huge burden on accounting and finance teams and many companies are still scrambling to comply.

  In addition, the new lease accounting rules will require a huge amount of work. As public companies can attest, private entities will have to identify every one of their leases, including contractual arrangements that don’t look like leases, but are considered leases under the rules. They need to hunt down the documents, including amendments and letter agreements for each lease, many of which are buried in file drawers in remote offices. Also, they will have to identify the key terms and data points to extract from those leases in order to perform their lease accounting calculations. Those who have a significant quantity of leases will need to select and implement lease accounting software to manage and process that data. And when all of that is done, they have to generate and validate the asset and liability values for their financial statements’ disclosure schedules.

  Each of these tasks individually can take months to accomplish. FASB recognized this, understanding that most private companies do not have teams and advisors in place to get this done (something else they have to do).

  FASB made a wise decision in recognizing these challenges in its recent board meeting, and in deciding to extend the compliance deadline to 2021. But private companies beware: don’t use the extra time to sit back and relax; you will need every single day of this newly-found year to get this all done.

   

  MARC BETESH, ESQ., MCR.H
  Founder of both KBA Lease Services and Visual Lease, Marc leverages his knowledge of leases with technology to improve the management and performance of leases for both companies’ clients.
  Marc received his BA from Temple University and his JD from Georgetown University. He is a member of the New York and New Jersey bars. Prior to establishing Visual Lease (1996) and KBA Lease Services (1985), Marc practiced law in New York City where he negotiated commercial leases.

  The post Visual Lease supports ASC 842 deadline extension to 2021 first appeared on Visual Lease.]]> https://visuallease.com/controls-you-can-trust-visual-lease-earns-soc-1-type-2-certification/ Tue, 28 May 2019 21:25:51 +0000 https://visuallease.com/?p=1759 The stakes are high when it comes to choosing a lease accounting platform, because it directly affects the accuracy of your company’s financial reporting. Just about every firm working to...
  The post Controls you can trust: SOC 1 type 2 certification first appeared on Visual Lease.]]>

  The stakes are high when it comes to choosing a lease accounting platform, because it directly affects the accuracy of your company’s financial reporting. Just about every firm working to implement the new lease accounting standards (FASB ASC 842 and IFRS 16) will be working with a new technology vendor to accomplish this project. How can you be sure you can trust what that vendor says about their own internal controls and practices, and how they will be handing your company’s financial information?

  That’s exactly what Visual Lease’s SOC 1 Type 2 certification provides: proof (for both you and your independent auditors) that our internal controls are appropriately designed and properly executed to ensure safe and accurate processing of our clients’ financial transactions.

  What is a SOC1 report?

  A SOC 1 report is a comprehensive assessment conducted by an independent auditor to evaluate the internal controls of a service organization that could impact the financial statements of its clients. This report focuses on the organization’s ability to maintain accurate and secure financial reporting processes and provides assurance to clients about the effectiveness of these controls.

  What’s required for a SOC1?

  The requirements for a SOC 1 audit vary depending on the type of report being issued. However, there are some general requirements that all SOC 1 audits must meet, including:

  • The service organization must have a written description of its internal controls over financial reporting.
  • The service organization must have a process for monitoring the effectiveness of its internal controls.
  • The service organization must permit the auditor to have access to all relevant documentation and personnel.
  • The service organization must cooperate with the auditor’s investigation.
  • The auditor must test the operating effectiveness of the service organization’s internal controls over financial reporting.
  • The auditor must obtain written representations from management about the effectiveness of the service organization’s internal controls over financial reporting.

  What does a SOC 1 Type 2 certification tell you?

  Your lease accounting software vendor is a service organization that acts as an extension of your own company in the sense that they perform processing of your financial data, adding lease accounting journal entries to your GL and calculating lease assets and liabilities. That’s why your technology vendor’s controls and practices need to stand up to the same level of scrutiny that your own do.

  Service Organization Control (SOC) assessments and reports, created by AICPA (American Institute of Certified Public Accountants) and performed and generated by an accredited audit firm, provide the assurance that a service organizations controls are properly designed to meet their stated control objectives at a specific point in time.

  A SOC 1 report specifically addresses a service organization’s controls that relate to internal control of financial reporting. The Type 2 certification adds an assessment of the service organization’s execution of their own controls (whereas a Type 1 audit assesses only the design of controls). Auditors can come in at any point during or after the report’s specified time period to test and verify the service organization’s compliance with controls.

  Because a SOC 1 Type 2 report covers a specific time period, it’s important to look for continuity of coverage over time. Chances are you will rely on your lease accounting technology for many years to come, so your auditors need to be satisfied that your chosen vendor continues to follow their stated controls and practices for the long term.

  Visual Lease’s SOC 1 Type 2 certification services as assurance that your data is secure in our system and your lease accounting calculations are accurate.

  Controls examined in Visual Lease’s SOC 1 Type 2 audit

  Every SOC 1 audit is not the same; service organizations can have differences in their stated objectives and controls.

  Visual Lease’s SOC 1 Type 2 audit covered data security, acceptable use of data, physical security of our offices, backup and recovery, and continuity planning. Our audit also went above and beyond policies and business practices to validate the most critical aspect of our service: our lease accounting calculations engine.

  The following are the specific controls and business practices that auditors assessed and certified in Visual Lease’s SOC 1 Type 2 report.

  • Organization administration.  These controls provide reasonable assurance that individuals employed are qualified, experienced, and trained for the job functions they perform.
  • Client onboarding and administration.  These controls provide reasonable assurance that client and related lease data will be supported, authorized, accurate, and reliable.
  • Lease calculations.  These controls provide reasonable assurance that lease data will be processed completely and accurately.
  • Governance and compliance.  These controls provide reasonable assurance that risk identification and management, as well as relevant laws and regulations that impact operations, are identified, known, understood and implemented into business operations.
  • Physical security.  These controls provide reasonable assurance that physical access to the system is restricted to authorized personnel.
  • Environmental controls.  These controls provide reasonable assurance that the system is protected against fire and smoke and that temperature and humidity is maintained within predefined ranges.
  • Logical access:  These controls provide reasonable assurance that logical access to systems is restricted to authorized personnel and is based on job responsibilities.
  • Vulnerability management.  These controls provide reasonable assurance that the Visual Lease infrastructure is adequately secured from vulnerabilities.
  • Backup and recovery.  These controls provide reasonable assurance that appropriate backups of critical systems are made to enable recovery from an outage or data center failure.
  • Change management.  These controls provide reasonable assurance that changes are tested, approved, and documented prior to implementation.
  • Website availability.  These controls provide reasonable assurance that service levels are defined between Visual Lease and its clients and that application availability and the hosting environment are monitored.
  • Third party providers.  These controls provide reasonable assurance that third-party service providers are monitored.

  How has SOC 1 Reporting Evolved Over Time?

  Before, the absence of standardized reporting allowed companies to share information as they pleased, favoring insiders but leaving consumers and shareholders in the dark about internal controls and investor safeguards.

  The American Institute of Certified Public Accountants (AICPA) stepped in to standardize this process, introducing auditing standards for compliance. In 2011, these standards evolved into SSAE 16, later renamed SOC 1, effective from June 15, 2011.

  SOC 1 aimed to align US reporting with international practices, introducing two key changes:

  1. Requiring a comprehensive “system description” in place of the prior control description.
  2. Mandating a management-crafted assertion outlining control standards and responsibilities.

  This new framework focused on reporting the service organization’s financial control internals, including risks from internal personnel and processes in the system description.

  The post Controls you can trust: SOC 1 type 2 certification first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-data-collection-tips-for-decentralized-companies/ Tue, 07 May 2019 13:05:55 +0000 https://visuallease.com/?p=1736 The challenges of lease accounting data collection for distributed firms Getting ready for compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16) is a complex and...
  The post Lease accounting data collection: Tips for decentralized companies first appeared on Visual Lease.]]>

  The challenges of lease accounting data collection for distributed firms

  Getting ready for compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16) is a complex and time-consuming process. But the challenge is greater for companies who have widely distributed lease data, such as firms with many physical locations, and parent companies with many subsidiaries.

  If your company is facing this challenge, you’re probably wondering how to accomplish some important pieces of the process:

  • Collecting lease accounting data from many different people, systems, and locations.
  • Setting up a lease accounting and lease management system that meets everyone’s needs.  

  In this article, we’ll share some tips to help you find and collect all your lease data, as well as strategies to make your compliance process faster and smoother.

  Lease data collection tips: how to find all your lease data

  One of the reasons lease accounting data collection is so complicated is the wide variety of assets that companies lease.

  It’s obvious to look for real estate leases, office equipment leases, and vehicle leases. But there are other leases that may not immediately come to mind, such as furniture or construction equipment. And, there are items that are considered leases even if the contract doesn’t say so, such as assets that are included with service agreements.

  When those assets are distributed across many locations and regions, it’s even more difficult to find everything.

  Here are the lease data collection steps we recommend. Share this process with each stakeholder collecting data for their respective subsidiary company or location.

  STEP 1: Start with Accounts Payable

  Your Accounts Payable teams can provide a list of all recurring monthly payments. This will identify the lease holders and finance companies you are paying. Depending on your records, you may be able to drill down and find information about the leases covered by these payments.

  STEP 2: Reach out to those who negotiate and manage leases

  If you need more information than you can get from Accounts Payable, contact those who obtain and manage leases. Real Estate, IT, and Procurement should all have records for the leases they manage. Be sure to ask for all the documents related to each lease. For example, Real Estate should provide commencement letters along with the lease contracts.

  STEP 3: Turn to Procurement and Legal to find embedded leases

  Embedded leases can be found in service contracts and other types of agreements. Ask your Procurement and Legal teams to check all contract records for assets you use as part of a contract, even if the contract doesn’t specify the word “lease.”

  Learn how to identify embedded leases: Embedded Leases Accounting: Do Your Contracts Contain Leases?

  STEP 4: Ask lessors and finance companies for lease records

  If you don’t have records of all the leases covered by a recurring payment, OR you don’t have all the data you need to track for each lease, it’s time to turn to the lessors. Since they need to do their own accounting for leases, they should be able to provide the details you’re missing.

  Now that you know how to tackle lease data collection, here’s what you need to know to implement the project throughout your organization.

  Tips for lease accounting project planning

  Plan your timeline conservatively

  As you work out your timeline to lease accounting compliance, plan for more time than you think you’ll need, especially for lease accounting data collection. Those of us who have been through this process with hundreds of public companies over the past year know that most companies underestimate the effort required for lease data collection. Consider the steps involved in collecting lease data:

  • Identifying everyone in your organization who may have lease data somewhere.
  • Figuring out what data you need to collect for every lease.
  • Devising a method for collecting the data in a central location.
  • Reaching out to stakeholders and asking them to find leases (and waiting for them to do so, when they also have other jobs to do).
  • Having lease contracts abstracted to collect all relevant data points.
  • If necessary, obtaining translation services for contracts in foreign languages.
  • Figuring out where you’re missing data points and doing the research to find that information.
  • Testing and validating lease data.

  The point is, for most accounting teams there is more to do than you realize at the beginning of the project. And many dependencies and stakeholders to manage. So take that into account in your planning process and start early.

  Related Article: Lease Accounting Compliance Deadline: Will You Be Ready?

  Make decisions at a global level

  When you have a distributed organization, you often have different groups operating independently. That means each subsidiary or location is tracking and using lease data in different ways. If you don’t have visibility into what everyone is doing, you may be considering sending out a survey or otherwise collecting input from everybody about how to set up your lease accounting system. Or every getting everyone involved in choosing the tool.

  Here’s our advice based on lessons learned over the past couple of years. Going that route can significantly delay your project. The time it takes to wait for the responses, then figure out how to include every field that everyone asks for, is time you’ll wish you had back later on. Instead, make the decision at a global level about what data you need to track for accounting and lease management purposes (ideally with the help of your accounting advisor and key stakeholders), and move forward from there.

  Read the last tip for advice on getting buy-in and cooperation from all those who will be using the new lease system.

  Set up spreadsheets for lease data collection

  The simplest way to do lease data collection in a distributed organization is by using spreadsheets. Once you know the data fields you need to collect, create a spreadsheet for each stakeholder collecting lease data.

  As you receive the spreadsheets, you can import the data into your lease accounting system. Once you have data in the system, you can begin to test and validate.

  IMPORTANT: Be sure to make accounting decisions that impact data collection (such as practical expedients you plan to take) as early in the process as possible.

  Share the benefits of your lease accounting and management system

  Once you’ve chosen and configured your lease accounting system, you can show it to all your stakeholders when you ask them to collect their lease information. Demonstrating the lease management capabilities and reporting they stand to gain once their data is in place can encourage them to make data collection a priority.

  We know that complying with the lease accounting changes is new to most private companies. However, it’s far from new to us at Visual Lease. We have been through this process hundreds of times over, and we are here to help. Don’t hesitate to reach out to us with your questions.

  

  The post Lease accounting data collection: Tips for decentralized companies first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-decisions-partner-with-an-accounting-adviser/ Fri, 19 Apr 2019 13:00:53 +0000 https://visuallease.com/?p=1726 For private companies faced with adopting ASC 842 and/ or IFRS 16 this year, there are many complex lease accounting decisions to make. These decisions impact not only your compliance...
  The post Lease accounting decisions: Why it’s smart to partner with an accounting Advisor first appeared on Visual Lease.]]>

  For private companies faced with adopting ASC 842 and/ or IFRS 16 this year, there are many complex lease accounting decisions to make. These decisions impact not only your compliance project, but ultimately your balance sheet, financial reporting, and ability to pass audits.

  How will you make those decisions, especially if you’re not an expert on the new standards?

  Many companies will benefit from advisory expertise to guide them. Here’s why.

  Private Companies Are Underestimating the Complexity of Lease Accounting

  For private companies who do not have massive global lease portfolios, adopting the new lease accounting standard (FASB ASC 842) might appear to be a simple exercise. We are seeing many who assume they can purchase software, load in some data, click a button, and achieve compliance.

  The reality is, even with a smaller lease portfolio, adopting the new standard is complicated. Simply adopting software and putting data into it does not make you compliant.

  For one thing, software can only perform calculations and create journal entries from the data you put in. If you’re missing data, or your payment entries are not properly broken out, what you get out of the system will be incomplete and inaccurate.

  Getting compliant with the new standard requires making accounting decisions that have big implications for your financial reporting. Those decisions impact what data you will put into your lease accounting system, and in what format. We’re talking about decisions about practical expedients, discount rates, and other factors that impact your calculations and reporting.

  If you’re not an expert on the new standard, it may be tempting to rely on advice from your software vendor to help you make those decisions. Keep reading to learn why that’s a mistake.

  Why Trust Accounting Advisers for Advice About Accounting Decisions?

  When it comes to adopting the new lease standards, there are gray areas that may force you to make decisions about how you want to handle your lease accounting. When it’s time for an audit, you’ll need to justify your decisions. That’s why you need to carefully consider who you rely on to help you make them.

  Here’s an example. We worked with a large public energy firm that has many thousands of leased port-a-johns in its portfolio. According to ASC 842, any lease longer than 12 months needs to be included on the balance sheet, and therefore in lease accounting calculations. Even though these leases were longer than 12 months, they comprised less than 1% of the firm’s total lease disclosure dollar amount.

  The head of financial reporting decided that these leases were not significant enough to include in lease accounting calculations. He felt that making the effort to collect all the data and perform complex calculations didn’t make sense, given that the result would make little impact on the financial statements.

  When this company faces an audit, they will need to defend that position to an auditor. If you’re in that position, how will you do it? Here’s what won’t fly: telling an auditor your lease accounting vendor said it was okay. It’s very likely the auditor will be concerned about a conflict of interest with advice from a software vendor, even if they are experts.

  If you have carefully studied the standards, you may be comfortable relying on your own expertise. Otherwise, citing advice from recognized experts from major accounting firms is the safest way to make sure your decisions are sound (and justifiable to an auditor).

  7 More Reasons to Get an Accounting Advisory

  If you’re on the fence about whether it’s worth getting help from an accounting advisory partner, consider that they can help you with much more than decisions about what to include in your calculations. Here are just a few areas where an advisory partner can ease the burden of getting ready to adopt the new lease accounting standard.

  Technical accounting. Advisory partners can steer you through the process of making the important up-front accounting decisions about practical expedients, discount rates, and other gray areas.

  Tax implications. Your lease accounting decisions can have significant tax implications. Advisers can help you work through that and be prepared.

  Centralizing lease data. An adviser can help with the complex and time consuming process of gathering distributed data into a central location for importing into your lease accounting system.

  Data validation & analysis. You’ll need to understand exactly what data points to collect for each lease, and validate the completeness and accuracy of your data. An advisor can expedite your data collection efforts and help you avoid mistakes.

  Vendor selection. An adviser can help you define software requirements based on your specific needs and priorities, and recommend appropriate tools.

  Policies and process control. Getting compliant is only the beginning of adopting the lease accounting standards! Going forward, you’ll need new policies and procedures for approving lease financials and getting the data into your accounting systems. Advisers can help you design new controls.

  Change management. Once everything is ready, companies will need to manage the change process with communication and training. Advisors can help put that into place.

  We Are Committed to Your Success

  Like many lease accounting software providers, Visual Lease has technical accountants and CPAs on staff. However, we’ve made it a policy not to make accounting decisions for our customers. Not because we can’t give good advice, but because advice from a software vendor will not satisfy an auditor. It’s just too risky for our customers.

  We want you to be successful in adopting the new lease standard, with complete and accurate reports that don’t draw flags from an auditor. That’s why we highly recommend doing your due diligence and getting credible and reliable advice from advisory experts.

  Learn more from these related articles:

  FASB Lease Accounting Changes: How to Assemble Your Readiness Team

  Lease Accounting Implementation for Private Companies: 5 Pitfalls to Avoid

  

  The post Lease accounting decisions: Why it’s smart to partner with an accounting Advisor first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-implementation-for-private-companies-5-pitfalls-to-avoid/ Mon, 01 Apr 2019 18:44:24 +0000 https://visuallease.com/?p=1683 If you’re a private firm just beginning to prepare for compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16), consider yourself extremely fortunate. While you certainly...
  The post Lease accounting implementation for private companies: 5 pitfalls to avoid first appeared on Visual Lease.]]>

  If you’re a private firm just beginning to prepare for compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16), consider yourself extremely fortunate. While you certainly face a big challenge ahead in 2019, you have the advantage of learning from the pitfalls that many public companies made with lease accounting implementation in 2018.

  Last year, Visual Lease worked with hundreds of global public companies going through lease accounting implementation. In this article, we’ll explain the missteps and oversights we saw that resulted in wasted time and effort, caused project delays, and opened up these firms to significant risk of inaccurate financial reporting. We’ll also share advice to help private firms avoid these pitfalls and experience a smoother (and less stressful) transition.

  Costly lease accounting implementation pitfalls by public firms (and how private firms can avoid them)

  1. Underestimating the time and resources required

  Ask anyone who spent 2018 helping public companies through lease accounting implementation projects, and they will all tell you the same thing: many firms underestimated the time and the resources needed to get it done. So they waited too long to get started. And they failed to engage the help they needed early enough. We actually had a company come to us only 4 weeks prior to their January 1, 2019 implementation deadline! We were able to help, but needless to say it was a difficult period for them that stretched right up until their first quarterly reporting date in March.

  Before accounting teams fully understand the scale and the scope of transitioning to FASB ASC 842 and/or IFRS 16, they often assume it will be a simple matter to gather data, do a few calculations, and produce journal entries. In reality, there are many more accounting complexities, logistical issues, and technical details than you may expect. If you wait too long to start or fail to plan for adequate resources, you can easily be blindsided by unexpected issues and wind up not being ready in time to meet the compliance deadline.

  Read this for details you might not know about lease accounting implementation: Lease Accounting Compliance Deadline: Will You Be Ready?

  2. Choosing the wrong implementation team

  Because lease accounting implementation is a complex project with high stakes and many stakeholders, we highly recommend having an experienced project manager spearhead your effort. That person could be someone from your own internal project management team, an outside consultant, or even a representative from your accounting advisory firm.

  When it comes to putting together the rest of the team, don’t go too big or too small. With a team of 15 people, you’ll face analysis paralysis and take too long to make decisions. However, if you leave out key stakeholders, you run the risk of making mistakes that are costly and time consuming to fix later.

  For example, it’s essential to include representatives from Real Estate and others who manage your leases. These lease experts can make sure you are collecting important data that you’ll need for performing calculations and journal entries. For example, we worked with one company that came to us thinking they had all their data ready for importing. However, they missed an important component: they had no commencement dates for their property leases. That happened because they collected payment information with no input from the Real Estate team.

  Read this to learn more about putting together your team: FASB Lease Accounting Changes: How to Assemble Your Readiness Team

  3. Configuring your lease database too soon

  It’s certainly smart to engage your lease accounting technology vendor early in the process. However, software implementation starts with gathering your requirements and building a database. If you have not yet made accounting decisions and begun to gather your lease data, you might not be ready to configure your database just yet.

  Your vendor will ask questions during this process that you might not be ready to answer. If you guess wrong, you could make errors that mean re-work later.

  The most efficient strategy (both for optimizing time and choosing the right software) is to make accounting decisions and gather data while you’re shopping for technology.

  4. Making accounting decisions too late

  We have seen too many companies jump into data collection before making the important accounting decisions that affect exactly which data points are needed for lease accounting calculations.

  Practical expedients are a good example. The practical expedients you elect to take have an impact on how your data needs to be structured and broken down. We saw a company that had centralized all their lease payment data only to realize that due to a practical expedient they needed to break lump sum rents down into lease and non-lease components. That caused considerable re-work very late in the process, eating up the time they had planned for testing (more on testing to come).

  Discount rates are also frequently overlooked. Some firms decide to use the same rate across the board for all leases, while others use a complex table of rates for different types of calculations. To avoid time consuming re-work and costly delays, It’s important to make those decisions BEFORE running your lease accounting calculations and producing journal entries.

  5. Failing to validate your data

  When it comes to testing, many firms focus on validating the mathematical calculations produced by their lease accounting software. Of course we don’t recommend skipping this due diligence, but remember that software vendors, global public companies, and major accounting firms have already completed this process thousands of times over in 2018, and the platforms do work. Here’s the part you must focus on: making sure your lease data is complete and accurate.

  Under the previous standards, more than 80% of leases were operating leases with little impact on the books. Under ASC 842 and IFRS 16, the impact is much greater. Now you will have both an asset and a liability on your balance sheet for nearly all leases. If your data is wrong, the accuracy of your financial reports is compromised. We don’t need to tell you how serious the consequences can be when that happens. You could end up violating a debt governance. Reporting errors often require time-consuming investigation and adjustments to fix. That’s why transitioning to the new standards requires a higher level of lease data accuracy than ever before.

  Are you sure you have a complete set of payment data from all leases? Are start and end dates valid? Have you included lease amendments?

  Here’s what we’ve seen: companies are assuming all their calculations are correct until they run their first set of live reports shortly before the end of the first quarter. Then they realize the numbers are way off as compared to the actual expenses for that time period.

  We recommend developing models and testing with your actual lease data to uncover anything that you might have missed. If you find inconsistencies, you need to dig into what’s missing or incorrect in your data.

  How can you avoid this last-minute panic?

  • Include all lease stakeholders in the process so you capture accurate and complete data from the outset.
  • Start collecting data now and get it your lease accounting database as early as possible.
  • Plan for plenty of time for data validation.

  

  The post Lease accounting implementation for private companies: 5 pitfalls to avoid first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-compliance-deadline-will-you-be-ready/ Thu, 14 Mar 2019 13:45:09 +0000 https://visuallease.com/?p=1674 For private companies just beginning to think about adopting the new lease accounting standards, it may seem like you’ve got plenty of time. The lease accounting compliance deadline for a...
  The post Lease accounting compliance deadline: Will you be ready? first appeared on Visual Lease.]]>

  For private companies just beginning to think about adopting the new lease accounting standards, it may seem like you’ve got plenty of time. The lease accounting compliance deadline for a calendar-year private company is January 1, 2020. FASB ASC 842 takes effect for fiscal years (and interim periods) starting after December 15, 2019.

  That might seem very far away right now. Let me assure you that it’s not!  Based on our experience going through the compliance process with hundreds of public companies over the past two years, the best advice we can give private organizations is to start on your lease accounting compliance project NOW rather than later.

  Lease accounting compliance deadline: waiting too long will cost you

  There’s a limited pool of talent and resources available to help organizations gather data, abstract lease contracts, and handle systems integration. It’s a question of supply and demand: as the lease accounting compliance deadline approaches, the cost to obtain those services can rise significantly.

  Also, if you wait too long and end up cutting corners by skipping over the planning stages, that can come back to bite you in both re-work and extra expense later. For example, we’ve seen companies jump in and collect lease data before they have considered their practical expedients and how that impacts the data needed and how it must be broken out. The result? They had to scrap their first set of data and pay to do it twice.

  Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

  Why you need more time than you think

  Gathering your lease data requires a massive effort.

  In the beginning, many companies underestimate the time and resources that will be needed to find, collect, and aggregate lease data. If your data is decentralized, the effort will be even greater. Think about your own internal resources. How much time will they have to devote to this effort on top of their other responsibilities? I can tell you this: even if you start now, dedicating an hour a day won’t get it done.

  Here’s an example to illustrate my point. Let’s say you have 400 real estate leases where you’ve negotiated lump sum rent payments for the sake of simplicity. That might have been a great strategy until now. However, as you prepare for lease accounting compliance, it may turn out that you need to break down gross rent payments into lease and non-lease components. How will you do that? You may need to ask landlords for copies of their invoices. You may need to seek out the advice of real estate brokers. Now imagine doing that 400 times for each of your property leases. Now you should begin to understand why this exercise takes a long time.

  Learn more: Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance

  It’s smart to build in time for the unexpected.

  The lease accounting compliance effort is a complex project and unexpected things inevitably cause delays. As I mentioned, decentralized organizations are the most at risk. When lease information has never been collected in one database, companies often have no idea how far out to cast the net to find all their lease contracts. Here’s what ends up happening: invoices for a recurring payments turn up that weren’t accounted for in the calculations. If that happens late in the process, it can cause a lot of re-work and significantly delay your project.

  Tips for getting started on your lease accounting compliance project

  Engage reputable resources now.

  As I mentioned, there’s a limited pool of vendors and consultants with the expertise to help you pull together and abstract lease data. In 2018, resources were tight handling the public companies racing to achieve compliance by Jan 2019. This year, four to five times as many private companies will be trying to engage those same resources before the upcoming lease accounting compliance deadline of January 2020.

  If you have limited internal resources and a lot of leases, it’s in your best interest to engage the help you need right now. And, be sure to invest the time to properly evaluate those services. Get samples of lease abstracts to check for the quality you need. The old saying “garbage in, garbage out” should guide your due diligence efforts. Poor data will ultimately lead to inaccurate financial reporting.

  Decide on practical expedients.

  The practical expedients you decide to take for your financial reporting have a big impact on the way your data needs to be collected, broken out, and organized. If you collect data without making these decisions, you may have to backtrack and start all over again. Or in the best case, delay your project while you manually rework your lease data.

  Divide and conquer.

  Many companies struggle with which task to do first: collecting lease data or choosing a lease accounting system. It’s a tough question, because it’s kind of a chicken-and-egg situation. You need to understand your data to choose a system, and you need the system to know how to organize the data.

  In our experience, the most efficient way is to do both simultaneously. Gather your lease accounting compliance committee and create two teams: one to spearhead the data collection effort, and one to evaluate lease accounting technology. Have your teams regularly touch base to report on progress, compare notes, and share helpful information.

  The post Lease accounting compliance deadline: Will you be ready? first appeared on Visual Lease.]]> https://visuallease.com/best-practices-for-variable-rent-leases/ Fri, 14 Dec 2018 17:19:28 +0000 https://visuallease.com/?p=1492 When ASC 842 and IFRS 16 were first announced, there was quite a bit of uncertainty about how the accounting would work for variable rent leases. Large public companies found...
  The post Variable rent leases: Accounting best practices for ASC 842 & IFRS 16 first appeared on Visual Lease.]]>

  When ASC 842 and IFRS 16 were first announced, there was quite a bit of uncertainty about how the accounting would work for variable rent leases. Large public companies found themselves in the role of early adopters, and had to work out many complex accounting calculations and processes that had never been done before.

  FASB and IASB have since provided revised guidance, and accounting advisors and technology providers (like Visual Lease) have learned valuable lessons from the experience of helping public companies move toward compliance in 2018.

  If you are part of the next wave of organizations ramping up your lease accounting compliance efforts for the 2019 deadline, you’re in luck. You can benefit from the best practices developed over the past year, and avoid time-consuming mistakes and delays.

  What are variable payments?

  Variable payments are payments that can fluctuate or change in amount based on specific factors or events. These factors could include variables such as usage, sales volume, market conditions, or other predefined triggers. Unlike fixed payments, which remain constant over time, variable payments can vary up or down depending on the circumstances they are tied to. These payments can be found in various contexts, including lease agreements, loans, contracts, and other financial transactions where the payment amount is subject to change based on certain conditions being met.

  Why are variable rent leases so complex from an accounting standpoint?

  In the past, the difficulty with variable rent leases was only about calculating the correct payment, whether that was based on on a variable interest rate, CPI increase, a percentage of sales, or some other variable factor.

  Under ASC 842 and IFRS 16, variable leases require much more complicated accounting. You’ll need to understand how to break out all the components of variable rent leases, including non-lease components, so you’ll be able to properly represent them on your balance sheet. Also, you need to consider how the accounting treatment will change over time.

  Here’s just one example to illustrate some of the issues that will arise with variable rent leases:

  Let’s say you have a lease that starts at $10,000 per month, with straightforward CPI increases over time. That base rent of $10,000 goes into the calculation of your ROU asset and liability, and the CPI increases are treated separately as variable payments.

  That process continues the same way (although the amounts of CPI increases may change each year) until something happens that requires a remeasurement of the lease, such as exercising an option. Upon remeasurement, all those CPI payments that were variable before now get treated as fixed payments that go into the calculations for ROU assets. Only the future CPI increases (after the remeasurement) qualify for the variable payment treatment.

  That’s just for leases with simple CPI increases. What happens if your increase has a floor? Let’s say each increase can’t be less than 2 percent. In that case, the 2 percent becomes part of the fixed payment, and only increases above 2 percent are treated as a variable payment. To complicate matters further, if you also report under IASB or other non-US GAAP standards, CPI increases are handled differently.  Your accounting standard must be capable of handling multiple methods simultaneously.

  Needless to say, there’s a great deal to learn. When it comes to handling all the complicated scenarios for variable rent leases, you will need guidance from your accounting advisors. Here’s what is critical to know now as you begin preparing for compliance with the new lease standards:

  How are variable rent leases accounted for under ASC 842 and IFRS 16?

  Under both standards, variable rent leases are classified as finance leases. This means that the lessee must recognize a right-of-use asset and a lease liability on the balance sheet. The lease liability is calculated as the present value of the future lease payments, including any variable payments. The right-of-use asset is calculated as the cost of the lease, less any lease incentives received.

  The variable payments under a variable rent lease are treated as part of the lease liability. This means that the lease liability will increase or decrease each time the variable payments are adjusted. The lessee must also recognize interest expense on the lease liability over the lease term.

  The main difference in the treatment of variable rent leases under ASC 842 and IFRS 16 is how the variable payments are estimated. Under ASC 842, the variable payments are estimated using the most recent information available at the commencement of the lease. Under IFRS 16, the variable payments are estimated using the best available estimate at the commencement of the lease.

  The difference in the treatment of variable rent leases under ASC 842 and IFRS 16 can have a significant impact on the lessee’s financial statements. For example, if the variable payments are estimated to be higher under ASC 842 than under IFRS 16, the lease liability will be higher under ASC 842 and the lessee’s interest expense will also be higher.

  What are the key considerations for tracking and reporting variable rent lease data?

  • Identifying all of the variables that affect the lease payments. This includes the index or rate that the rent is tied to, the amount of usage of the leased asset, and any other factors that are specified in the lease agreement.
  • Tracking the values of the variables over time. This will allow you to accurately calculate the lease payments and update your accounting records accordingly.
  • Recording the lease payments in your accounting system. This will ensure that the lease payments are properly reflected in your financial statements.
  • Reporting the lease payments to your stakeholders. This may be required by law or regulation, or it may be necessary for internal reporting purposes.

  What are the challenges of accounting for variable rent leases?

  There are several challenges to accounting for variable rent leases, including:

  • Complexity: Variable rent leases can be more complex to account for than fixed rent leases because the lease payments can fluctuate over time. This can make it difficult to accurately calculate the lease liability and right-of-use asset.
  • Volatility: The value of variable rent leases can be more volatile than the value of fixed rent leases. This is because the lease payments can be affected by changes in the index or rate that the rent is tied to, or by changes in the amount of usage of the leased asset. This volatility can make it difficult to forecast the future cash flows from the lease and to manage the lease risk.
  • Data management: Variable rent leases require careful data management to track the variables that affect the lease payments and to calculate the lease liability and right-of-use asset accurately. This can be a challenge if the lease agreement is complex or if the variables that affect the lease payments are not well-defined.
  • Compliance: Variable rent leases can be complex to comply with accounting standards and regulations. This is because the accounting treatment of variable rent leases can vary depending on the type of lease, the index or rate that the rent is tied to, and the amount of usage of the leased asset.

  Despite the challenges, it is important to properly account for variable rent leases. This is because variable rent leases can have a significant impact on a company’s financial statements. By carefully managing the challenges of accounting for variable rent leases, companies can ensure that their financial statements are accurate and that they are in compliance with accounting standards and regulations.

  Best practices for recording and tracking variable rent lease data

  1. Identify all the variables in your lease payments

  It’s not enough to capture the fact that a lease obligation has a variable component. Different variable payment structures qualify for different accounting treatments. And to further complicate things, under the US standard (ASC 842) variable leases may be treated one way, whereas under the international standard (IFRS 16) variable leases may be treated differently. If you must comply with both, you may need to apply two different accounting treatments to the same lease. That’s why it’s so important to understand and capture every parameter that affects how lease payments change over time.

  You’ll need the advice of your accounting partners to decide how you’ll treat different variable payment scenarios as well as what practical expedients you plan to take. Then you can work out what data you’ll need to create the calculations.

  2. Isolate every variable in your lease management and accounting system

  Create separate line items for every variable; don’t make the mistake of combining them with the overall obligation that’s being increased over time. If everything is lumped together, when a remeasurement occurs you’ll be forced to go back and spend a lot of time making manual accounting adjustments.

  3. Creating the data right structure

  It’s essential to create the right relationship between your fixed rent components and your variable payment components in your lease system.

  On one hand, you need to connect them so that you can combine them for payment purposes. But you must also be able to treat them separately as needed for accounting purposes that change over time.

  When a remeasurement event occurs, you’ll be in the best position to make a smooth and easy transition to a different accounting treatment.

  Visual Lease accommodates complex lease structures and makes your workflow simple

  It’s no secret that accounting for variable rent leases (or any leases that have a variable payment component) is complicated. That was true even before the new lease accounting standards, but under ASC 842 and IFRS 16 the complexity has increased exponentially. Plus, with leases more visible on the balance sheet and making a bigger impact on your financial reporting, the stakes are higher and you need to be sure you get it right.

  That’s why Visual Lease has taken what we’ve learned working with the early adopters and built best practices into our tools that adapt to the complexities of variable rent leases. With our smart and flexible data architecture and the ability to change accounting treatments automatically, you not only get to compliance fast, but you do it right so you avoid re-work later. Your Day 2 workflow is simple and efficient

  Ready to see how it works? Request a demo now.

  FAQs:

  What are the different types of variable rent leases?

  There are two main types of variable rent leases:

  1. Index-based leases: These leases tie the rent payments to an external index, such as the Consumer Price Index (CPI) or the London Interbank Offered Rate (LIBOR). The rent payments will increase or decrease in line with the index.
  2. Usage-based leases: These leases tie the rent payments to the amount of usage of the leased asset. The rent payments will increase or decrease depending on how much the asset is used.

  How are variable lease payments treated in accounting?

  Variable lease payments are handled differently based on lease type. For operating leases, they’re recognized as expenses when incurred. In finance leases, they become part of the lease liability and noted as interest expense over the lease term.

  What are variable lease payments under IFRS 16?

  In IFRS 16, variable lease payments are payments influenced by events beyond time, like asset usage or market changes. These include percentage-of-sales payments, usage thresholds, or market price adjustments.

  Are variable lease payments included in lease liability?

  Yes, variable lease payments must be included in the lease liability and asset. They’re added initially if known, or later when event-dependent.

  What’s the difference between variable and fixed loans?

  Fixed loans maintain a constant interest rate, ensuring steady payments. Variable loans have rates that change due to market shifts, impacting monthly payments.

  What is an example of a variable rate?

  Examples of variable rates include adjustable rate mortgages (ARMs) and credit cards, where rates change based on indices or market conditions.

  The post Variable rent leases: Accounting best practices for ASC 842 & IFRS 16 first appeared on Visual Lease.]]> https://visuallease.com/how-lease-accounting-software-can-help-you-save-money-on-leases/ Wed, 05 Dec 2018 08:45:34 +0000 https://visuallease.com/?p=1487 Can your lease accounting software find lease payment mistakes? Were you under the impression that lease accounting software could only perform accounting calculations and add information to your balance sheet?...
  The post How Lease Accounting Software Can Help You Save Money on Leases first appeared on Visual Lease.]]>

  Can your lease accounting software find lease payment mistakes?

  Were you under the impression that lease accounting software could only perform accounting calculations and add information to your balance sheet?

  It’s true that this is the primary focus of many lease accounting products. However, smart organizations are choosing more comprehensive lease software that’s designed to provide lease administration along with the lease accounting calculations you need for FASB and IFRS compliance.

  Why? Because by properly managing leases and auditing lease payments (which are now much more visible to your financial officers and external auditors), you can uncover millions of dollars in hidden waste and overpayments.

  Having this capability is an important opportunity for organizations that want to save money on operational expenses. And who doesn’t stand to benefit from saving money?

  3 common ways organizations pay too much for leases

  Organizations spend a great deal of time and money negotiating leases for real estate and other assets, making sure the terms align with their best interests. Then, after an agreement is completed and signed, it goes into a filing cabinet, never to be seen again.

  Bills come in from lessors and get paid by your AP staff. Expenses are incurred and paid for. Meanwhile, how do you know those charges are in line with what you agreed to pay? Very few organizations are checking to make sure they are, because it’s just too time consuming to find the lease and check every bill. (Not to mention trying to understand the contents of the lease once you find it.)

  The problem is, the charges are inaccurate more often than you might expect. That’s because the lessors are not checking either. Landlords typically bill every tenant using to same method and leave it to lessees to challenge the charges.

  There are countless details and nuances in lease contracts, especially for real estate leases. When no one is checking the bills against the lease details, incorrect charges and overpayments happen frequently. Here are just a few common examples.

  1. Paying charges specifically excluded from the lease

  With the use of many leased assets, things periodically need to be maintained and repaired. In a leased office space, the AC needs to be serviced, broken plumbing must be repaired, and faulty light fixtures replaced. The same is true for vehicle leases: cars, trucks and construction vehicles need oil changes and repairs.

  When you order these repairs and maintenance services, chances are you automatically pay for them. But what if the lease specifies that the landlord or lessor pays for these items?

  If you’re not checking, you’ve likely paid for many expenses that were not your responsibility.

  2. Paying an inflated share of building expenses

  In leased buildings, shared operational expenses (such as utility changes, cleaning costs, or landscaping expenses) commonly get divided among all the tenants in the building. Each tenant pays a percentage determined by the amount of usable space they occupy.

  So what happens when there’s a change to the amount of usable space? Maybe the landlord added a new wing to the building. Or, maybe you gave up a portion of the space you were renting when a floor was subdivided. In both cases, your percentage of CAM charges should be reduced.

  If your landlord doesn’t adjust your bills and your AP staff automatically pays those incorrect bills, you lose money for the remainder of the lease.

  3. Paying for things you didn’t get

  When a lease is negotiated, sometimes landlords agree to certain terms you request, such as the first month’s rent free, initial cleaning, or changing the carpet.

  Many times, those agreed-upon changes to the landlord’s standard lease never make it into the billing, so you never get your free month’s rent. Or worse, you get charged for things you never received, like cleaning or carpeting.

  Find and prevent overpayments with lease audit capabilities

  The fact is, it doesn’t matter what’s in your leases if you’re not tracking the details and regularly validating your payments to be sure your lease payments align with the contracts.

  When your lease accounting software tracks not only lease payment information (needed for accounting calculations) but also documents all the details of your leases, you have a powerful tool for preventing overpayments.

  Here’s how you can do that when you choose lease accounting software (like Visual Lease) that offers lease auditing capabilities.

  Validate every payment against the lease

  Visual Lease users can automatically validate lease payments BEFORE you pay the wrong amount!

  Every time you pay a bill, you’ll enter the charge into the system. When the system is tracking all your lease terms, it can automatically analyze the payment against the lease contract. If the amount doesn’t match what’s expected, you’ll be alerted. You can choose to pay only the expected amount and hold back the differential until you can investigate with the lessor.

  Audit payments to flag anomalies

  Certain lease payment amounts, such as CAM building expenses, change over time and you may not be able to validate simply by checking against the lease contract. For example, utility charges for one location may suddenly go up. While you may expect utility rates to increase, how can you tell if you’re being overcharged? It’s possible that a new tenant is the building is using more than their share and you’re being charged a percentage of that. Or, there may be an charge for electricity on the weekend because you failed to notify the landlord in advance.

  If you’re not looking for these mistakes (on your part or the landlord’s), you’ll never find these opportunities to save big money.

  To find them, you’ll need to use your lease accounting software to look for payments that increase beyond an expected range. Visual Lease lets you run a report that flags payment amounts that fall outside your specified tolerances. Then you can follow up with landlords and other lessors to verify the charges, and only pay what you really owe.

  Streamlining the process of validating payments makes it much easier to catch the mistakes that slip through your payment processes every day.

  Not what you expected from lease accounting software, right?

  Request a Visual Lease demo to learn more about how you can save money on leases.

  The post How Lease Accounting Software Can Help You Save Money on Leases first appeared on Visual Lease.]]> https://visuallease.com/lease-data-you-ignored-in-your-hurried-lease-accounting-compliance-exercise/ Thu, 29 Nov 2018 09:15:53 +0000 https://visuallease.com/?p=1484 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...
  The post Lease Data You Ignored in Your Hurried Lease Accounting Compliance Exercise first appeared on Visual Lease.]]>

  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

  Wasted money

  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.

  Your career

  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.

  5. Insurance

  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.

  The post Lease Data You Ignored in Your Hurried Lease Accounting Compliance Exercise first appeared on Visual Lease.]]> https://visuallease.com/asc-842-ifrs-16-lessons-learned/ Sun, 25 Nov 2018 15:03:00 +0000 https://visuallease.com/?p=2068
  
  New lease accounting standards are sweeping the industry, bringing about significant change and challenges for entities of all sizes and industries. For most companies, the changes take effect beginning in 2019, but some entities, like private companies, have an extra year. The long-term impact of the new standards has yet to be seen, but the implementation issues facing many entities have become increasingly evident.

  The modifications may be significant but are far from new. The Financial Accounting Standards Board and the International Accounting Standards Board issued in 2016 the ASC 842 and IFRS 16, respectively. The standards bring many leases onto the balance sheet, increasing the visibility of a company’s assets and liabilities.

  In fact, listed companies using IFRS Standards or US GAAP are estimated to have around $3.3 trillion of lease commitments, of which more than 85 percent do not appear on their balance sheets. Why? Historically, leases have been categorized as either “finance leases” (reported on the balance sheet) or “operating leases” (disclosed only in the notes to the financial statements)¹.

  “When the new FASB and IASB leases standards take effect, they’ll provide investors across the globe with more transparent, comparable information about lease obligations held by companies and other organizations,” stated FASB Chair Russell G. Golden in announcing the new standards².

  With the first wave of businesses transitioning to the new lease accounting standards beginning January 1, 2019, many entities have been busy developing plans for ASC 842 and IFRS 16. Other entities, like private companies, have an extra year to adopt ASC 842. IFRS 16 will be effective for annual periods beginning on or after Jan. 1, 2019. For those businesses that have yet to implement the new standards, understanding the lessons learned will prove essential.

  This white paper will explore some of the key differences between ASC 842 and IFRS 16 and will provide actionable insights and lessons learned to help businesses navigate the complexities and ensure a successful adoption.

  Notable Differences

  While ASC 842 and IFRS 16 converge in many ways, they do diverge in several critical areas. Here’s a sampling of some key points of differentiation.

  Low value leases: One notable difference is that IFRS 16, which replaces accounting requirements (IAS 17 Leases) introduced more than 30 years ago, does not require a company to capitalize leases of “low-value assets” (assets less than or equal to $5,000). ASC 842 does not include this exemption. Among assets commonly leased, office furniture,personal computers and mobile phones are typically expected to qualify as “low-value assets,” according to the IASB. This is in addition to an exemption on short-term leases (less than 12 months), which is also offered under ASC 842.

  Lease classification: Unlike ASC 842, which has a dual model approach, IFRS 16 requires a single model approach. It removes the classification of leases as either operating leases or finance leases, treating all leases as finance leases. As noted by KPMG, this will mean that dual reporters must separately track leases that have a different classification between US GAAP and IFRS because the accounting will be different³.

  Transition approach: When adopting IFRS 16, companies can choose between taking a retrospective approach or a modified retrospective approach. Meanwhile, FASB issued

  in July 2018 an amendment that created an additional (and optional) transition method in an effort to reduce costs and ease implementation for financial statement preparers. Specifically, the ASU provides: 1) An option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements; and 2) A practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met⁴.

  Lessons Learned

  Preparing for the implementation of any new accounting standard can be a  significant undertaking but, with the proper planning, companies can alleviate some of the headaches. To help ensure a smooth transition, consider these lessons learned:

  Act early: When undertaking a large project, such as collecting, extracting and entering leases, it’s important to have a clear understanding of the desired output. This requires an early evaluation and selection of a system, which will give you a clearer idea of which data points you can track, how your journal entries will look, and what GL/AP integrations you need to consider. Before you do anything, look at your leases. Read five, 10 or 20 of them and, if necessary, have someone who is familiar with the leases explain them to you. Eventually, when you have questions about systems or ASC 842 technical considerations, you will understand them in the context of your portfolio.

  Educate: Staff education and training is essential. Ensure that your associates have reviewed the new standards and understand the implications. It is also important to stay abreast of any potential changes in interpretation that may arise going forward. While many leases are straightforward (tenant-based real estate leases, fixed expense equipment leases, etc.), it’s important to know your business model and recognize if there are any unique lease types (embedded, variable rent, index-based, multiple-asset agreements, etc.).

  Leverage technology: Technology should not be thought of as strictly a compliance solution. Purchasing technology presents a significant opportunity to find enterprise value in your solution. What if you could centralize your real estate leases and track non-financial components? What if you could use reporting and analytics to uncover risk, or synergy, across your portfolio? What if you could leverage a solution to centralize all contracts, not just leases? Leveraging a robust end-to-end lease accounting and management software solution, that also helps ensure ASC 842 and IFRS 16 compliance, is essential.

  Have a Plan: Break the implementation down into phases and create a cross-functional team to spearhead the project. Ensure the plan clearly outlines the roles, responsibilities and timelines. Have a plan for including people outside of accounting (i.e. real estate people who would actually have the lease and people who are in charge of office equipment leases such as copiers and furniture). Also, consider working backward and think about Day 2 first. Why? It’s easy to have a plan for Day 1, but what about next year? What about when you expand, make an acquisition, or hire new associates? Extend your focus beyond Day 1 compliance to sustainable Day 2 compliance. What will be the new process internally? (i.e., entering, approving a lease, recording journal entries, passing an audit, etc.) What other value can you uncover from this exercise? What are some sample leases? (Have a real estate, asset manager or legal expert explain them to you, if necessary). Then, start collecting.

  Communicate: Clarity and communication is essential. Communicate the impact of the new standards to all stakeholders, including those outside of the corporate accounting department. This includes such groups as real estate and IT. They too will be impacted and need to understand the changes.

  Conclusion

  Don’t delay. Begin your implementation and decision-making process today. Preparing for the new accounting standards may seem daunting but you’re not alone. Turn to experts like lease accounting and management software professionals Visual Lease, who can help you navigate the complexities and set you on reliable path to ASC 842 and IFRS 16 lease accounting compliance.

  About Visual Lease

  Visual Lease is a leading provider of lease accounting and lease administration software. Our software will help get your organization compliant with ASC 842 and IFRS 16 requirements. The Visual Lease platform also provides and easy-to-use Day 2 solution with its lease management capabilities and infrastructure. The system enables organizations to quickly and easily manage their lease portfolios, define and track specific lease clauses, proactively manage critical dates (such as renewal options), and visualize your asset portfolio! Request a demo of Visual Lease today

  1 “IASB Shines Light on Leases by Bringing Them onto the Balance Sheet.” IASB, 13 Jan. 2016, archive.ifrs.org/Alerts/PressRelease/Pages/IASB-shines-light-on-leasesby-bringing-them-onto-the-balance-sheet.aspx
  2 “FASB Issues New Guidance on Lease Accounting.” FASB, 25 Feb. 2016, www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176167901466&d=&pagename=FASB/FASBContent_C/NewsPage
  3 “Leases: Top Differences between IFRS 16 and ASC 842.” KPMG LLP, advisory.kpmg.us/articles/2018/ifrs-16-asc-842-differences.html
  4 “FASB Issues Targeted Improvements to Leases Standard.” FASB, 30 July 2018, www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176170985150&d=Touch&pagename=FASB/FASBContent_C/ NewsPage

  The post ASC 842 and IFRS 16: 5 Lessons Learned for a Smoother Transition first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-reporting-features-asc-842-journal-entries/ Wed, 21 Nov 2018 08:15:21 +0000 https://visuallease.com/?p=1473 Journal entries for the new lease accounting standards: are you getting the intelligence you need? As the deadline for complying with FASB lease accounting changes draws closer, financial leaders are...
  The post Visual Lease Reporting Features: ASC 842 Journal Entries first appeared on Visual Lease.]]>

  Journal entries for the new lease accounting standards: are you getting the intelligence you need?

  As the deadline for complying with FASB lease accounting changes draws closer, financial leaders are realizing they need much more than a tool that produces a list of journal entries for each lease in their portfolio.

  Journal entries for the new lease accounting standards are an essential requirement, but they are really only the starting point for accurate and favorable lease accounting and financial reporting.

  To optimize your lease accounting outcome, you need business intelligence that helps you:

  • Understand how lease accounting impacts your financial reporting
  • Examine lease accounting details for different parts of your lease portfolio and different segments of your business
  • Make lease accounting choices that result in the best possible financial picture for your organization
  • Make better decisions about leasing moving forward

  To that end, Visual Lease’s recent software update provides enhanced reporting capabilities and business intelligence for ASC 842 journal entries.

  We have also fine-tuned all the nuances of transitioning current leases over the new lease accounting standards, so you have everything you need in place to get prepared for Day 1 compliance.

  Keep reading to learn about Visual Lease’s new journal entry summary report, which provides powerful and flexible tools that turn your journal entries into truly valuable data.

  

  Business intelligence helps you do more with ASC 842 journal entries

  Large organizations have mountains of financial data. But for that data to be useful for making decisions and improving outcomes, you need the ability to dig in and see that data in a variety of ways.

  That’s exactly what we’ve provided with the new Visual Lease journal entry summary report. Using this powerful new tool based on data warehouse and analytics technology, you can view journal entry information across your entire lease portfolio. And, best of all, you can slice and dice it to see exactly what you need, when you need it.

  For example, you can look at:

  • Journal entries for different reporting entities within the larger organization
  • An analysis of leasing information by department
  • Lease accounting impacts for a month, quarter or year
  • Lease dates, debits and credits to determine account balances for your balance sheet

  

  What our customers seem to love is the flexibility the tool offers to quickly produce a custom view of your journal entries:

  • Drag and drop columns to re-arrange information
  • Change grouping and subgrouping
  • Create subtotals at each group level
  • Show the results in visual formats such as charts and graphs

  The best part? As you select options to view different journal entry data, the report rebuilds in real time. So there’s no waiting and you have instant access to the information you need.

  Visual Lease’s new report is an amazingly powerful tool for analytics reporting and data visualization. In fact, there’s so much you can do with it that we offered our customers a training webinar to show them the possibilities and help them get value from the tool immediately.

  See for yourself: request a demo now!

  Journal entries: think beyond the basics

  Chances are, right now you are focused on ASC 842 implementation and transitioning to accounting for leases under the new standard. So you might be tempted to think only about producing accurate journal entries for all your leases and getting them onto the balance sheet.

  That’s understandable. And of course, every lease accounting tool can do that.

  However, don’t rush into the wrong decision because, in the urgent push to get prepared for Day 1, you’re overlooking the chance to think bigger and get more. Look for an ASC 842 lease accounting and reporting tool with features that can help your organization meet goals and improve outcomes.

  

  The post Visual Lease Reporting Features: ASC 842 Journal Entries first appeared on Visual Lease.]]> https://visuallease.com/how-to-implement-lease-accounting-technology/ Tue, 13 Nov 2018 15:51:24 +0000 https://visuallease.com/?p=2196

  Steps to Ensure a Smooth Transition to ASC 842 / IFRS 16

  

  With the countdown to FASB/IASB lease accounting changes well underway, many organizations are scrambling to implement technology to help them through the process. Adopting a new enterprise software tool can pose significant challenges, and given the timeline, there’s very little margin for error. You need things to go smoothly or risk not being ready to meet the compliance deadline.

  
  Step 1.Choose lease accounting technology that fits your business processes and infrastructure

  There are several lease accounting tools on the market, with more popping up all the time. Quick demos may give you the impression that they are all quite similar, but that can be misleading. One of the most critical factors is how well the system can adjust to the way you work and how it will fit into your technical infrastructure.

  Your technology should conform to the way you work

  Your lease accounting technology should adapt to the way you do things, rather than the other way around. It should be able to track different kinds of assets and group them the way you group them for operational purposes (e.g, by business unit, region, asset class, property or equipment type, rent type, master contract type, among others). You should be able to run reports in whatever order you want so that you can validate your work.

  When focusing on the new lease accounting rules, you should ensure that your system can accommodate things like different interest rates for varying asset types and lengths of terms. It should have processes for smoothly transitioning from existing straight-line rent calculations to the new ASC 842/IFRS 16 methods. And whether you have a consultant helping you or not, the system should be flexible and easy enough to allow you to do this yourself, without having to involve the vendor or hire consultants every time you need something.

   

  It should seamlessly integrate with your existing systems

  Every company has a unique technology infrastructure and there are many places that consume lease data, such as communication platforms, business intelligence tools, and ERP and AP systems. To minimize the complexity and implementation time, you’ll want your lease accounting system to plug into these systems without gaps. And when a vendor says it can integrate with your SAP or Oracle system, investigate the depth of the integration. Determine if the system provides flexible APIs, has XML data export/import capabilities, and whether it can create journal entries. Determine if it can integrate with multiple general ledgers. These features are needed for many integrations.

  It should facilitate data migration and updating

  Collecting and validating the data you’ll need for lease accounting calculations is a challenging part of FASB/IASB readiness; getting it into your lease accounting database shouldn’t be. Check to see that the system vendor can migrate the data for you for a reasonable cost and within a reasonable time.

  Also, as you live with your data, you undoubtedly will need to bulk update it from time to time. Check to see that the system has embedded import tools that are easy enough for you to use so that you don’t have to call on the vendor each time. Also check the scope of these import tools. Many only allow you to import limited data.

  It should have built-in audit functions

  The system you select should have features that ensure you end up with valid data in the system and accurate journal entries on your balance sheet. Look for data auditing features and alerts that let you know you may have data integrity issues. For example, if imported data fails to sync or assign, the system should let you know what happened and why so you can take corrective action.

  Also, you’ll find that it’s extremely helpful to have flexible drill-down reporting capabilities that allow you to verify that the data in your FASB reports make sense from a business perspective. You should be able to run reports on the fly to investigate anomalies in your data.

  Having the support or endorsement of one of the major accounting firms (and especially by your own advisory partners) will go a long way toward giving you the confidence that the system will perform accurately

  2. Manage your stakeholders

  Put together a cross-functional team to plan and execute your FASB/IASB readiness project. While your Controller and accounting managers have responsibility for adopting the new lease accounting standards and are likely to be leading the effort, it’s essential that other stakeholders are represented and involved early in the planning stage.

  Real Estate. Your company’s most complex leases will be property leases. That’s why your Head of Real Estate and lease administrators will be invaluable allies in the process of locating, collecting, understanding and extracting the data you need for compliance with the new standards. Ideally, when complete, your lease accounting system will become the single source of truth for all your lease information, even going so far as to use the system for payment processing. Relying on your lease administration system to pay landlords and other vendors is a great way to ensure the accuracy of your data.

  Managers of equipment and fleet leases. The new lease accounting standards require leased equipment to be included on the balance sheet. Chances are, your company doesn’t have a single group managing all those leases. So you’ll need to seek out and involve the various groups that do so they can help with data collection. For example, IT may be in charge of leasing computers, Procurement may manage office copiers, and Facilities may handle your vehicles.

  Information Technology. Your IT team must validate that the technology you choose can integrate with existing systems as needed. IT will also need to be intimately involved in developing and implementing your data migration process.

  Procurement. In many organizations, technology selection is coordinated by a procurement representative. Their expertise is valuable in thoroughly vet vendors to ensure they meet organizational standards.

  As you assemble your team, make sure roles are clearly defined and you designate an overall project leader as well as a point person for each key task.

  3. Lock Down Your Policies

  You will need to make policy decisions that impact how data will be collected and used for calculations. Since your organization’s leases will vary in their structure and terms, you’ll need to develop rules to determine how different elements will be treated in your accounting calculations. You’ll know quickly whether you need to comply with IFRS, GAAP or both. Those decisions will guide you in forming both the Qualitative and Quantitative Disclosures in your financial statements.

  Embedded leases are an important example. There are many types of service contracts that include usage of equipment that may be considered a lease. You’ll need to decide on what does and does not constitute a lease within these agreements. Similarly, you may decide to adopt FASB’s “practical expedient” of capitalizing rather than separating out service components from your leases.

  As a first step, have a conversation with your accounting advisory partners who can fully explain your obligations under the new standards and advise you about these policy decisions. Doing this before you begin collecting data avoids having to reanalyze your data later on.

  4. Start Locating Your Data

  As you begin to understand everything you’ll need to collect, the next step is to determine where that data currently lives.

  Property lease data may be the easiest to locate, since your real estate group is already tracking at least some of the that data in spreadsheets or some form of lease administration tool. However, you’ll probably find that the data being tracked is not complete, and you’ll need to go back to the physical copies to get more details. Those documents are likely to be found in drawers and file cabinets throughout your organization. This is where you’ll need the help of your real estate team to track it all down.

  Other types of asset leases may be more difficult. Chances are, you won’t find it in any central location. You’ll need to extract it from various systems as well as hard copies.

  Once you find the data you need, you must get it all into a common format that can be easily migrated. That involves abstracting the details from lease documents and centralizing all the data you collect so it’s ready for migration into your lease accounting system.

  5. Decide what you are going to abstract and how

  As you develop your implementation timeline and choose lease accounting technology, you must have a realistic plan for extracting the data from your lease documents. For many, this is the most time-consuming part of the FASB/ IASB readiness process.

  Lease data categories

  There are several buckets of data that are contained in your leases. Consider these questions in your analysis:

  • General information – usually includes lease type, business unit to which it belongs, region, location, dates, parties. Do you know how else you would want to group records?
  • Parties – this would normally includes lessor, lessee, payor and payee. Should you include additional contacts such as brokers, operational contacts, accounting contacts?
  • Documents – should you upload all legal and billing documents or just legal ones?
  • Financial – you will need to track lease payments, of course. But you also have to manage your assumptions for capital lease testing, option period testing, FMV values, useful lives, etc. Keep all of this in mind when defining the scope of your abstracts.
  • Legal clauses – your operational team (real estate, equipment) will want to track many more fields to support their work. These include things like facilities and maintenance obligations, legal rights, property attributes, option details, etc. Decide what you need and why, and then figure out how to get the answers.

  Abstract once or abstract twice?

  It takes 2 to 5 hours to read and summarize (abstract) the financial and real estate terms of a typical real estate lease and about 30-60 minutes for a simple equipment lease. Depending on your time pressure, you might want to just abstract the items that impact the lease accounting calculations and save the rest for later. This will cut the real estate lease time by about 40%, and the equipment lease time by about 15%.

  However, you’ll get the full benefits of your lease technology sooner when you establish a single source of truth that contains all your validated lease information. Also, going back to fill in the missing information will take longer than had it been done at one time. Check with your stakeholders to see if this is an acceptable plan.

  You may need as many as 200 data points to properly abstract a complex lease. Our lease experts have identified less than 20 minimum data points that many organizations will need to get FASB-compliant. In our 30-minute Visual Lease demo, we share exactly what they are, how you can get them, and how Visual Lease uses them for rapid compliance with the new FASB and IASB rules. Book a demo now to see for yourself.

  Artificial intelligence and lease abstracting

  Some vendors will tell you that it’s fine to use artificial intelligence (AI) and other automated lease abstraction tools to speed up the abstracting process. Most true machine-learning/AI tools are not yet mature and yet will be very expensive for even a large company to implement.

  Conversely, most of the tools on the market use simple OCR to extract easy-to-identify terms. Vendors tout 90 percent accuracy for automated tools, which may sound good until you realize that 10 percent of your data will be wrong. Finding the 10 percent could take up more time that the entire process saved.

  You may want to consider a hybrid approach, using automated tools to extract monthly rent payments and other simple terms and leaving the more difficult abstracting cases to humans who understand the standards and work according to the recommendations of your accounting advisement partners. This streamlined process results in better data integrity while shrinking your timeline to compliance.

  6. Validate your data

  After you gathering data from many different repositories, especially for large organizations with multiple subsidiaries, you’ll need a process for validating that the data is correct. For example, you might find the same information in multiple places, and need to figure out which to use as the source of record. You may need to consolidate and convert information in different languages and currencies. And you will certainly have holes where the information you’re looking for was never tracked. For example, for real estate leases you may need to find out the likelihood of lease options being exercised. Also, you’ll likely need to fill in financial data that was not needed previously, such as Fair Market Value.

  To validate and complete your database, you’ll need to turn to the SMEs in your organization who obtain and/or manage the leases. Make sure your build this process into your implementation timeline.

  Conclusion: the right technology + smart preparation shorten your timeline to compliance

  While we will not mislead you into thinking it will be simple to get ready for compliance with the new lease accounting standards, for most companies it is possible to accomplish the task in under 6 months. Once you’ve documented and substantiated your lease data, technology implementation should be fast and straightforward; in fact we’ve proven that can be done in 30-60 days. Let us show you how.

  About Visual Lease

  Visual Lease is a leading provider of lease accounting and lease administration software. Our software will help get your organization compliant with ASC 842 and IFRS 16 requirements. The Visual Lease platform also provides and easy-to-use Day 2 solution with its lease management capabilities and infrastructure. The system enables organizations to quickly and easily manage their lease portfolios, define and track specific lease clauses, proactively manage critical dates (such as renewal options), and visualize your asset portfolio! Request a demo of Visual Lease today

  The post How to Implement Lease Accounting Technology first appeared on Visual Lease.]]> https://visuallease.com/lease_accounting_implementation/ Wed, 01 Aug 2018 18:52:31 +0000 https://visuallease.com/?p=1395 For public companies who must comply with FASB ASC 842 and/or IFRS 16 within a few short months, how to get ready FAST is the critical question. The fact is,...
  The post Lease Accounting Implementation Services: The Fast & Efficient Track to Compliance first appeared on Visual Lease.]]>

  For public companies who must comply with FASB ASC 842 and/or IFRS 16 within a few short months, how to get ready FAST is the critical question. The fact is, if you are not well into your implementation process already, you are running a big risk of not being ready in time. Private companies have until January 1, 2020, but should be in the planning stages by now.

  A shortage of internal resources is another challenge. Typically, companies do not have personnel to dedicate to FASB compliance, or the experience and technical accounting understanding to support this type of project.

  For many, taking advantage of lease accounting implementation services from an expert consulting firm may be the ideal solution to both problems.

  In this article, we will address how you can benefit from third-party lease accounting implementation services, the range of services available, and the value you can expect to gain from working with experts who have already helped numerous companies through this process.

  Learn more:

  Changes in Lease Accounting: Don’t Risk Missing the Deadline

  Why work with an outsourced lease accounting implementation services provider?

  Understanding the timeline to FASB and IFRS compliance

  Every organization is going through the FASB ASC 842 lease accounting process for the first time. That is why it is so difficult to predict how long it will take to achieve compliance.

  Experts providing lease accounting implementation services, on the other hand, have been through this process many times with clients in a wide range of industries and with a variety of lease portfolios. As a result, they understand the complexities and the workload extremely well, and can more accurately predict the time and effort it will take for each client to be prepared to comply with the new standard.

  “The lease implementation effort is underestimated by many companies,” said Steven Sayewitz, a Manager at Riveron, focusing on lease accounting system selection and implementation, “especially when taking into account the data collection effort, policy decisions, and future workflow requirements. Because of our methodical process and experience, asking the appropriate scoping questions on the front end and performing a rigorous portfolio sampling helps to collect accurate accounting data and project a realistic timeline to compliance.”

  Avoiding false starts

  Part of the reason companies underestimate the timeline is because they do not know what they do not know. There is a learning curve involved in this process and a great many decisions to be made. Companies jumping into the process without the guidance of an expert often make mistakes that waste time and money. With lease accounting implementation services, you gain the advantage of experience and avoid those mistakes.

  “Often companies need to pivot from work already performed after months of effort,” said Sayewitz. “By getting into the details and discussing policy decisions and approach, areas of consideration come to light which may not have been initially considered.”

  “Companies can limit re-work by engaging with experts early on to help them through the initial questions and planning.”

  Learn more:

  IFRS & FASB Changes: a Lease Accounting Quick Reference Guide

  Sharing the load

  A great deal of time-consuming work is needed to get prepared for the lease accounting changes. Collecting lease data and preparing the data for your lease accounting system is probably the biggest task. However, there are additional tasks that may prove surprisingly difficult for those who are not experts, such as choosing the right lease accounting software, and developing new processes and procedures for gathering, updating and reporting on lease data post-compliance.

  Consultants providing lease accounting implementation services can take some or all of those tasks off your plate, freeing up your staff to focus on other tasks and initiatives.

  Preparing for day 2 (Post-implementation)

  The right lease accounting implementation services partner can facilitate development of policies and procedures that not only get you ready to “flip the switch” to ASC 842, but also help you maintain compliance for years to come.

  What implementation steps can you outsource?

  Lease accounting implementation services can include any or all of the following steps:

  Initial assessment: reviewing your complete lease portfolio and identifying everything that qualifies as a lease.

  Controls and policies development: developing processes and approvals to ensure valid data, and advising on policy decisions that minimize time while mitigating risk, such as decisions about when to take practical expedients.

  Project management: overseeing your lease accounting implementation process and keeping all involved parties on track for meeting the compliance deadline.

  Software selection: knowing the strengths and limitations of software providers and identifying the ideal solution for your specific needs.

  Gathering data: collecting lease information from decentralized sources throughout your organization.

  Lease abstraction: extracting the relevant clauses from your contracts.

  Data preparation and transfer: aggregating and normalizing lease data from many sources, centralizing and moving into your lease accounting database.

  Testing and validation: robust accounting testing and checks and balances to make sure your reporting results accurately represent your lease portfolio.

  Process development for Day 2: developing a plan for maintaining compliance, including policies and processes for ongoing collection and updating of lease records.

  Cost and value of lease accounting implementation services

  Given the looming deadline, escalating the timeline is enough of a reason to consider lease accounting implementation services. But, companies also want to understand the value they are getting for the expense.

  Sayewitz emphasized that when you choose an experienced advisor, lease accounting implementation services can easily pay for themselves by giving time back to your internal staff.

  “If internal resources are tasked with figuring out what the guidance requires, systems to adopt, and creating new processes for day 2, inevitably some productivity loss around day-to-day responsibilities will occur,” said Sayewitz.

  And, there is additional ROI that comes from using lease accounting implementation services that most organizations overlook. It creates the basis for accurate financial reporting, and helps develop streamlined processes, enabling those responsible for accounting of leases to focus more on the financial impact and opportunities for lease spend cost savings.

  In next week’s blog post, we will continue this discussion with details about using lease data to drive cost-saving decisions, as well as other lease accounting tips from implementation experts. Do not miss it!

  Want to learn more?  Schedule a demo today to get started.

  The post Lease Accounting Implementation Services: The Fast & Efficient Track to Compliance first appeared on Visual Lease.]]> https://visuallease.com/asc-842-legal-implications/ Thu, 19 Jul 2018 19:25:54 +0000 https://visuallease.com/?p=1389 For most corporate attorneys, FASB ASC 842 compliance is an accounting exercise that is only vaguely on their radar (if at all). Here is why that is as a major...
  The post ASC 842 Legal Implications: What Lawyers Must Know About Lease Accounting first appeared on Visual Lease.]]>

  For most corporate attorneys, FASB ASC 842 compliance is an accounting exercise that is only vaguely on their radar (if at all). Here is why that is as a major mistake: there are significant ASC 842 legal implications that put companies, as well as their officers and boards, at risk.

  Visual Lease is a lease accounting solution that was developed by attorneys & accountants, so we are hyper-focused on avoiding the potentially disastrous consequences of lease accounting mistakes. At virtually all the companies we talk to every day, the FASB ASC 842 compliance effort is driven by accounting and SEC compliance teams with very little input from the legal department. In our view, this is worrying, to say the least.

  In this article, we will explain some of the important ASC 842 legal implications, what corporate attorneys need to know about lease accounting, and how they should be protecting the company by getting involved in FASB ASC 842 compliance efforts.

  Why corporate attorneys must understand lease accounting and ASC 842 legal implications.

  Let’s begin with a quick explanation of the significance of FASB lease accounting compliance for the company.

  ASC 842 is FASB’s new accounting standard for leases, which is slated to take effect in January 2019 for public companies and a year later for private companies.

  While leases are significant commercial agreements and important operationally (especially real estate leases), until now leases were not important for accounting. That is because lease payments do not appear on the balance sheet under the current accounting standard.

  That is all changing under the new ASC 842 standard. Leases must now be brought onto the balance sheet, so they are visible to auditors. Lease agreements now impact the company’s financial reporting and are subject to Sarbanes-Oxley.

  Anything less than an unqualified approval from a financial auditor has major consequences for your organization. When it is time for a financial audit, you must be sure all your numbers are correct. In addition, you must be able to show that you followed all the right processes to validate the data used in your financial calculations.

  Our advice to corporate attorneys? Do not let your accounting team do this without your input.

  As legal counsel, your job is to protect the company, its officers and board members from exposure and even personal liability due to improper financial reporting. That is why it is essential for corporate attorneys to understand the ASC 842 legal implications and to provide guidance for the lease accounting process.

  Here is what you need to know.

  3 things corporate attorneys need to know about lease accounting

  #1 How to identify a lease

  There are ASC 842 legal implications for contracts that do not look like leases. For accounting purposes, certain types of agreements may count as a lease, even if the word “lease” never appears.

  For example, embedded leases may be found in service contracts or other agreements that target specific physical assets that are exclusive to your company. Examples include a corporate box at a sports stadium, racks at a data center facility, or vehicles used by a transportation service. Your company needs to identify every such agreement and determine whether or not it contains a lease. If it does, the lease component must be extracted for lease accounting reporting.

  As it stands now, accounting is making judgments about contracts without the expertise attorneys have in understanding contract language. That is why legal must know the ASC 842 legal implications and get involved in evaluating contracts and advising accounting about what should be considered a lease.

  Learn more: Embedded Leases Accounting: Do Your Contracts Contain Leases?

  #2 How to validate lease data and data collection plans

  To protect your organization, legal must work together with accounting to make sure that lease information is accurately captured, summarized, and reported on. If you do not, you run the risk that auditors will not give and unqualified opinion and certify that your books are kept in accordance with GAAP.

  To mitigate that risk, corporate attorneys should oversee (or at least approve) the data collection and validation process for lease accounting. You will need to understand:

  • The types of lease data needed for ASC 842 compliance
  • Tactical procedures for obtaining lease data
  • How to validate lease data so that lease accounting calculations and financial reports are accurate and complete

  Learn more:

  Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance
  Lease Data Validation Steps for FASB/IFRS Accounting & Reporting

  #3 Sources of lease data

  Who is providing the lease data that you are feeding into lease accounting systems and using to perform calculations for financial reports? You need to be very careful if it is coming from external service providers.

  It is becoming more and more common for large organizations to outsource real estate services. In that case, much of your lease accounting data may be coming from thirty parties. How can you be sure that those service providers are following due diligence and providing accurate information? Legal may want to recommend the following:

  • Verification of lease data that comes from third parties (by comparing with original contracts, for example).
  • Make sure that contracts with outsourced service providers assign them some liability in case of errors.
  • Have outsourced service providers keep data in your own lease accounting system, rather than one that is under their control.

  Learn more:

  Why Real Estate Brokers Need Lease Accounting Software Solutions

  ASC 842 legal implications: the silver lining for the legal team

  Guiding your company through the lease accounting compliance process is going to prove time-consuming and complex. However, there is a benefit that your legal team can gain from this effort: a useful tool for managing corporate contracts.

  Just about every organization with more than a handful of leases will need to purchase a tool to manage lease data and perform calculations. If you choose the right system, it can prove a significant asset to the legal team along with accounting, real estate and procurement.

  Did we mention that Visual Lease was designed by lawyers? Moreover, that we use our own software to track and manage all our contracts (not only leases)?

  We would be happy to show you how that works. Schedule a demo today to get started.

  The post ASC 842 Legal Implications: What Lawyers Must Know About Lease Accounting first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-guide-capturing-essential-data-for-fasb-calculations/ Thu, 28 Jun 2018 08:00:21 +0000 https://visuallease.com/?p=1372 As a lease accounting solution provider, we talk to finance leaders every day who are facing the deadline for FASB ASC 842 and/or IFRS 16 compliance. Not surprisingly, we hear similar...
  The post How to Capture Essential Data for FASB Calculations first appeared on Visual Lease.]]>

  As a lease accounting solution provider, we talk to finance leaders every day who are facing the deadline for FASB ASC 842 and/or IFRS 16 compliance. Not surprisingly, we hear similar questions from almost everyone.

  In this blog post, we’ll be able to help guide you with the task you’re probably dreading most: collecting all the data needed to generate lease accounting calculations and reports.

  These are two questions that come up in every conversation regarding lease accounting standard compliance:

  1. What are the important data points we must collect to produce FASB calculations?
  2. How do I get that data into my lease accounting software? (For more information, please visit our blog post: How to Get Data into Your Lease Accounting Tool).

  When people ask questions about gathering their data points, usually, they’re looking for a complete list of all the fields they need to fill in or a lease accounting example they can follow.

  While we’d love to provide that, unfortunately, it’s not quite that simple. This is due to a few reasons:

  • Reason #1: Each business’ lease portfolio does not look the same and contains many different variables. The data you need to track in your lease accounting software depends on many unique factors, including:
    • the type of leased assets you have,
    • how your leases are structured,
    • your financial reporting needs,
    • and your goals for managing your leased assets.
  • Reason #2: Never depend on any canned list from a service provider. Always consult with your accounting advisor for new lease accounting guidance. You may need help with interpreting lease data, making decisions, and ensuring you’re capturing lease data accurately.
  • Reason #3: To get prepared for FASB, you need much more than a list of data points to capture. You need to understand what to look for in your leases, what to collect from your financials and market information, and what to think about as you collect data.

  Therefore, instead of offering a list of fields to collect, this article will help you understand the process and the types of data you’ll need for basic FASB calculations. We’ll also point out the questions you need to ask along the way to make sure, at the end of the day, you have complete and accurate lease accounting reports that are optimized for your business.

  How do I identify and categorize my leases?

  Identifying leases

  When we first begin working with a client, we recommend starting by identifying everything categorized as a lease. This includes any potential embedded leases, real estate leases, equipment leases, and so much more.

  Identifying and finding every lease is a complex and time-consuming task. Additionally, not everything you think of as a lease may qualify as one for the FASB standards. And if that wasn’t complicated enough, some contracts that don’t contain the word “lease” actually do qualify as a lease (i.e. embedded lease). We’ve seen some very unique ones that you might not think about, such as box seats at a stadium.

  To identify embedded leases, you will need to review service contracts and other types of agreements that may contain them. (Here’s a helpful article that addresses how to do that: Embedded Leases Accounting: Do Your Contracts Contain Leases?)

  Identifying real estate leases are not as complex. This is because most organizations commonly have more visibility into them to pay bills and handle the day-to-day operation of facilities. Chances are you have that data in some central location, even if it’s a collection of spreadsheets.

  However, equipment leases and other assets tend to be more problematic to identify. Your organization may have many different people and departments leasing smaller assets such as vehicles, computers, and office equipment. Very rarely do we find a company that has all that information in a one place. It may take some detective work to find all the lease documents. As a starting point, we recommend that you get scanned copies of every lease in a central location.

  Categorizing your lease portfolio

  Once you have managed to collect all your lease documents, the next step is to organize them into any categories you will need for reporting purposes. For example, most organizations will track real estate leases separately from equipment leases. However, you may want to get more granular and separate other assets into specific classes.

  Once your leases are categorized in a way that works for your business, you’re ready to start extracting the required FASB data points. The essential lease data for FASB is all about dates and dollars.

  Which dates are essential to capture for FASB 87?

  FASB lease accounting calculations require all the key dates associated with your leases, which includes:

  • When your lease term starts and ends.
    • This is straightforward and can be found on the lease contract or a lease commencement letter.
  • Lease options that, if exercised, may change when the lease ends.
    • For example, does the lease include an option to terminate prior to the expiration date?
    • Is there an option to extend the lease past the original end date?
    • Do you have an option to purchase the property or asset?
    • Can you exercise the option unilaterally? That means you can just execute the option as stated in the lease and you don’t need consent from the owner/lessor.

  How will you determine if you’re reasonably certain to exercise lease options?

  To do FASB calculations, you must be able to specify if you are reasonably certain to exercise lease options. The answer to that question determines the lease end date used to calculate your lease liability. Ask yourself the following questions:

  • Do you have a process in place to regularly review leases and make those decisions?
  • How will you make sure you don’t miss critical option dates?

  To exercise lease options (to renew a lease or terminate early), you must take action by a specified date, which usually means notifying the owner/lessor of your intention to exercise the option. You might not need to track those notification dates to do your lease accounting calculations, but failing to track these dates in your lease accounting system will come back to bite you.

  You’ll want to record lease options so you can do hypothetical calculations that help you make the best decisions about exercising options. A robust lease accounting system like Visual Lease, provides the ability to view side-by-side comparisons with different options and schedules to see how they impact your business.

  If you’re not tracking the option dates, you might forget to notify the owner about a renewal option you intended to exercise, which could mean you’d lose out on favorable lease terms and pay much more for the renewal. As a result, all the due diligence you’ve done to choose the right financial plan would potentially be wasted.

  Always make sure you’re not overlooking critical operational dates for the current lease term and that your software provides alerts for these critical dates.

  Which financials are essential to capture for FASB?

  Collecting expense information is an important step to preparing and gathering your essential lease data. At the very least, you’ll need to account for:

  • Fixed rent. Your FASB calculations need to show the fixed rent obligation for each right-of-use asset. Be careful about extracting “fixed rent” terms from leases. There may be additional expenses you need to include, such as recurring charges for parking or storage.
  • Rent escalation. How are your leases structured? Examine leases for details about how rent escalates. If the lease language is difficult to understand or has a variable contingencies such as CPI adjusted rents or rent due based on consumption or volume (such as number of parking spaces or a percentage of gross sales), you may need help from your accounting advisors to determine how to do the calculations.
  • Other charges. Depending on which practical expedient you decide to take, you may need to record real estate CAM (common area maintenance) charges, taxes, and insurance.

  How to account for extra charges beyond fixed rent?

  Ask yourself, what’s the intent of these charges? Are they really adjusted rents? Variable rents? Do they change based on specific circumstances? Talking to your accounting advisor will help you accurately interpret and extract the relevant expenses.

  Will you take practical expedients?

  As a lessor, you’re entitled to take a practical expedient when reporting on certain expenses, such as CAM charges. You’ll need to define how you intend to account for each asset class. Make sure you’re capturing asset data in a way that can be meaningfully grouped and reported on.

  Do you need to validate straight-line rent calculations?

  You need to be able to extract an accurate deferred rent starting balance as of the day you move to ASC 842. Are you comfortable with your current straight-line rent schedule (how you’re normalizing rent over the life of the lease)?

  If that process has been manual, you might not be sure you can accurately count on the data. Although, this problem can be solved via a strong lease accounting software provider. Visual Lease’s lease accounting software has a tool that calculates the figures you need to validate your straight-line rent calculations based on your financials.

  Post-compliance lease data

  We’ll conclude this lease accounting guide with one final bit of advice: don’t view achieving FASB ASC 842 compliance as the end game. From an operational standpoint, you have much to gain from taking full advantage of all the capabilities of your leasing software.

  After you get the FASB essentials well underway, the next step is to collect and migrate operational and performance data for your leased assets. Read these related articles to learn more:

  • Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance
  • How Lease Accounting Software Can Pay For FASB/IFRS Compliance
  • Lease Accounting Changes: The Silver Lining You’re Overlooking
  The post How to Capture Essential Data for FASB Calculations first appeared on Visual Lease.]]> https://visuallease.com/how-to-get-lease-data-into-your-lease-accounting-tool/ Thu, 14 Jun 2018 08:00:16 +0000 https://visuallease.com/?p=1362 As the deadline approaches for compliance with the new lease accounting standards, many companies are scrambling to choose a lease accounting tool. Just about everyone we speak to has the...
  The post How to Get Lease Data Into Your Lease Accounting Tool first appeared on Visual Lease.]]>

  As the deadline approaches for compliance with the new lease accounting standards, many companies are scrambling to choose a lease accounting tool. Just about everyone we speak to has the same question: how do I get my data into the system?

  In this article, we’ll explain 3 ways of migrating your data into a new lease accounting tool like Visual Lease. But first, we’ll provide some tips for how to prepare your data so you get the most from your new system.

  What to do BEFORE you migrate data into a lease accounting tool

  Before you even begin to think about migrating data, take a step back and consider your goals for your new lease accounting tool. What lease data do you need to track to achieve those goals, and how do you want to manage it?

  This is a critical first step that many overlook. If you jump right into moving your current data (as is) into the new system, you’ll miss opportunities to improve processes and get better results.

  Right now, your urgent goal is achieving FASB compliance. However, if you’re moving to a comprehensive lease management tool like Visual Lease, with a small investment of time upfront you can achieve much more. You can solve problems, streamline processes, save time, and save money.

  To learn more about how Visual Lease helps you do that, read this related article: Lease Accounting Changes: The Silver Lining You’re Overlooking

  To make sure you capture all the data you need, now is the time to reach out to all the groups and stakeholders in your organization that work with leases. These might include Real Estate, Facilities Management, Legal and Procurement. Ask them what lease data they frequently need, and have to refer back to the lease documents to obtain. Make sure you plan to record that information in your new lease accounting tool, even if you’re not currently tracking it now, or if you’re tracking it somewhere other than where your financial data resides.

  The fact is, most organizations will need to gather additional data, even if they have lease accounting data in a legacy system. Here’s some helpful information about the data collection process:

  FASB Lease Data You Can’t Get From the Lease Abstraction Process

  3 ways to move data into your lease accounting tool

  When people ask us about how they should migrate their data into a lease accounting tool like Visual Lease, the first thing we need to know is where the data currently resides. Generally, there are 3 options, or some combination of these 3 options:

  1. Lease data is stored in a existing database.
  2. Lease data is recorded in spreadsheets.
  3. Lease data is still in paper or electronic lease documents.

  Let’s address each of these scenarios individually. If your lease data resides in more than one format (which is common) you’ll have more than one process for getting all the data into your lease accounting tool.

  Migrating data from existing software

  If you’re going to be moving data into a lease accounting tool from an existing system, the first issue to address is data integrity. Has the data been regularly updated? Here’s a question we ask when evaluating the state of the data: If you had to use this data for an audit, would you be comfortable doing that?

  Remember the old adage about “garbage in.” Before moving any data, make sure it’s valid and accurate.

  Once you’re comfortable that your data is in good shape, most of the time the rest is straightforward. Visual Lease provides data migration tools that integrate seamlessly with most existing databases. We can work with you to map your data and move it directly into the Visual Lease database.

  In the unusual case that our migration tools don’t integrate directly with a existing system, the other option is to export Excel reports or flat files from your existing database, then import into Visual Lease. You might also choose to do this so you can validate and clean up your data before moving it into the new lease accounting tool.

  If needed, Visual Lease can take care of the mapping and the import for you. Or, if your team is comfortable with this task, they can use a Visual Lease import template (based on your new configured database) and do the import themselves. Of course, we’ll always follow up with a sanity check to make sure everything is in place.

  Migrating lease data from spreadsheets

  If you’re keeping lease data in one or more Excel spreadsheets, you’re not alone! Plenty of very large organizations with hundreds or thousands of leases have been managing leases this way up until now. That’s because leases were not very visible and centralized lease management was not a big priority. Of course, now that’s all changing in a hurry because of the new lease accounting standards.

  The good news is, getting your lease data into a lease accounting tool like Visual Lease shouldn’t be very complex. It’s a matter of mapping your data according to your newly configured database in the lease accounting tool, then importing.

  However, just like migrating from a database, you must do your due diligence and validate the data if there’s any question about its accuracy.

  Learn more about data validation: Lease Data Validation Steps for FASB/IFRS Accounting

  Migrating data from lease documents

  Even if you have lease data in other systems or spreadsheets, chances are there is some data you’ll need to obtain from your source lease documents. In that case, you’ll need to extract the relevant data points from those documents (this is called “abstraction”) and either import or enter data manually into your lease accounting tool.

  If you don’t have the resources to handle a large volume of lease abstraction, Visual Lease can take care of that task for you. Here’s how it works:

  • You’ll need to send digital copies of lease documents.
  • We build an abstracting scope, taking into account all the data that must be captured from the lease documents.
  • We abstract all the relevant lease clauses and data points, and enter into your Visual Lease database.

  Updating lease data in your new lease accounting tool

  Once your lease accounting tool is live, remember that you will also need a process for adding new records and making changes to existing records.

  For a large organization, it’s not unusual to have multiple departments entering and updating lease data. For example, Real Estate might create a new lease record. Finance might need to approve it. Accounting will enter payment records.

  Here’s our advice: make sure everyone who will be entering data receives training on the new lease accounting tool and understands your data entry workflow.

  

  The post How to Get Lease Data Into Your Lease Accounting Tool first appeared on Visual Lease.]]> https://visuallease.com/software-for-the-new-lease-accounting-standard-whats-the-best-time-to-buy/ Thu, 07 Jun 2018 08:00:28 +0000 https://visuallease.com/?p=1237 Preparing for the FASB lease accounting changes is time-consuming, and there are many tasks you’ll need to complete before the deadline so you’re ready to comply. Getting software for the...
  The post Software for the New Lease Accounting Standard: When’s the Best Time to Buy? first appeared on Visual Lease.]]>

  Preparing for the FASB lease accounting changes is time-consuming, and there are many tasks you’ll need to complete before the deadline so you’re ready to comply. Getting software for the new lease accounting standard is an important one. Almost every organization will need a tool to perform calculations and feed journal entries to the general ledger, at a minimum.

  You may have heard conflicting opinions about the right time to purchase software for the new lease accounting standard. In this article, we’ll dig into both sides and help you determine what’s best for your organization.

  Option 1: Collect data first, then get software for the new lease accounting standard

  Some accounting firms have recommended focusing on data collection first before beginning your search for software for lease accounting standard changes.

  For one thing, collecting all your lease data will require a major effort. Especially for public companies who need to comply with the new standard by January 2019, there’s no time to lose. It’s imperative that you start immediately if your data collection project is not already underway. For large companies, this effort alone could take 6 months.

  Here’s what the to-do list looks like for data collection:

  • Find all the records associated with property and asset leases that must be brought onto the balance sheet for compliance with ASC 842 and IFRS 16. That includes all the original lease documents plus any letters of intent, addendums, and modifications.
  • Identify lease data that you need to extract from lease records.
  • Abstract those documents to pull out relevant lease data.
  • Find embedded leases in other existing contracts, and extract the related data.
  • Classify leases to understand their lease accounting treatment under the new standards.
  • Aggregate data in a central repository, which could be a database or spreadsheets.
  • Figure out what data you’ll need to do lease accounting calculations that you don’t have in your current records.
  • Add missing data and validate your records for completeness and accuracy.

  To learn more, read our previous articles explaining this process:

  Data Collection Tips for ASC 842 Transition & IFRS Compliance
  FASB Lease Data You Can’t Get From the Lease Abstraction Process
  Embedded Leases Accounting: Do Your Contracts Contain Leases?

   

  Those recommending that you complete data collection before you purchase tools also point out that having your data ready can help define your requirements for software for the new lease accounting standards.

  While these are valid points, we believe the disadvantages of this approach far outweigh the benefits.

  Option 2: Choose your software for the new lease accounting standard ASAP

  Full disclosure: it’s true that Visual Lease sells software for the new lease accounting standard. So you might think we are biased on this question. However, our opinion is not based on self-interest, but rather on the interests of our clients. Let me explain.

  There’s one huge disadvantage to option #1, and that’s the rapidly approaching deadline for compliance with the new lease accounting rules. At this point, public companies that have not yet finished data collection won’t have enough time to complete that process before buying software for the new lease accounting standard.

  You may not be worrying about it because so many software providers are telling you that it’s quick and easy to implement their tools. And that may be true. However, the impending FASB lease accounting deadline can and will complicate matters. As demand increases the closer we get to January 2019, experts say resources needed for implementation will be harder to come by.

  As the deadline nears, software vendors will be inundated with new customers attempting to get lease accounting software up and running quickly. Even though vendors (including Visual Lease) are ramping up their staff to meet the demand, it’s very possible that the implementation time estimates you’re hearing now will be longer come November or December of 2018. If you wait to choose software for the new lease accounting standard until after you’ve finished collecting data, you may find yourself at risk of missing the deadline for compliance.

  The fact is, there are only so many lease accounting experts out there who are qualified to abstract your data and get it into software for the new lease accounting standard.

  Our best advice to mitigate the risk of not meeting the compliance deadline? You can compare and choose software while you are in the process of collecting data. When you do that, you get on track to finish data collection on time, and you can lock in the availability of implementation experts.

  There’s another upside to choosing this approach besides optimizing your timeline. You can also take advantage of your software vendor’s expertise to help with your data collection and other preparation efforts. After all, we have helped many other companies just like you to achieve FASB lease accounting compliance. We can share best practices that can help you improve your leasing policies and procedures as well. You can even get tips that can save your company a great deal of money.

  Learn more: How Lease Accounting Software Can Pay For FASB/IFRS Compliance

  The bottom line: now is the time to begin looking at software for the new lease accounting standard if you haven’t already done so. Get started by signing up for a demo of Visual Lease.

  

  The post Software for the New Lease Accounting Standard: When’s the Best Time to Buy? first appeared on Visual Lease.]]> https://visuallease.com/changes-in-lease-accounting-dont-risk-missing-deadline/ Thu, 24 May 2018 08:00:54 +0000 https://visuallease.com/?p=1211 Back in 2016 when FASB released their new lease accounting standard changes, the implementation deadline seemed far away and there were more immediate accounting issues to deal with (such as...
  The post Changes in Lease Accounting: Don’t Risk Missing the Deadline first appeared on Visual Lease.]]>

  Back in 2016 when FASB released their new lease accounting standard changes, the implementation deadline seemed far away and there were more immediate accounting issues to deal with (such as the new revenue recognition standard). As a result, many organizations put off preparing for the changes in lease accounting.

  Fast forward 2 years, and now the deadline is rapidly approaching. And according to research by the big 4 accounting firms, most companies are not prepared. In February 2018, KPMG reported that only 15 percent of companies they surveyed said they were ready for the changes in lease accounting.

  Deloitte published research in March that indicated only 21 percent of companies report being prepared to comply with lease accounting changes from FASB.

  While the reasons behind the delay are understandable, organizations are taking a huge risk if they continue to put off preparations for the changes in lease accounting. The task of gathering all lease data will take a considerable amount of time (several months at least). And, as the deadline approaches, the demand for expert resources to implement lease accounting technology will increase while availability tightens up. You might face a situation where you can’t make the deadline.

  What are the deadlines for the changes in lease accounting?

  It’s coming fast: public companies need to be ready to adopt the changes in lease accounting by January 1, 2019. Other companies have an additional year.

  It will take longer than you think to get ready for the changes in lease accounting

  There are many lease accounting software vendors out there reassuring companies about how fast they can get their tools up and running. And it’s true: in most cases, getting the software ready will be the fastest part of the process. Yet that reassurance may be giving people a misleading sense of how long the entire lease accounting readiness project will take.

  Here’s what you have to do to get ready for the changes in lease accounting (beyond software implementation) that will take much longer:

  • Assemble a team to lead the project.
  • Find all your lease documents.
  • Figure out exactly which data points you need to collect for lease accounting calculations.
  • Abstract the contents of all your lease documents.
  • Assess what’s missing and find that information.
  • Validate your lease data.
  • Develop new procedures for collecting and updating lease data in the future.
  • Determine the impact of the changes in lease accounting on your financial reporting.
  • Develop new standardized leasing policies for your organization.

  While the timeline will vary for every organization, experts say it will be difficult for a large company to accomplish all this in less than 6 months. As of right now, you have 7 months.

  And, as the deadline approaches, the law of supply and demand will work against you.

  A critical resource will be in short supply as the deadline approaches

  There are certainly a lot of lease accounting tools out there. But given the number of companies who have yet to implement software to handle the changes in lease accounting, experts predict that there isn’t enough vendor capacity to handle the demand.

  What does that mean? The closer we get to the implementation deadline for public companies (who have more data and more complex implementation needs) the more difficult it will be to get help from vendors. That might even include your accounting advisory partners.

  Every software vendor understands this and many (including Visual Lease) are ramping up their capacity as fast as they can. But chances are, as 2018 draws to a close, vendors will simply be challenged to handle the volume of work that pours in as companies are finally ready to implement software just before the deadline.

  The best advice for implementing the changes in lease accounting

  Start now.
  Don’t put off starting preparations for the changes in lease accounting another day. And, if you are already working on it, try to step up the process if you possibly can. The consequences of missing the deadline are severe and you need to do everything you can to make sure that doesn’t happen.

  Don’t wait to select software.
  We have seen come companies waiting until data collection is complete to begin looking at lease accounting technology to handle the calculations. While that strategy may have worked fine last year, time will not allow you to take that path at this point.

  A smarter strategy is to implement lease accounting technology while you’re collecting data. You’ll be able to migrate data as it becomes available, test as you go, and be ready for compliance as soon as your data collection and validation is complete. You can save yourself valuable time and lock in vendor resources so you don’t have to scramble for them as the deadline approaches for the changes in lease accounting.

  Visual Lease can help you navigate this complex process and get ready in time to meet your compliance deadline. Get started with a demo today, or reach out with your questions. We’re here to help!

  The post Changes in Lease Accounting: Don’t Risk Missing the Deadline first appeared on Visual Lease.]]> https://visuallease.com/lease-modification-accounting-under-the-new-standards/ Thu, 17 May 2018 08:00:31 +0000 https://visuallease.com/?p=1194 Lease modification accounting is a subject that isn’t getting as much attention as it should… yet. That’s going to change the closer we get closer to the deadline for IFRS...
  The post Lease Modification Accounting Under the New Standards first appeared on Visual Lease.]]>

  Lease modification accounting is a subject that isn’t getting as much attention as it should… yet. That’s going to change the closer we get closer to the deadline for IFRS and FASB compliance. The smartest accounting leaders are planning for it now.

  Why worry about lease modification accounting now?

  As the deadline quickly approaches for adopting the new lease accounting standards, your accounting teams are scrambling to collect all your lease data and get ready for initial compliance. Simply amassing all that information, and calculating your obligations and right-of-use assets as they currently stand, is a huge burden on the organization. It’s easy to make the mistake of overlooking preparations for Day 2, or what you’ll need to do to maintain your compliance after the effective date of the new standards.

  Lease modification accounting is the biggest Day 2 challenge, especially for large organizations with hundreds or even thousands of leases. Accounting for lease obligations and assets is no longer a set-it-and-forget-it exercise. Every time a lease changes, and even when your assumptions about leases change, you’ll need to revise your lease liability accounting as well as entries for right-of-use asset.

  Why worry about lease modification accounting now? Understanding it now will impact the processes and procedures you’ll need to put into place before you adopt the IFRS and FASB changes. And, if you’re smart, it will impact your choice of lease accounting technology.

  Lease modification accounting is much more complex under the new standards

  If you think figuring out how to get all your leases onto the balance sheet is complicated, just wait until you have to keep track of all the changes. And keep your journal entries and disclosures up-to-date and accurate.

  In the past, leases that were included on the balance sheet needed to be updated only when the terms of the lease were actually changed. Under the new lease accounting standards, FASB ASC 842 and IFRS 16, you’ll also need to do lease modification accounting when assumptions change… those you used to calculate your initial classification and measurement of lease obligations.

  What does that mean? You make certain assumptions when you classify a lease as an operating lease or a finance lease.
  When calculating your lease obligations and right-of-use-assets, you also make assumptions about whether or not you’re “reasonably certain” to exercise options. Both of these impact your lease accounting calculations, and when those assumptions change, your balance sheet will also need to change.

  What does lease modification accounting entail? When you have lease modifications caused by lease term revisions and changes to assumptions, you’ll sometimes need to re-assess your lease classification. You’ll also need to remeasure your lease, or re-calculate your lease obligations and right-of-use assets based on the change. Also, it’s likely you’ll need to document the reasons for the accounting changes in disclosure reports.

  Let’s look at some examples of when you’ll need to do lease modification accounting.

  When do you need to re-assess lease classification and re-measure a lease?

  According to the new lease accounting standards, there are two types of “triggering events” that could cause you to have to re-classify and/or remeasure your lease:

  • Contract-based events, such as an upcoming deadline for exercising an option to purchase the asset or renew the lease.
  • Other events under your control as the lessee. This is where those “reasonable certainty” decisions come into play. In many cases they will be decisions that you expected to go one way, but you revise the decision based on market conditions, business conditions, or something else.

  Here are just a few common examples of events that cause lease changes and the need for lease modification accounting:

  • Exercising an option to purchase a leased asset.
  • Exercising an option to renew a lease.
  • Terminating a lease early.
  • Adding additional space or reducing space associated with a property lease (this might be done as a lease modification or as a new lease).
  • Re-negotiating lease terms with the lessor to change payment amounts, due dates or other terms.
  • Changing assumptions, such as whether you expect to exercise an option to renew a lease or exercise an option to purchase the underlying asset.

  How to prepare now for lease modification accounting changes

  Especially for organizations with a large number of leases, keeping up with all these changes will be a big challenge. There are two components to this challenge:

  • Keeping accounting in the loop about all lease modifications and revised assumptions about leases.
  • Executing the lease modification accounting calculations.

  Here’s what you can do now to make sure your lease accounting stays accurate and in compliance after you implement the new standards.

  1. Put policies and procedures into place for capturing lease changes and potential lease changes.

  Chances are, your organization has many different teams involved in making lease decisions and maintaining leases. Your corporate real estate team is managing your valuable property leases: deciding whether to renew leases, take on new space, or make improvements to existing space that you expect to keep for a while. Also, you have procurement and IT teams managing equipment leases that are essential for your business: computer equipment, vehicles, construction equipment, or other specialty equipment.

  Chances are, none of those teams are in the habit of communicating information to accounting about lease changes. That’s going to have to change very soon. Now is the time to put processes and procedures into place to ensure your accounting teams get all the data they need to stay on top of lease modification accounting.

  TIP: Those processes are going to be much easier to implement and manage if ALL your lease data is in one place.

  Learn more:
  Equipment & Property Lease Accounting: Can One System Do Both?
  Lease Portfolio Management: Policies & Procedures to Reduce Risk

  2. Choose lease accounting software that makes it easy to do lease modifications.

  There are a lot of different ways that leases can change, and the lease modification accounting treatments can be very different depending on the situation.

  Your accounting teams are going to be snowed under if they need to manually calculate the changes every time a lease changes (or your assumptions change).

  You’ll save a lot of time and frustration with the right lease accounting technology. While many products make it possible for you to make lease changes, the best make it easy by offering a lease modification accounting wizard that asks you questions and automatically adjusts your accounting, creating the required journal entries and disclosure reports.

  Want to see how that works? Get a personalized demo of Visual Lease.

  

  The post Lease Modification Accounting Under the New Standards first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-software-comparison-data-security-features/ Thu, 10 May 2018 08:00:27 +0000 https://visuallease.com/?p=1192 For every organization that’s purchasing lease accounting tools to comply with the new FASB and IFRS standards (which is just about everyone), data security is a major concern. We’re talking...
  The post Lease Accounting Software Comparison: Data Security Features first appeared on Visual Lease.]]>

  For every organization that’s purchasing lease accounting tools to comply with the new FASB and IFRS standards (which is just about everyone), data security is a major concern.

  We’re talking about your company’s financial records, so rock-solid security is essential. Don’t forget that accounting auditors will want to know how your lease accounting software protects your information and ensures data integrity.

  As part of your lease accounting software comparison, be sure to check for the following security credentials and capabilities that ensure the safety of your data.

  5 data security checks to include in your lease accounting software comparison

  1. Physical security of servers.

  Most lease accounting software is cloud-hosted, which is the best option for a number of reasons. Given the timeframe for complying with the new lease accounting regulations, probably the most important reason for you is that a cloud-hosted solution is faster and easier to implement. It’s also much less expensive.

  However, choosing a cloud-based lease system means you must do your due diligence to ensure that your chosen vendor will keep your data safe. Be sure to ask these questions during your lease accounting software comparison:

  • Do they have redundant servers in multiple locations?
  • What type of physical security protects the buildings where servers are housed?
  • Who has access to those servers and for what purposes?

  2. Data encryption.

  Data is regularly moving into and out of your lease accounting software. For example, you’re importing new lease records, entering updates to lease records, and sending journal entries to your general ledger. Your data must be secured both when it’s at rest on the servers, and when it’s in transit as records are added, modified, or exported.

  Your lease data should be encrypted anywhere it is stored, and it must be encrypted via SSL when traveling to and from the servers.

  3. User authentication.

  You won’t find lease accounting software that’s not locked down; users must enter a user name and password to access the system. However, when doing your lease accounting software comparison, look for these authentication features that enhance security.

  Control of login credentials. Make sure all parts of the system are password protected. It’s also important that your system administrator create and manage login credentials for your users. If your lease software vendor can create a login for anyone who asks, that’s a security risk. Your vendor should only provide login credentials with your administrator’s approval.

  Password policy. In many organizations, lease software passwords must match your corporate password policy. Look for your lease software to provide flexibility so your administrator can set the desired password length, strength and expiration rules.

  Multi Factor Authentication. Some organizations want the extra security of multi factor authentication. How does that work? Users enter their user name and password, and the system emails them a second one-time password that they must enter to access the lease software.

  Authentication via Single Sign On (SSO). Your lease accounting software should provide the option to use your organization’s existing security store to authenticate users. If you have implemented centralized security system, enabled for single sign on, your employees can log in once and have access to all their applications. However, the big benefit is the ability to quickly and easily revoke access to everything if an employee leaves the company. Your users and their access permissions must be set up in your lease software, but they are linked to your centralized security store accounts so users can only log in using this system.

  4. IP whitelisting.

  Some organizations want to limit access to the lease software so that users can only log in from secured devices connected to the corporate network. IP whitelisting limits access to specific IP addresses or a range of IP addresses.

  5. User roles and permissions.

  Especially for comprehensive lease software (like Visual Lease) that manages the entire lifecycle of your leases, including administration and accounting, the design of user access and permissions is critically important for data security. Here are some items to check as part of your lease accounting software comparison.

  Levels of administrative access. While most organizations have a single system administrator, look for the flexibility to allow some managers different levels of administrative permissions.

  Separation of duties. What you want to see is a separation of roles and associated access rights within the various parts of the lease system. For example, a lease administrator may be able to create and modify lease records, but won’t be allowed to work with the accounting feed or create lease accounting calculations. On the other hand, you may want an accountant to send interface files to the ERP, move data to the general ledger, and approve invoices for payment. But you may want to prevent that user from creating payments. The goal is to give people access to only the capabilities and data they need to do their work and lower the possibility for fraud or malfeasance.

  Group permissions. The best lease accounting software has a set of defined roles with pre-assigned permissions. That makes it easy to set permissions for users simply by assigning them to a group.

  Here’s a great tip: creating a role for lease abstractors can be extremely useful. You can allow abstractors (who may be outside contractors or service providers) with the ability to create pending records but not to change live data. Then someone with a higher security level can review and validate the data before making it active. Doing that enhances your data integrity with another layer of authentication.

  Individual level controls. While group permissions save you time, you also need the flexibility to control certain rights at an individual level. Look for the ability to can add or remove specific rights as needed from users assigned to groups.

  Data security validation for Visual Lease

  When filling in your lease accounting software comparison checklist, you can check all the data security boxes for Visual Lease. We have earned SSA18 SOC 1 Type 1 certification following a comprehensive independent audit that verified our controls and operations.

  We’re happy to show you exactly how we keep your data safe. Give us a call or request a personalized demo.

  

  Get more tips for your lease accounting software comparison: Get the Best Lease Accounting Software By Comparing Price & Value

  The post Lease Accounting Software Comparison: Data Security Features first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-guidance-testing-with-hypothetical-calculations/ Mon, 30 Apr 2018 08:00:06 +0000 https://visuallease.com/?p=1175 As you prepare to implement the new lease accounting standards, you’re going to have questions and you’re going to need lease accounting guidance. Certainly you’ll turn to your accounting advisory...
  The post Lease Accounting Guidance: Testing With Hypothetical Calculations first appeared on Visual Lease.]]>

  As you prepare to implement the new lease accounting standards, you’re going to have questions and you’re going to need lease accounting guidance. Certainly you’ll turn to your accounting advisory partners for answers. However, there’s another source of lease accounting guidance you might not consider: your lease accounting software.

  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.

  5 ways to get lease accounting guidance with testing tools

  If you’re still deciding about lease accounting software, look for these helpful testing features that prepare you for the new lease accounting under GAAP and IFRS.

  These features give you the ability to “test drive” your data and your calculations. That’s important now as you develop new lease accounting practices. Also, you’ll find it helpful after you implement the new standards, since you can test a change without affecting your live data.

  1. Get a preview of your new financial reporting.

  This is probably the most important lease accounting guidance you need right now. Chances are, your financial leaders are anxious to see what your reporting is going to look like under the new standards. You want to understand the impact of the changes so you can take action as needed (such as preparing stockholders and lenders for what to expect).

  You can get that information well before you’re ready to go live using the hypothetical testing features in Visual Lease. 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).

  2. Set up pending calculations for peer review.

  As you prepare to implement lease accounting changes, you’re likely planning a peer review process and verification of your calculations before you go live. 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, it’s 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.

  Related article: Lease Data Validation Steps for FASB/IFRS Accounting & Reporting

  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 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 (IAS 17 is the current international standard, and the new IFRS 16 standard takes effect at the same time as the new FASB ASC 842).

  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 this article to learn more about the 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.

  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.

  Want to see what that looks like? Schedule a live demo of Visual Lease.

  

  The post Lease Accounting Guidance: Testing With Hypothetical Calculations first appeared on Visual Lease.]]> https://visuallease.com/how-to-optimize-equipment-lease-performance-using-fasb-data/ Thu, 26 Apr 2018 08:00:31 +0000 https://visuallease.com/?p=1168 Why measure and optimize equipment lease performance? Most large, global organizations have some form of management and oversight in place for their real estate leases. After all, those leases represent...
  The post How to Optimize Equipment Lease Performance Using FASB Data first appeared on Visual Lease.]]>

  Why measure and optimize equipment lease performance?

  Most large, global organizations have some form of management and oversight in place for their real estate leases. After all, those leases represent millions of dollars and you want to make sure you’re getting the best value for your investment. But up until now, equipment leases have been under the radar.

  That’s partly because of the de-centralized nature of equipment lease procurement and management: there could be hundreds of people, working in many different functions and regions, leasing different types of equipment. There’s no one group overseeing equipment leasing throughout the organization.

  Also, equipment assets, unlike real estate, tend to move around and are harder to track. It’s much more likely that leased equipment will get lost, stolen or damaged before the end of the lease.

  As a result, few companies have bothered measuring equipment lease performance, even though they may have many thousands of equipment leases globally. That’s changing now because of the new FASB and IFRS standards for equipment lease accounting.

  Starting at the end of this year for public companies, all equipment leases get brought onto financial balance sheets and reports. That means they are now visible. Equipment lease performance will be increasingly scrutinized by financial leadership, external auditors, and investors.

  Will you be able to explain why you’re spending so much to lease equipment? Let’s take a closer look at all the ways you waste money without centralized lease management for equipment. Then we’ll show you how you can take control of the situation with something you’re already doing: collecting equipment lease data for FASB.

  How does poor equipment lease management cost you?

  There are great reasons why companies choose to lease equipment instead of buying it. Leasing improves cash flow and makes budgets more flexible. It also allows you to get the benefits of new equipment and technology sooner than you might if you purchased equipment assets.

  However, the financial benefits of leasing often disappear without careful oversight to prevent mistakes and wasted expense. For example:

  • Failing to renew equipment leases by the option date and having to pay more for the renewal.
  • Making poor decisions about purchase options.
  • Agreeing to leases with terms that cost you more than you’re saving.
  • Continuing to make lease payments after the lease expires.
  • Failing to terminate leases for equipment that’s no longer in use.
  • Paying the wrong amounts, especially for variable payment leases.

  These are just a few of the ways your organization loses money without centralized equipment lease management and oversight in place.

  The good news is, you can use the lease accounting data you’re collecting for FASB to help you analyze the effectiveness of your lease decisions. Then you can use that information to put standardized policies and procedures into practice that improve performance.

  Tap into FASB data & technology to measure equipment lease performance

  Like most organizations, you’re probably scrambling to collect and centralize all the lease data needed for compliance with the new FASB and/or IFRS standards. And your organization is probably investing in equipment lease accounting software to perform calculations, send journal entries to your GL system and produce disclosure reports. This situation can be a great opportunity to use that lease data and technology to your advantage.

  First of all, you’ll need a central repository that captures ALL your equipment lease data, not just what’s required for FASB.

  Also, choose equipment lease software that does more than accounting. For the same price or even less, you can get a comprehensive platform that helps you manage equipment leases (and real estate leases too) as well as handle the accounting.

  Learn more: Equipment and Property Lease Accounting: Can One System Do Both?

  Here’s what to look for:

  Asset-level equipment lease tracking. Some products only track leases at the contract level. But equipment lease contracts often include hundreds of individual assets on the same contract. To properly manage your leased assets, you need to be able to track serial numbers, locations, and other data points associated with each item on the contract.

  Easy customization. For a large global organization, you need to organize your system and your data according to the way you work. Make sure you’ll be able to make changes as your company makes structural changes such as mergers or acquisitions.

  Flexible reporting. To get the intelligence you need to improve your lease performance, you’ll need the ability to slice and dice equipment data by a variety of criteria.

  Intelligent alerts. To prevent missing critical lease option dates, set up alerts to notify lease managers in time to act.

  Equipment lease audits. Validate all lease payments against lease contract terms and avoid overpaying.

  With your centralized lease data repository and management technology in place, you’ll be able to create reports that reveal the true cost of your equipment leases.

  Want to see how that works in Visual Lease? Schedule a personalized demo.

  

  Use lease intelligence to develop standards

  With the right lease data at your fingertips and a comprehensive leasing system, you can:

  • Find out which types of lease structures and lease terms provide the best financial return.
  • Break down equipment lease performance by regions, business units, type of asset, asset manager, or any other criteria that helps you compare performance.
  • Find out where you’re losing money.

  Here are just a few ways you can use that intelligence to standardize equipment lease operations across your organization and improve performance:

  1. Develop policies for negotiating lease terms for different types of assets.
  2. Set up lease approval requirements to make sure policies are enforced.
  3. Establish timelines and procedures (and assign responsibility) for regularly updating equipment lease data. That should include the location of leased assets and usage status.
  4. Set up procedures for handling end-of-term and early lease terminations.
  5. Track and compare the performance of people and groups responsible for lease procurement and management.

  Don’t miss this opportunity to take control of your equipment leasing and stop wasting money. The experts at Visual Lease can help you get the right data and analytics in place to drive cost-effective process improvements.

  The post How to Optimize Equipment Lease Performance Using FASB Data first appeared on Visual Lease.]]> https://visuallease.com/data-first-ifrs-16-asc-842-compliance-model-offers-lasting-value/ Thu, 19 Apr 2018 08:00:17 +0000 https://visuallease.com/?p=916 Achieve fast compliance and long-term value with Grant Thornton and Visual Lease’s joint lease accounting solution With the enactment of the new IFRS 16 & ASC 842 (FASB) lease accounting...
  The post Data-First IFRS 16 & ASC 842 Compliance Model Offers Lasting Value first appeared on Visual Lease.]]>

  Achieve fast compliance and long-term value with Grant Thornton and Visual Lease’s joint lease accounting solution

  With the enactment of the new IFRS 16 & ASC 842 (FASB) lease accounting rules, there’s important work to be done, especially for organizations facing a 2019 deadline for compliance with both lease accounting rules (IFRS 16 & ASC 842).

  Here’s the to-do list for accounting for leases under the new standards:

  • Finding all the records associated with property and asset leases that must be brought onto the balance sheet for compliance with ASC 842 and IFRS 16;
  • Classifying leases to understand their treatment;
  • Aggregating data in a central repository;
  • Selecting a software tool to automate the process of performing calculations, creating journal entries, and producing disclosure reports for IFRS 16 and ASC 842;
  • Revising or creating internal processes and controls needed for ongoing accounting and lease management.

  Many accounting teams are still shell-shocked from the revenue recognition changes. However, it’s still important to understand that accounting for leases under IFRS 16 and ASC 842 will have a big impact on your balance sheet as well. You need to be sure you’re getting the IFRS 16 and ASC 842 implementation right.

  In response, the specialists at Grant Thornton have developed a process and set of integrated tools for end-to-end implementation of the new lease accounting standards. Grant Thornton’s cloud-based data repository, readiness and validation tool – known as LeaseX, helps prepare your data for FASB and IFRS-compliant lease accounting calculations. then, by using the Visual Lease platform, you can
  create journal entries and disclosures on your balance sheet and run insightful analytics reports.

  What’s more, this joint solution for IFRS 16 and ASC 842 also offers longer term lease management improvements that can have big payoffs for the entire organization.

  IFRS 16 and ASC 842 prep: Focus on data collection first

  A good lease accounting process starts with data collection, as it takes a great amount of time and effort to gather all of your data for IFRS 16 and ASC 842 compliance.

  Learn more: Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance

  Once that’s underway, you can work to accomplish the following:

  • Talk to stakeholders within your organization to learn more about their lease management needs. Look at the big picture instead of focusing only on accounting requirements for IFRS 16 and ASC 842. Doing that up-front will help you get the most benefit from your lease software solution, potentially making your compliance project a revenue gain instead of a cost.
  • Put lease management processes and controls in place to streamline lease accounting compliance going forward, and also to improve decision making and reduce costs. Grant Thornton’s Advisory teams can help you design these processes and controls, while Visual Lease’s flexible management tools can help you implement them.

  Learn more: Lease Portfolio Management: Policies & Procedures to Reduce Risk

  Streamlining FASB and IFRS data collection and validation with Grant Thornton’s LeaseX

  As a leading independent audit, tax and advisory firm, Grant Thornton guides its clients through every step of achieving IFRS 16 and ASC 842 lease accounting compliance. To minimize the data collection burden on organizations, Grant Thornton has created LeaseX.

  LeaseX organizes, simplifies and streamlines the process of taking masses of scattered lease data and transforming it into a centralized and complete resource for compliance. The accounting advisory teams at Grant Thornton determine the data fields required to perform the lease accounting calculations under IFRS 16 and ASC 842.

  Once that step is complete, the data collected in the LeaseX repository is quick and easy to import into Visual Lease, which performs the lease accounting calculations and creates journal entries and disclosures in your GL/ERP. LeaseX is also compatible with other leasing software.

  Here’s what the process of getting your lease data into LeaseX looks like:

  1. Grant Thornton works with your organization to set up a LeaseX repository that’s customized according to your organization’s structure and requirements.
  2. Next, the specific data needed about each lease to comply with IFRS 16 and ASC 842 is extracted. You can import this data from an existing repository, have your own team review leases and enter data manually, or have Grant Thornton help you with lease abstraction.
  3. LeaseX continuously validates the contents of your repository, showing you where data is missing on a lease-by-lease basis.
  4. Throughout the process, you can monitor your IFRS 16 and ASC 842 readiness progress by seeing how many leases are complete and how many still outstanding.
  5. You can also monitor your total Right of Use (ROU) asset and liability numbers as you populate your data. Financial leaders will appreciate having that information earlier in the process, rather than having to wait until data collection is complete to understand the impact on the balance sheet.

  When your LeaseX repository is complete and validated, it’s a simple matter to export the data to Visual Lease. At that point, you’re ready for IFRS 16 and ASC 842 compliance with the ability to generate journal entries and disclosures.

  LeaseX and Visual Lease: Long-term lease accounting and management

  Grant Thorton, in alignment with Visual Lease, now offers a joint solution that not only streamlines IFRS 16 and ASC 842 lease accounting compliance, but also helps create smarter and more effective lease management. Integrating these operations creates efficiency, reduces leasing expenses, and drives smarter lease decisions across the organization.

  Learn more: Lease Accounting Changes: The Silver Lining You’re Overlooking

  Visual Lease’s cloud-based platform handles every aspect of lease management and accounting for IFRS 16 and ASC 842 and beyond. With all of your lease data in one unified platform, you have a single source of truth and an end-to-end solution that you can always count on to be accurate and up to date.

  Get up and running FAST. LeaseX and Visual Lease integrate seamlessly, meaning there’s next to no implementation time. In one click you can import your prepared LeaseX data into Visual Lease.

  Seamless systems integration. Visual Lease provides a deep level of integration not only with LeaseX, but also with a wide variety of systems including SAP, PeopleSoft, Power Plan, Workday, NetSuite, JD Edwards, and more than 50 other platforms — empowering you to automate GL journal entries or create cash transactions in your AP/AR system. You can even integrate with multiple GLs.

  Visual Lease works the way you work. No two organizations are alike, so a leasing solution tailored to your company and your specific requirements can be invaluable. Visual Lease’s customization possibilities go beyond simply changing field names, and instead allow you to design the system to work according to your processes and controls – and with Visual Lease, you can quickly make those changes yourself.

  The post Data-First IFRS 16 & ASC 842 Compliance Model Offers Lasting Value first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-update-compliance-just-got-easier-with-visual-lease-fasb-20/ Thu, 22 Mar 2018 08:00:38 +0000 https://visuallease.com/?p=1078 With FASB compliance less than a year away, Visual Lease is doing all we can to smooth the transition — including delivering a new lease accounting update designed to make...
  The post Lease Accounting Update: Compliance Just Got Easier with Visual Lease FASB 2.0 first appeared on Visual Lease.]]>

  With FASB compliance less than a year away, Visual Lease is doing all we can to smooth the transition — including delivering a new lease accounting update designed to make it even easier to meet the requirements of ASC 842 and IFRS 16.

  What’s new in our lease accounting update?

  Visual Lease FASB 2.0, our enhanced Lease Accounting module, provides a range of new tools for displaying multiple lease views and running a variety of calculations, for the ultimate in accounting flexibility. For example, our lease accounting update enables you to:

  • Pick a particular calculation or run parallel entries for ASC 840, ASC 842, IAS 17, and IFRS 16
  • Run hypothetical calculations and preview them side by side for comparison, such as different interest rates or lease dates
  • Create different calculations and reporting for different dates or different locations
  • Automatically compute and reverse journal entries when lease terms change — or even end calculations and remove old assets from your balance sheet entirely

  With the new FASB lease accounting rules now requiring all lease assets and expenses to be accounted for, Visual Lease’s enhanced module empowers you to create compliance-related reporting from your accounting data, for a more complete picture of your lease profile and related financial obligations.

  For instance, you can look back on 2 years’ worth of journal entries and automatically pull data from your balance sheet for footnotes in Qualitative Disclosure Reports. Forecast what the next 5 years of lease obligations will look like and generate reports on all types of lease expenses — operating, short- and long-term, variable, and sub-lease, as well as finance.

  For companies that include different entities, you can create drill-down Disclosure Reports according to different entities, regions, countries, lease terms, or whatever criteria you need. Our lease accounting update also includes enhancements for visualization of short-term versus long-term lease liabilities and for handling IFSR-only portfolios.

  What are some enhancements in FASB 2.0?

  Our lease accounting update not only sets you up for compliance with new FASB lease accounting rules on Day 1 — it also provides enhancements that help you handle complex lease scenarios on Day 2 and beyond.

  Flexible Classifying & Calculating

  Added audit trail and override capabilities give an administrator the ability to change the bright lines in Capital Lease Testing, to adjust how a lease is classified and how journal entries are done.

  For instance, you can override the default values for the Lease Test Threshold amounts (normally 75% of Useful Life and 90% of Fair Market Value) to tweak those values (e.g., set the threshold to 88%) to be sure leases are properly classified. Our lease accounting update also expands the FASB schedule and calculations with additional criteria, such as Deferred Rent and Prepaid/Accrued Rent balances. The addition of a new Journal Entries section allows FASB schedule data to be viewed in Journal Entry form.

  Easier Currency Conversion

  A number of enhancements to Visual Lease help you handle complex currency conversions over multiple periods with greater ease and agility. Integration with foreign exchange tables allows third-party data to be used in the system, for tasks such as tracking changing currency rates over time and allowing customer databases to import rates from Visual Lease’s reference tables on demand.

  Secure Single Sign-on

  Our lease accounting update strengthens our already robust security features with the addition of secure single sign-on. Utilizing user authentication from Federated Security Sources, this capability enables users to log on once for secure access and the ability to work with Visual Lease and accounting, general ledger, and ERP systems simultaneously.

  Managing User Workflow, Alerts, & Notifications

  The lease accounting update adds tools for managing user approval to tasks, such as allowing specific users to import lease financial entries or hiding project modules from specific users. We’ve also improved lease alerts and notifications by including full contact information for alert recipients — making it easier to identify the alert targets — and adding a quick search capability when selecting targeted organizations.

  Enhancements to Financials

  Adding a new field for Cost per Rentable Area, our lease accounting update allows this to be included as a recurring, computed cost and adjusted when there are changes in lease terms; Cost per Rentable Area has also been added to ad hoc and abstract reporting capabilities. Enhancements to financials include:

  • Forecast calculations on Multiple Lease Update for budgeting/projections
  • Ability to filter entries for the financial types used on each lease and for options such as forecasts and GL entries
  • Improved searching of the full hierarchy of financial categories
  • Mapping to other financial categories for forecasting and straight line rent automation functions

  What will the near future bring?

  The new FASB lease accounting rules are designed to align U.S. standards with global accounting standards while increasing transparency in financial reporting by 2019. FASB 2.0 from Visual Lease is designed to help you meet those requirements with speed and ease; additionally, it is compliant with IFRS 16, the new international standard.

  Are you ready for compliance? Learn more:
  FASB Lease Accounting Changes: How to Assemble Your Readiness Team
  Get the Best Lease Accounting Software by Comparing Price & Value

  Moving forward, we will continue to support these efforts with regular releases — so we encourage you to return to this space frequently to read about the latest lease accounting update from Visual Lease and learn more about how we can help you make the transition.

  Want to see for yourself? Request a demo

  The post Lease Accounting Update: Compliance Just Got Easier with Visual Lease FASB 2.0 first appeared on Visual Lease.]]> https://visuallease.com/why-real-estate-brokers-need-lease-accounting-software-solutions/ Thu, 01 Mar 2018 08:00:33 +0000 https://visuallease.com/?p=975 FASB lease accounting is changing the game not only for companies with leases, but also for the real estate brokers who help them to manage their property leases. Now, in...
  The post Why Real Estate Brokers Need Lease Accounting Software Solutions first appeared on Visual Lease.]]>

  FASB lease accounting is changing the game not only for companies with leases, but also for the real estate brokers who help them to manage their property leases. Now, in addition to providing lease administration software to clients, brokers will be smart to consider providing lease accounting software solutions as well.

  In fact, if they don’t, real estate service firms may find themselves losing clients.

  Keep reading to learn why, and what to do about it.

  Why lease administration software is important for real estate brokers

  Commercial real estate services firms typically provide day-to-day management of property leases for their clients. This service is a relatively small source of revenue. However, it serves as a foot in the door to get the more profitable business: the big transactions when companies acquire new space.

  That’s why many commercial real estate brokers offer lease administration services. As part of that service, they include a software solution that can used by both the client and the service provider. It helps the service firm more efficiently manage leases, and it gives the client easy access to their lease information when they need it.

  Now, the upcoming lease accounting changes are shifting that model. Real estate firms are in danger of losing their foot in the door if they don’t offer lease accounting software solutions as well.

  FASB changes & the need for lease accounting software solutions

  The lease accounting changes coming from FASB and IFRS (in January 2019 for public firms, and a year later for private organizations) mean that companies need to track much more lease data than they did previously. Just about every lease must be brought onto accounting balance sheets.

  So, companies need an automated way to centralize lease data and perform the necessary calculations. While the entry-level lease administration tools offered by real estate firms may handle the basic lease management functions, there’s no support for lease accounting. That means every company with more than a handful of leases is out there shopping for lease accounting software solutions.

  The dilemma for companies: one system or two?

  The need for lease accounting software solutions creates a dilemma for large organizations that currently maintain lease data in a broker-owned lease administration tool.

  Should they purchase one of the standalone lease accounting software solutions, and keep lease administration information in the existing system?

  Or, should they move to one complete, integrated lease solution that does both?

  The two-system approach: a logistical nightmare

  As companies begin to investigate the technology infrastructure they will need to meet lease accounting objectives, it quickly becomes clear that the two-system approach is problematic at best.

  For one thing, the lower-end lease administration tools that real estate service firms typically offer don’t integrate well with other systems. Until now that wasn’t a problem, because they didn’t need to.

  Because of the new lease accounting rules, lease payments and other data will need to be regularly fed to general ledger systems. Since low-end lease admin tools can’t send data feeds, companies would be forced to use manual export/import processes.

  Not only is that incredibly time consuming, but it’s expensive to set up. For the real estate firm, integration with lease accounting software solutions could cost more than they’re currently paying for their administration tool.

  For the client, relying on manual data moves is risky: it’s prone to error. When it comes to accounting data for multi-million dollar real estate leases, it’s a risk many CFOs (and their audit firms) won’t even consider.

  And there’s even more manual work involved in keeping lease data up to date in lease accounting software solutions. Property leases can and often do change during the course of the lease: payments change, options are executed, and space is added or removed. That means more manual movement of data, and more risk of mistakes, when you’re stuck with two systems.

  Few large organizations are going to accept a difficult ongoing data management process like this. That’s why end-to-end lease administration and lease accounting software solutions are catching on.

  The issues with moving to a single system

  When a large company decides to move to a combined solution, they face another problem with their real estate firm.

  Finance executives may not want an outsourced real estate firm to have administrative access to their accounting data. That decision may be made based on lease accounting guidance from audit partners. And they certainly don’t want their real estate firm to OWN their lease accounting software solution.

  For real estate services firms, the handwriting is on the wall: clients need to centralize all their lease data, and many will choose to take it back into their own hands. That could easily mean the real estate broker loses their foot in the door that ensures they get the bigger business associated with property leases.

  Can real estate service firms keep their clients’ business with lease accounting software solutions?

  Smart real estate service providers won’t just take this situation lying down and wait to lose customers.

  The good news is, if you’re proactive you can get out in front of the problem and actually improve your relationship with your clients.

  Our advice? Take these steps now:

  1. Get educated about the upcoming FASB and IFRS lease accounting changes.

  Learn about the challenges companies are facing and the data they need to collect. Understand lease accounting problems and solutions. Also, be able to speak to clients about the risks and opportunities related to FASB compliance, and how you’ll be stepping up your management practices accordingly.

  Here are a few articles to get you started:

  Lease Accounting Changes: The Silver Lining You’re Overlooking
  Lease Portfolio Management: Policies & Procedures to Reduce Risk
  Corporate Real Estate Strategies and the New Lease Accounting Standards

  2. Learn about end-to-end lease administration and lease accounting software solutions.

  You may be able to improve your position by offering technology that better meets your clients leasing needs instead of one that’s only half a solution.

  We’re happy to show you Visual Lease and explain how we stack up to our competitors: REQUEST A DEMO.

  3. Get a seat at the table and help clients make smart decisions.

  The fact is, if your clients choose the right lease accounting software solutions, you can still keep their lease administration business.

  Visual Lease, for example, has the security infrastructure in place to allow an outsourced firm to work with a client’s lease administration data, while controlling access to sensitive accounting data.

  Don’t wait for your clients to come to you with this problem.

  Find out who is involved in your clients’ FASB/IFRS implementation process and technology selection. Get involved and earn their trust by recommending smart lease accounting software solutions. If you do, you can stay in the game and keep your valued clients.

  The post Why Real Estate Brokers Need Lease Accounting Software Solutions first appeared on Visual Lease.]]> https://visuallease.com/corporate-real-estate-strategies-and-the-new-lease-accounting-standards/ Thu, 22 Feb 2018 08:00:50 +0000 https://visuallease.com/?p=959 For corporate real estate decision-makers, will the new lease accounting standards make an already challenging job even more difficult? You already have many factors to consider when choosing locations, negotiating...
  The post Corporate Real Estate Strategies and the New Lease Accounting Standards first appeared on Visual Lease.]]> For corporate real estate decision-makers, will the new lease accounting standards make an already challenging job even more difficult? You already have many factors to consider when choosing locations, negotiating lease terms, and defining your overall corporate real estate strategies. Soon you will also need to consider how your leases impact your organization’s financial reporting.

  Why lease accounting may impact corporate real estate strategies

  The new lease accounting standards from FASB (U.S.) and IASB (international) essentially require all leases to be brought onto the balance sheet. That’s a big change. According to JLL, currently more than 85% of lease commitments don’t appear on the balance sheet.

  After the new rules take effect, balance sheets will show very different debt-to-equity ratios and return on assets. These changes may have far-reaching impacts on the organization, such as loan covenants and greater scrutiny on lease policies and decisions. And it’s happening soon: January 2019 for public companies.

  The questions for corporate real estate is, should these lease accounting standards change your corporate real estate strategy? And if so, how?

  Corporate real estate strategies you may have to re-think

  If you’ve researched the impact of lease accounting on corporate real estate management strategy, you’ve probably seen a wide range of opinions. However, there’s one thing everyone agrees on. The increased financial impact of leasing will mean increasing scrutiny of your corporate real estate strategies and decisions. You may also face new approval requirements from finance leaders for real estate leasing decisions.

  Now is the time to think through your current corporate real estate strategies, understand how the new lease accounting rules may impact your organization, and adjust accordingly.

  The buy vs. lease decision

  Under the new lease accounting rules, you will lose some of the financial benefits of leasing space. Does that mean you should decide to purchase buildings instead of leasing?

  Some experts predict that when looking to occupy all or most of a building (like a corporate headquarters), more organizations will now consider the option to buy. According to CBRE, if you’ve got excellent credit you may find that the cost of capital to purchase is lower than the long-term cost to lease.

  However, others experts argue that many other factors (besides balance sheet impact) will continue to be the main drivers in the decision to buy or lease space. Some of these include:

  • business requirements and forecasts
  • availability of capital
  • debt and equity covenant restrictions

  Remember that the lease accounting changes, in most industries, will impact everyone equally. Your competitors are facing the same challenges you are. However, if you are the lone company in your vertical with a lot of leased space (versus owned) then you may want to rethink your corporate real estate strategies related to leasing.

  Lease term length

  Under the new rules, longer leases can have a more detrimental effect on the balance sheet due to larger lease liabilities. Does that mean you should consider shorter lease terms as one of your corporate real estate strategies?

  There’s already a trend toward shorter lease terms globally. The average lease length for commercial space in the U.S. is 7 years, but in some international markets the average is 2 to 3 years. With the lease accounting changes factored in, some predict that trend will grow.

  However, there are practical considerations that may preclude shorter lease terms. For one thing, there’s a lot of risk for landlords with shorter leases. Tenants may also not want to risk having to move every 2 to 3 years. And for certain industries where leasehold improvements are common, having to depreciate that cost over a short lease may not be realistic.

  That being said, it’s possible we may see leases for smaller turnkey spaces becoming shorter with more options. But remember, options that you are “reasonably certain” to exercise will be included (for accounting purposes) as part of the lease term anyway.

  Lease structure

  In many industries, fixed, all-inclusive lease payments are common for the sake of simplicity. However, under the new lease accounting standards, a higher proportion of variable payments (i.e. with payments for taxes and maintenance separated out) may result in smaller lease liabilities. Should you consider modifying lease structures as one of your corporate real estate strategies?

  To be sure, structuring leases with separate payments for lease and non-lease components will simplify the workload for your financial reporting team under the new standards. But that can be more work for accounts payable (unless you have lease management software that makes variable payments simple and automatic).

  Even with fixed lease payments, you can ask landlords to provide details about breakdowns of your payments for reporting purposes. However, landlords may consider that proprietary information and may not be willing to comply. If you face that situation, outsourced real estate partners can also provide helpful information.

  Sale-leaseback is another lease structure that changes significantly with the new standards. Until now, these transactions served as a form of off-balance sheet financing. With this advantage taken away, you may find this lease structure a less attractive option in your playbook of corporate real estate strategies.

  More resources for strategic corporate real estate leadership:
  Lease Portfolio Management: Policies & Procedures to Reduce Risk
  The Uncertain Future of the Corporate Real Estate Profession

  The bottom line: how to decide what’s right

  Who is right in all these debates? The fact is, there is no one correct answer for everyone. You need to make decisions that are best for your organization. That means considering lease accounting impacts along with other factors that currently affect your corporate real estate strategies and decision making.

  Here’s the difficulty: you can’t possibly do that without all your lease data in a central repository. And without software that makes it easy for you to analyze your lease data, find out where your risks and opportunities lie, and make informed decisions about corporate real estate strategies.

  Just about every organization is rushing out to get lease accounting software to push out balance sheet calculations. But lease accounting software alone can’t help you with the critical decisions ahead. The lease accounting changes can serve as your opportunity to implement a comprehensive end-to-end lease solution that helps you improve corporate real estate strategies along with lease accounting.

  Learn more:
  Lease Accounting Changes: The Silver Lining You’re Overlooking

  The post Corporate Real Estate Strategies and the New Lease Accounting Standards first appeared on Visual Lease.]]> https://visuallease.com/fasb-changes/ Tue, 13 Feb 2018 08:00:12 +0000 https://visuallease.com/?p=946 We know you’ve got questions about the IFRS and FASB changes related to the new lease accounting standards. Even if you’ve carefully reviewed FASB ASC 842 and IFRS 16, it’s...
  The post IFRS & FASB Changes: A Lease Accounting Quick Reference Guide first appeared on Visual Lease.]]> We know you’ve got questions about the IFRS and FASB changes related to the new lease accounting standards. Even if you’ve carefully reviewed FASB ASC 842 and IFRS 16, it’s helpful to have the essential facts you need to prepare for the FASB accounting changes in one place.

  That’s why we have prepared this quick reference that explains the IFRS and FASB changes in the new standards. You can also see the differences between the IFRS changes and FASB changes to lease accounting.

  Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

  Scope of IFRS and FASB changes

  FASB changes in ASC 842

  Scope includes leases of all property, plant, and equipment.

  IFRS 16 changes

  Scope includes leases of all assets.

  Definition of a lease

  Under both standards, A lease contract must convey the right to control the use of a specifically identified asset for a specified period of time. A customer controls an identified asset when the customer has both the right to obtain substantially all of the economic benefits from its use and the right to direct that use.

  FASB changes in ASC 842

  A lease is defined as a “contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”

  IFRS 16 changes

  A lease is defined as a “contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.”

  Definition of a short-term lease

  FASB changes in ASC 842

  A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise.

  A lessee may recognize the payments on such a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.

  IFRS 16 changes

  A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option.

  A lessee may recognize the payments on a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.

  Lease accounting overview

  Under both standards: As of the lease commencement date, a lessee will recognize both:

  1. A liability for its lease obligation (initially measured at the present value of the future lease payments not yet paid over the lease term).
  2. An asset for its right to use the underlying asset (i.e., the right-of-use (ROU) asset) equal to the lease liability, adjusted for lease payments made at or before lease commencement, lease incentives, and any initial direct costs.

  FASB changes in ASC 842

  Lease classification
  A lessee will classify a lease as a finance lease when the lease meets any of the following criteria at lease commencement:

  1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
  2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
  3. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion will not be used for lease classification purposes.
  4. The present value of the sum of lease payments and any residual value guaranteed by the lessee that is not already reflected in lease payments equals or exceeds substantially all of the fair value of the underlying asset. Note that for measurement purposes, lease payments will only include amounts probable of being owed by the lessee under a residual value guarantee.
  5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

  FASB operating lease and finance lease treatment
  For a finance lease, the ROU asset is generally amortized on a straight-line basis. This amortization, when combined with the interest on the lease liability, results in a front-loaded expense profile in which interest and amortization are presented separately in the income statement.

  For an operating lease a straight-line expense profile that is presented as a single line item in the income statement.

  IFRS 16 changes

  All leases will be recorded as per the FASB’s finance lease approach when amortizing the ROU asset.

  Lease term

  FASB changes in ASC 842

  Lease term is the non-cancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option or in which the exercise of those options is controlled by the lessor.

  Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee, (2) a contract term obliges the lessee to exercise (or not exercise) an option to extend or terminate the lease, or (3) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.

  A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.

  IFRS 16 changes

  Lease term is the noncancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option.

  Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee or (2) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.

  A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.

  Lease payments

  Under both standards, lease payments include:

  • Fixed payments
  • Variable payments that are based on an index or rate (e.g., CPI) calculated by using the index or rate that exists on the lease commencement date.
  • Amounts that it is probable will be owed under residual value guarantees.
  • Payments related to renewal or termination options that the lessee is reasonably certain to exercise.

  Lease payments do not include variable lease payments that are based on the usage or performance of the underlying asset (e.g., a percentage of revenues).

  FASB changes in ASC 842

  Variable payments based on an index or rate would only be reassessed when the lease obligation is reassessed for other reasons (e.g., change in the lease term, modification).

  IFRS 16 changes

  Variable payments based on an index or rate would be reassessed whenever there is a change in contractual cash flows (e.g., the lease payments are adjusted for a change in the CPI).

  Discount rate

  Under both standards, lessees use the rate charged by the lessor if the rate is readily determinable. If the rate is not readily determinable, lessees will use their incremental borrowing rate as of the date of lease commencement.

  FASB changes in ASC 842

  Private-company lessees can elect to use a risk-free rate.

  IFRS 16 changes

  No exemptions provided for private-company lessees.

  Lease modification accounting

  Under both standards, a lease modification is any change to the contractual terms and conditions of a lease.

  A lessee will account for a lease modification as a separate contract (i.e., separate from the original lease) when the modification (1) grants the lessee an additional ROU asset and (2) the price of the additional ROU asset is commensurate with its stand-alone price.

  Lessees would account for a lease modification that is not a separate contract by using the discount rate as of the modification effective date to adjust the lease liability and ROU asset for the change in the lease payments.

  The modification may result in a gain or loss if the modification results in a full or partial termination of an existing lease.

  Sublease treatment

  FASB changes in ASC 842

  The intermediate lessor would classify a sublease by using the underlying asset of the master lease.

  IFRS 16 changes

  The intermediate lessor would classify a sublease by using the ROU asset of the master lease.

  Sale-leaseback treatment

  FASB changes in ASC 842

  The transaction would not be considered a sale if (1) it does not qualify as a sale under ASC 606 or (2) the leaseback is a finance lease.A repurchase option would result in a failed sale unless (1) the exercise price of the option is at fair value and (2) there are alternative assets readily available in the marketplace. If the transaction qualifies as a sale, the entire gain on the transaction would be recognized.

  IFRS 16 changes

  The transaction would not be considered a sale if it does not qualify as a sale under IFRS 15.A repurchase option would always result in a failed sale. For transactions that qualify as a sale, the gain would be limited to the amount related to the residual portion of the asset sold. The amount of the gain related to the underlying asset leased back to the lessee would be offset against the lessee’s ROU asset.

   

  The post IFRS & FASB Changes: A Lease Accounting Quick Reference Guide first appeared on Visual Lease.]]> https://visuallease.com/fasb-compliance-elimination-of-2-year-lookback-for-lease-accounting/ Tue, 06 Feb 2018 08:00:03 +0000 https://visuallease.com/?p=937 Good news for companies facing FASB compliance in 2019 There’s good news on the FASB compliance front, which is not quite official yet but should be finalized any day now....
  The post FASB Compliance: Elimination of 2 Year Lookback for Lease Accounting? first appeared on Visual Lease.]]> Good news for companies facing FASB compliance in 2019

  There’s good news on the FASB compliance front, which is not quite official yet but should be finalized any day now. It looks like the FASB board is about to approve an option for organizations to eliminate the 2-year lookback as they move to FASB compliance with ASC 842.

  Apparently, the FASB board is attempting to reduce the monumental amount of lease data collection companies are facing, especially large, distributed organizations with large leased portfolios. To get ready for lease compliance, you’ll need to fundamentally change your lease accounting practices. As of now, that means finding, classifying, extracting, collecting and aggregating mountains of data over a 3 year period (representing the current reporting year plus 2 years prior).

  What does this FASB compliance change mean for you?

  Let’s be clear about one thing: this change does not impact the new lease accounting standard effective date. For public companies and others meeting certain criteria, you’ll need to be ready for FASB compliance by January 1, 2019. Most private companies have another year.

  What’s changing is the requirement to provide financial statements for a 2-year comparative reporting period (as known as the 2-year lookback) according to the new rules. Instead, you can choose to apply the new lease accounting standard at its effective date to achieve FASB compliance with ASC 842.

  According to the new FASB standard (ASC 842), you must recognize and measure leases at the beginning of the earliest period presented in your financial statements (which is 2 years prior to the current year). That means, for public companies using the January 1, 1019 FASB compliance date), you would need to measure and recognize leases as of January 1, 2017.

  That’s why public companies are scrambling to collect lease data right now. You’re already a year behind.

  Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

  Under the proposed change, the requirement to measure and recognize leases during the comparative reporting period goes away. Needless to say, this change simplifies the transition to FASB compliance under the new standard. You won’t need to include leases that expired prior to January 1, 1019, and you won’t need to remeasure leases modified multiple times during your comparative reporting period.

  Don’t let this news slow down your FASB compliance plans

  Once this change is officially announced, many public companies will be breathing a collective sigh of relief.

  However, we have to caution you not to let this news change slow down your efforts to get ready for FASB compliance. You have fewer leases to worry about and some data collection tasks that you can cross off the list. But there’s still a great deal of work to do. And, the sooner you get through the job of preparing data and changing your lease accounting practices, the sooner your organization can reap the benefits of FASB compliance.

  You may be wondering what benefits we’re talking about. Getting to go home to your family at a reasonable hour instead of working 18 hour days? Maybe, but there are other considerable financial and efficiency gains you can achieve because of your FASB compliance efforts.

  If you’ve been following our blog, you know we have been pointing out some of the upsides related to the effort required to achieve FASB compliance.

  In case you missed it, read these articles to learn more:

  Lease Accounting Changes: The Silver Lining You’re Overlooking
  How Lease Accounting Software Can Pay for FASB/IFRS Compliance

  The post FASB Compliance: Elimination of 2 Year Lookback for Lease Accounting? first appeared on Visual Lease.]]> https://visuallease.com/adopting-new-lease-accounting-standards-is-your-structure-a-handicap/ Tue, 30 Jan 2018 08:00:38 +0000 https://visuallease.com/?p=929 Organizational Challenges & the New Lease Accounting Standards There are many organizational models that are used to manage corporate real estate. Companies adopt primarily two models: centralized and decentralized. In...
  The post Adopting New Lease Accounting Standards: Is Your Structure a Handicap? first appeared on Visual Lease.]]> Organizational Challenges & the New Lease Accounting Standards

  There are many organizational models that are used to manage corporate real estate. Companies adopt primarily two models: centralized and decentralized. In this article, we’ll explore the differences and how they impact your organization’s ability to transition to the new lease accounting standards: FASB ASC 842 and IFRS 16.

  Two common CRE organizational models

  In the decentralized model, typically the business units handle all the primary functions of the corporate real estate function to include leasing, design, construction, facilities management, lease administration, etc. The decentralized model is popular with large diverse organizations that prefer to control all the key disciplines of the real estate function at the unit level.

  The centralized model serves as the real estate support staff for all the business units. This model is popular with homogeneous companies with a singular service or product offering. Major accounting firms and banks are typically organized with a centralized corporate real estate function serving all the lines of business.

  Major challenges of implementing the new lease accounting standards

  Now consider the major tasks needed to implement the new lease accounting standards with respect to these two organizational models. The first step is assembling and organizing the lease portfolio data. Invariably this task will be a challenge when leases are scattered throughout the business units. Just getting the leases assembled and organized will be an administrative nightmare. And there will be the issue of consistency across unit portfolios.

  Learn more: Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance

  Which organizational model is better equipped to manage the transition to the new lease accounting standards?

  The centralized corporate real estate organization has the advantage of uniformity and consistency in the real estate file, making the task of conversion to the new lease accounting standards significantly easier. The centralized group has the advantage of familiarity with the portfolio and can retrieve files and data readily. The centralized group also has the benefit of having worked with corporate finance, legal, and accounting; and thus these relationships will work to make the conversion process more efficient.

  The centralized group also has more direct access to senior management, and can resolve issues of lease strategy, balance sheet effects, and other issues that surface during the transition process.

  From my experience the greatest impediment to a company wide change is effective communication. The centralized group is typically more unified and enjoys smoother communication processes than a decentralized group that must cope with different personalities, unit culture, and differences in approach.

  Most decentralized real estate organizations will most likely form a multi-unit task force with representatives from each of the unit real estate groups chartered to gather and organize the lease files from each of the units.

  Creating a task force to execute the new lease accounting standards

  Despite the organization models and their respective challenges, it’s likely that a multi-discipline team will be formed to manage and execute the transition process. Most likely the task force will create a separate lease database and create in essence a “parallel universe” that will have all the specific calculations and values prescribed by the new lease accounting standards.

  The advantage of this approach will be minimizing disruption to ongoing operations. This approach will require a high level of cooperation and collaboration from the real estate staff(s). From my experience it’s a best practice to appoint a senior manager to lead such a task force, and have the leader report to a fairly high level in the corporate structure.

  The task force should include a representative from corporate accounting, corporate finance, and also include external specialists such as representatives from the accounting firm supporting the organization’s annual audit.

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

  The post Adopting New Lease Accounting Standards: Is Your Structure a Handicap? first appeared on Visual Lease.]]> https://visuallease.com/how-lease-accounting-software-can-pay-for-fasb-ifrs-compliance/ Thu, 25 Jan 2018 08:00:34 +0000 https://visuallease.com/?p=923 Lease accounting software has become a necessary expense for most organizations due to the new IFRS and FASB lease accounting standards. However, choosing wisely can save more money in operating...
  The post How Lease Accounting Software Can Pay For FASB/IFRS Compliance first appeared on Visual Lease.]]>

  Lease accounting software has become a necessary expense for most organizations due to the new IFRS and FASB lease accounting standards. However, choosing wisely can save more money in operating expenses than your lease accounting compliance efforts will cost.

  What will FASB/IFRS compliance cost you?

  For the vast majority of organizations, the effort to get ready for compliance with the new FASB and IFRS lease accounting standards will have a significant cost impact. According to research by EY, estimates range from $500,000 to $5 million. And furthermore, most organizations have not even budgeted for this expense.

  Because compliance is mandatory, many will simply assume this cost must be absorbed as a necessary expense. But here’s what you may be overlooking: lease accounting software can help reduce operating expenses so much that it more than pays for the cost of your lease accounting implementation efforts.

  Seem too good to be true? It’s not. Keep reading and we’ll explain.

  Lease accounting software is a cost of compliance… or is it?

  Probably the biggest expense associated with lease accounting compliance is the cost of gathering and aggregating all your lease data. That’s especially true for global and distributed organizations with large leased portfolios.

  Another expense that’s mandatory for the vast majority of companies is the cost of lease accounting software. The new standards have increased the complexity of lease accounting to the point where it’s no longer possible to continue storing data and producing calculations in Excel spreadsheets (as most have done until now).

  However, the cost of lease accounting software may not turn out to be an expense after all, depending on the technology you choose. In fact, choosing the right product can be a net gain for your organization due to the operational cost reductions you can achieve.

  Learn more: Lease Accounting Changes: The Silver Lining You’re Overlooking

  Let’s explore exactly how that’s possible with the best lease accounting software.

  5 ways lease accounting software pays you back

  Before we get into the details, there’s one caveat you must be aware of: not all lease accounting software solutions can provide these benefits. In fact, those that only perform lease accounting calculations can’t.

  These cost-saving benefits come from having an integrated solution that combines lease accounting with end-to-end lease management.

  1. End overpayments on variable rents and CAM charges

  For retail companies, variable rent payments are a way of life. Lease payments vary month to month because they’re based on a percentage of sales. That’s only one example of many different scenarios where property lease payments change regularly. Then there’s common area maintenance or CAM charges: the ongoing maintenance changes that the landlord passes on the lessee. These are often subject to change over the term of the lease.

  These variable payments can be a logistical nightmare for accounts payable teams, who have to figure out what exactly they need to pay each month. When that’s done manually (or not calculated at all, but simply paid based on the landlord’s calculations), you’d be amazed at the costly mistakes that result.

  When your lease management & lease accounting software documents all lease terms, automatically calculates the correct payments every time and integrates with your AP system, you save money by preventing overpayments.

  2. Avoid paying expenses that are the lessor’s responsibility

  When your lease terms are not easily accessible to those making decisions at ground level, it’s surprisingly easy to end up paying for things you shouldn’t. One simple example: you pay to get a leaky roof replaced, when in fact the lease clearly states that this is the landlord’s responsibility. That happens because the facilities staff handling the issue has no access to the terms of the lease.

  When you have a single lease management & lease accounting software solution that’s used by everyone from facilities staff to procurement to accountants, all your information is kept up to date and easily accessible. That prevents costly mistakes.

  3. Stop making automatic payments on expired leases

  When your AP system is not integrated with your lease management & lease accounting software, payments can continue going out long after leases expire. If you’ve got a large leased portfolio, especially lots of shorter term equipment leases, this kind of mistake can quickly add up.

  With an integrated solution, your payments automatically stop when the lease’s end date is reached. No one has to remember to cancel the payment.

  4. Avoid missing lease option deadlines

  Property leases often include options to renew at a favorable rate, provided you exercise that option by a specified date. As real estate professionals know, missing just one of those deadlines can cost you millions on a single long term lease. That’s because you lose the chance of that favorable rate and then are forced to pay market rate for what can be several years at a minimum.

  Your lease management & lease accounting software can alert you when those critical lease dates are approaching, so you have enough time to carefully consider your options and make the most cost-effective decisions.

  5. Negotiate better lease deals

  When all your lease data is available in a single source of truth (your combined lease management & lease accounting software) you have a gold mine of business intelligence that you can use to drive better lease deals. You can easily access terms of similar leases and use that data during your negotiations to get more favorable terms that can result in huge cost savings.

  The fact is, there are significant benefits to be gained by the effort to comply with the new lease accounting standards. Choosing the right lease accounting software puts you in the best possible position to actually reduce expenses across your organization instead of adding to them.

  The post How Lease Accounting Software Can Pay For FASB/IFRS Compliance first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-changes-the-silver-lining-youre-overlooking/ Thu, 18 Jan 2018 08:00:45 +0000 https://visuallease.com/?p=907 Lease accounting changes: the onus and the opportunity It’s no secret: the lease accounting changes required by FASB ASC 842 and IFRS 16 have put a significant burden on companies,...
  The post Lease Accounting Changes: The Silver Lining You’re Overlooking first appeared on Visual Lease.]]> Lease accounting changes: the onus and the opportunity

  It’s no secret: the lease accounting changes required by FASB ASC 842 and IFRS 16 have put a significant burden on companies, especially the accounting teams. The effort to achieve compliance requires an investment of time and money, which can seem particularly onerous since you have no choice in the matter. It’s like a huge black cloud hanging over your head. But just as every cloud has a silver lining, there’s an upside to this effort.

  The lease accounting changes are mandatory, but that doesn’t mean you can’t benefit from implementing the new lease accounting standard. In fact, if you do things right, the process can lead to big changes in the way you manage leases, ultimately reducing expenses and improving your bottom line.

  To reap those benefits, here’s what you need to do as you prepare for the lease accounting changes:

  • Implement lease accounting software with integrated lease management capabilities. When you do that, you’ll have all your lease data in one single source of truth, the intelligence to show you opportunities for improvement, and the tools to reform inefficient and wasteful lease management practices.
  • Take advantage of working with both accounting and technology experts to get your house in order and improve operational and decision-making processes.

  Let’s take a closer look at what you stand to gain from the lease accounting changes and how to make it happen.

  Efficient and cost-effective lease management

  As leases become more visible and their impact on organizational finances is realized, the processes surrounding lease management will be increasingly scrutinized. Here at Visual Lease, we work with organizations in every industry and we see the same trend: a lack of consistent practices related to leases. In fact, when it comes to leases for equipment and other assets, many have no documented policies and processes at all. Because of the lease accounting changes, that’s changing.

  Not having lease management tools and controls in place costs you money. Here are just a couple of examples:

  • Accounts payable continues to make monthly payments on outdated leases.
  • You pay for building repairs that are the landlord’s responsibility according to the terms of the lease.

  With lease expenses appearing on financial reports because of lease accounting changes, those at the top of the food chain will be examining lease costs and looking to improve operational efficiency and decision-making.

  Are you prepared to do that? You will be if you’ve chosen the right technology to implement the lease accounting changes.

  Your choice of lease accounting technology is critical

  Until now, most organizations used spreadsheets to handle lease accounting for FASB and/or lease accounting for IFRS. With the new lease accounting changes, both the volume of work and the complexity have increased exponentially as virtually all leases must be brought onto the balance sheet. That means the old methods are no longer sufficient and everyone is shopping for new technology.

  Especially for public companies racing to meet the January 2019 compliance deadline, it’s easy to make the mistake of going with lease accounting software that merely takes data from other sources and spits out the calculations. Doing that may seem simpler in the short term. However, here’s what you’ll find out after the lease accounting changes are complete: having multiple systems for lease accounting and lease management leads to more complexity, more mistakes, and higher costs. Even worse, you’re missing out on the opportunity to improve your lease administration. That’s the real silver lining in this situation.

  A complete lease platform enables process improvement

  What if you could eliminate the mistakes that drive up your lease-related expenses? When you consider the costs associated with high-value property leases alone, it’s easy to see how much wasted money you can reclaim by eliminating overpayments, late fees, and payments that shouldn’t have been made at all.

  An end-to-end lease accounting and management platform helps you put an end to that, by documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms.

  That’s just the beginning. A complete system alerts you about upcoming critical dates related to lease options, so you have the time to make the right decision about executing options. As lease administrators know all too well, making the wrong call, or missing an option date entirely, can be a mistake that can cost millions on just one long-term real estate lease.

  When everyone involved in managing leased assets, handling payments, and accounting for lease payments on the balance sheet is using the same system, you also eliminate data integrity problems that occur when data is moved between systems. You can count on the accuracy of your lease data because it’s updated in real time by those working with leases.

  Preparing for the upcoming lease accounting changes requires you to centralize lease data so calculations can be done and journal entries & disclosures added to your GL. But don’t limit your consolidation of lease data to only what’s required for FASB & IFRS compliance. When you centralize all lease data, including administration information that’s outside the scope of accounting calculations, you create a gold mine of business intelligence that can guide more cost-effective leasing decisions that are aligned with the goals of your business.

  Have you considered integrating with your AP system, streamlining and tracking all expense payments? What about auditing your large expenses, providing warnings or stop payments on landlord overcharges, such as CAM expenses?

  Learn more: Equipment and Property Lease Accounting: Can One System Do Both?

  Expert advice for improving your lease management operations

  With the right tools in place and data at your fingertips, you’re in a great position to transform your operation and save money in the process. But to make those decisions, you need the confidence that comes from experience. Let’s face it: few organizations have implemented major lease accounting changes and transformed lease management operations throughout the company. That’s why, as you work toward implementing the lease accounting changes, getting the advice of knowledgeable experts who have been down this road before is invaluable.

  As you prepare for the lease accounting changes you’ll have the opportunity to work with knowledgeable technology professionals and your accounting partners. However, these experts may not know very much about leases.

  That’s an overlooked benefit to implementing an end-to-end lease accounting and management platform like Visual Lease. We are lease experts, and we can help with every aspect of your transformation. Our decades of experience working with global organizations to implement our technology, and to continuously improve it, enables us to guide our clients toward smart decisions and achieve the results they want.

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

  The post Lease Accounting Changes: The Silver Lining You’re Overlooking first appeared on Visual Lease.]]> https://visuallease.com/7-things-to-consider-before-choosing-a-lease-accounting-system/ Sat, 13 Jan 2018 15:37:21 +0000 https://visuallease.com/?p=2189

  Avoiding Costly Mistakes in the Race for FASB/IASB Compliance.

  

  Don't Select A System Without Considering These Factors…

  1. The Benefits of a Single System

  In the race to get compliant, accounting leaders may assume the easiest way to get the calculations they need is to purchase a simple standalone lease accounting tool and feed it with data from other systems or repositories (such as spreadsheets, or a lease management point solution).

  That approach rarely proves as fast or easy as you expect. For one thing, your lease data probably resides in numerous systems: real estate may have their own point solution, procurement may have spreadsheets with IT equipment data, and many leased assets are still in a PDF on somebody’s computer! Aggregating all that information is complex and requires some manual intervention to ensure data integrity. Without all of the data residing in one place and serving as your “single source of truth,” you’ll face a time-consuming data validation process to ensure information is consistent and not duplicative. And don’t forget, you’ll need to repeat this process on Day 2 to ensure data is synced and your reporting is valid and accurate.

  Selecting a single platform that performs both administrative and accounting functions can allow you to skip secondary data validation and ongoing integration costs. Also, while your immediate goal might be FASB/IASB compliance, don’t make the mistake of overlooking the long term benefits that a single system can provide:

  • It can help you manage your policies with respect to options and contingent/variable rent obligations
  • It can provide the strategic business intelligence needed to shape short and long term real estate decisions to support business needs while reducing occupancy expenses
  • It can directly identify and correct costly payment mistakes.

  The financial benefits of these lease management capabilities can easily dwarf the cost of your FASB/IASB compliance efforts, providing an easy ROI.

  2. Price and Value

  While we’re on the subject of costs, it’s important to understand that there are one-time expenses associated with implementing a lease accounting system for compliance with the new standards. These may include project management, lease abstraction, data collection and the implementation cost for the lease accounting system. Be sure to consider these costs when comparing prices for solutions. Some will cost a great deal more to implement than others. Software license prices can also vary widely. Never rush into a contract (especially a long term one) without digging deep enough into the functionality to understand the value you’re going to get for the price. Ask yourself:

  
  3. How You’ll Get Data into the Lease Accounting Tool

  The simplicity (or complexity) of getting your data into your chosen lease accounting tool is probably the biggest factor impacting how fast your company can become compliant. Before choosing a system, ask these questions to understand the process, resources and time required for this all-important task.

  Will you need to pay an external consultant to manage the process, or is the vendor willing and able to help you manage it?

  Does the vendor have enough lease expertise to help you manage data collection and abstraction? If consultants are needed, it’s important to understand total costs and project duration.

  Is data migration automated, manual or a hybrid?

  It’s essential to have bulk-upload capabilities to speed population of both quantitative and qualitative data. However, relying entirely on automated data entry, especially for complex real estate lease information, will result in data integrity problems. The system you choose should easily accommodate both manual and automated data entry, and the process must include quality checks throughout.

  Does the vendor provide data migration tools and implementation instructions?

  You should expect collecting and validating all your lease data to be challenging, but migrating it into the new system should be straightforward. Migration tools and clear implementation instructions show the vendor’s level of expertise with the process.

  What kind of implementation support you can expect from your accounting partners?

  Will they act as an advisory arm to help you with data collection and cleansing as well as policy decisions? Many accounting and consulting firms are providing clients with a repository database where you can aggregate data and validate before importing in your lease accounting system.

  4. Integration With Your Existing Systems
  Every vendor says their product integrates with other systems. However, to be sure you’ll get the results you expect, it’s up to you to investigate the depth and details of the integration. You may want the data from your lease accounting system to feed multiple tools and enterprise systems.
  Many organizations (especially multinational organizations and those with multiple subsidiaries) will need the following integration capabilities:
  • Ability to create journal entries, including multiple GLs
  • Ability to integrate with common ERP and AP systems, such as SAP & Oracle
  • Flexible APIs and XML capabilities for unique integrations
  • Integration with modern communication platforms, from Outlook to Slack, for alerting users about critical events and actions
  • Ability to feed business intelligence systems that provide high-level dashboards for the C-suite
  • Ability to bolt onto an IWMS or lease administration system to add seamless lease accounting functionality to a legacy database
  5. Drill-Down Reporting Capabilities

  At the end of the day, you need your lease accounting system to provide essential reports with reliable data and accurate calculations. Certainly you’re anxious to see standard FASB disclosure reports, financial variance and future expense reports. Systems that can’t provide those basics won’t make your short list. However, it’s in your best interest to look deeper.

  To get the most benefit from your lease accounting system, you’ll want the ability to easily “slice and dice” financial data in unlimited ways. We’re talking about customizing reports according to your terminology, reporting schedule and business practices. There are many situations where you’ll want the ability to easily create ad-hoc and drilldown reports, or make adjustments to predefined reports, such as

  • Fiscal year or quarterly reports
  • Drilling down into expense obligations by region, organization, cost center, asset type and other variables
  • Performing currency conversion and analyses
  • Evaluating KPIs and metrics for fixed assets

  Being forced to lean on the vendor or a consultant every time you need an adjustment or new report will not only slow you down, but also add considerably to the cost of using the system.

  
  6. Your Obligations Under the New Standards

  At a high level, implementing ASC 842 and IFRS 16 seems simple enough: gather all your lease information and feed it to your balance sheet. However, there are complexities you must understand at the outset so you know exactly what data you need to gather and policy decisions you need to make. For example, in some cases you’ll need to decide exactly what constitutes a lease. You’ll need to extract embedded lease information within service contracts.

  If you have not already done so, now is that time for a discussion with your audit advisors to learn exactly what you will need to do to be compliant with the new standards. Fully understanding what’s required will guide you in making smart decisions and plans upfront, and help you avoid time-consuming and expensive surprises later on. With those decisions and plans in place, you’ll better understand what features you need in a lease accounting system.

  7. Your Plan for Day 2

  While your financial leadership may be laser-focused on getting a lease accounting system live and “flipping the switch” to report in the new format, don’t make the mistake of failing to consider Day 2: your ongoing usage of the system. These are some key factors that will impact how well your lease accounting system works for you, Post-implementation.

  User Experience. At this stage of the game when you’re primarily concerned with getting data into and out of a lease accounting system, you may not take a close look at how easy (or difficult) it is to work within it. After you go live, this becomes a much bigger issue.

  • Leases change regularly and need to be updated. How many screens will you have to wade through to find the field to modify?
  • Is information entered once and used throughout, or entered in multiple places, resulting in data integrity problems?
  • How easy is it to produce quarterly and annual reports?
  • Will you need to hire experts or invest a lot of time and money in training every time you add new users?

  Flexibility. There’s no such thing as a cookie-cutter company. It’s virtually certain that you’ll want to make changes to any lease accounting system so that it operates according to the way you do business. At a minimum, you’ll want the system to accommodate your fiscal calendar and reporting schedule. You may work with multiple currencies. You may need to adjust interest rates depending on asset type, useful life or location, or have the ability to override global rules (related to discount rates or capital/operating lease tests, for example). How easy is it to make those changes? If those things are difficult or impossible, imagine what you’ll go through to make major changes to accommodate an acquisition or a reorganization. Easy configurability is not a nice-to-have, it’s a necessity

  Audit Support. During an audit, the last thing you want is to be scrambling to answer questions about how numbers were calculated and the details of policy decisions. Your lease accounting system should provide easy access to supporting data behind FASB quantitative and qualitative disclosures via drill-down capabilities.

  About Visual Lease

  Visual Lease is a leading provider of lease accounting and lease administration software. Our software will help get your organization compliant with ASC 842 and IFRS 16 requirements. The Visual Lease platform also provides and easy-to-use Day 2 solution with its lease management capabilities and infrastructure. The system enables organizations to quickly and easily manage their lease portfolios, define and track specific lease clauses, proactively manage critical dates (such as renewal options), and visualize your asset portfolio! Request a demo of Visual Lease today

  The post 7 Things to Consider Before Choosing A Lease Accounting System first appeared on Visual Lease.]]> https://visuallease.com/lease-portfolio-management-policies-procedures-to-reduce-risk/ Thu, 04 Jan 2018 08:00:58 +0000 https://visuallease.com/?p=865 Because of the new FASB and IFRS lease accounting changes, leases are an increasingly visible part of your organization’s financial reporting. Leases are now being carefully scrutinized by everyone, including...
  The post Lease Portfolio Management: Policies & Procedures To Reduce Risk first appeared on Visual Lease.]]> Because of the new FASB and IFRS lease accounting changes, leases are an increasingly visible part of your organization’s financial reporting. Leases are now being carefully scrutinized by everyone, including financial leadership, real estate strategists, procurement teams and external auditors, because the risks associated with poor lease decisions have suddenly been magnified. That’s why, as your organization prepares to comply with the new lease accounting rules, lease portfolio management and oversight are more important than ever before.

  When we talk about lease portfolio management, in the past that meant real estate. Now property leases are only one component of your company’s lease portfolio management equation. Leases for every conceivable type of asset must be accounted for, which requires standard procedures and controls for managing the leases. While some organizations may have these in place for high-value real estate leases, very few have standard policies and processes for equipment lease portfolio management. And those that do exist are probably not implemented uniformly throughout the organization.

  Related article: Equipment and Property Lease Accounting: Can One System Do Both

  While your accounting teams are preparing for the lease accounting changes, now is the time to put lease portfolio management policies and procedures into practice across all teams that handle lease portfolio administration.

  Policies and procedures organizations will need to implement for lease portfolio management

  Centralize lease data

  Getting compliant with the FASB & IFRS standards will, for most companies, require you to move all your lease data into a central repository that will feed lease accounting calculations, journal entries and disclosures to your GL.

  While you’re figuring out how to get all the lease data you currently have into a new system, make sure you create policies and procedures for adding new leases once you’ve implemented your new software. Especially for equipment leases that were never tracked before, procurement and IT groups that obtain and maintain these items will need to be trained on how to enter new lease data into the lease management & accounting system.

  TIP: Training many new people on new technology can be a burden. Your best bet? Choose intuitive software that’s simple to understand and use without extensive training.

  Create an audit trail

  Property leases in particular can have many changes throughout the course of the lease term. Not only must every change be recorded in your lease management and accounting system, but with just about every global lease being tracked, there are many people involved in making changes. That means you must put policies and procedures into place to track change approvals and submissions. You’ll need these in case of questions or problems with day-to-day lease administration and also in the event of financial audits.

  TIP: Make sure your lease accounting software can support your audit trail, with drill-down capabilities that link data to supporting documents and fields to track changes and approvals.

  Standardize lease requisition and monitoring

  Before the new lease accounting standards were announced, most leases (especially your equipment lease portfolio) were hidden away in file drawers. As a result, companies had little reason to establish consistent processes for lease requisition and approval. Monitoring lease changes probably didn’t happen at all.

  Now that you must roll up lease data for inclusion on the balance sheet and in financial reports, having accurate and consistent data is essential and your lease portfolio management practices must be expanded and organized. Every group that’s involved in acquiring and maintaining leases should follow standard practices for lease negotiations, processing new leases, documenting lease changes, and handling lease terminations.

  TIP: Because lease changes now significantly impact your financial reporting, make sure your lease accounting software has automated re-measurement tracking.

  Create lease vs. buy guidelines

  The balance sheet impact of the new lease accounting changes is a concern for many organizations. Your decisions about how best to acquire and finance assets are more important than ever. Especially for large organizations with many departments and people involved in acquiring assets, providing guidance into the decision making process can have a positive impact on the company’s financial picture.

  TIP: When you have one system that serves as a central source of truth for ALL lease data, you’ve got an invaluable source of intelligence for lease portfolio analysis that can help you craft those guidelines.

  Establish internal controls

  Documenting standard operating procedures around lease portfolio management is only half the battle. You must put internal controls in place to monitor compliance with these processes across your organization. With lease accounting on the balance sheet and now subject to Sarbanes-Oxley compliance, there’s no margin for error.

  TIP: Your lease management software can actually help you monitor compliance with lease policies. For example, Visual Lease has an audit tool that identifies lease payments that fall outside parameters that you set. This type of tool helps you identify mistakes, and significantly reduce lease expenses in the process.

  5 steps to transforming lease portfolio management

  Overhauling your processes and procedures related to lease portfolio management may seem like a daunting task, but doing it now will save you big headaches down the road. You’ll also be in the best position to take advantage of your centralized lease accounting data to make better decisions and optimize expense for leased assets.

  1. Start by assembling a high-level team, including your CFO, Controller, senior accounting managers, as well as heads of corporate real estate and procurement.
  2. Assemble the resources to understand and analyze how different groups are handling lease portfolio management currently.
  3. As your organization begins pulling together lease data for FASB and IFRS compliance, the cross-functional leadership team should develop the related policies and procedures that need to be implemented across the organization to support ongoing lease portfolio management.
  4. Make a transition plan to roll out the changes throughout all affected teams, and get everyone up to speed on the new lease portfolio management policies and processes.
  5. Choose the right technology to make lease portfolio management easier. In addition to the tips mentioned above, the critical factor for reducing risk, cutting costs and maximizing productivity is having one system to handle ALL your lease portfolio management and accounting tasks.

  Are you still looking for the right lease management and accounting technology for your organization? Request a Visual Lease demo today.

  

  The post Lease Portfolio Management: Policies & Procedures To Reduce Risk first appeared on Visual Lease.]]> https://visuallease.com/equipment-property-lease-accounting-can-one-system-do-both/ Thu, 14 Dec 2017 08:00:24 +0000 https://visuallease.com/?p=831 As organizations are preparing to adopt the new FASB and IFRS lease accounting standards, virtually all must choose new technology to facilitate the process. And many are under the assumption...
  The post Equipment & Property Lease Accounting: Can One System Do Both? first appeared on Visual Lease.]]> As organizations are preparing to adopt the new FASB and IFRS lease accounting standards, virtually all must choose new technology to facilitate the process. And many are under the assumption that they need two new systems: one to manage property lease accounting and another to handle equipment lease accounting.

  The truth is, there is no reason to complicate the situation further than it already is. In fact, there are significant benefits to choosing one platform that can do both accounting for equipment leases and accounting for property leases.

  In this article, we’ll explore why this myth has developed in the first place, as well as the different capabilities that are needed for equipment lease accounting and property lease accounting. Armed with that knowledge, you’ll be in the best position make your life easier (and make the smart choice for your business) by choosing one solution that can do both.

  Why are so many solutions fractured?

  The release of the new lease accounting standards has (not surprisingly) lead to a huge influx of new lease accounting tools. Many of the vendors have chosen to focus on equipment lease accounting because that really didn’t exist prior to February 2016; equipment leases did not need to be represented on the balance sheet or included in financial reports. Then there are the vendors who have been specializing in property accounting software for some time. Both of these groups have been emphasizing the differences between equipment lease accounting and property lease accounting to get companies to believe they need separate solutions.

  It’s quite true that there are significant differences, which we will explain here. But if you know what to look for, you can choose one system that does both accounting for leased equipment and accounting for property equally well. And you get the benefits of a simpler solution that provides a single source of truth.

  The differing complexities of equipment lease accounting and property lease accounting

  We like to explain the difference between equipment lease accounting and property lease accounting in terms of vertical vs. horizontal complexity.

  A property lease is complex horizontally because it can have a many different structures and data points, along with numerous data streams, critical dates, options and expansions. Not to mention many more source documents. Property leases change all that time, so that adds even more horizontal complexity: you need mechanisms in place for updating your property lease accounting as things change.

  Learn more: FASB Lease Data You Can’t Get From the Lease Abstraction Process

  Equipment leases tend to have more vertical complexity. A lease for an automobile or a laptop has fewer data points and requires less interpretation for performing calculations. However, equipment leases tend to be organized in a vertical structure, with a master lease that must be tied to hundreds or even thousands of sub-leases, or embedded leases, for individual items.

  Property lease accounting: features to look for

  When you think in terms of numbers (as accountants tend to do), understanding the relative importance of property and equipment leases in your accounting can be misleading. That’s because, with a few exceptions (such as retail companies), most organizations have far more equipment leases than property leases. But here’s what you can’t overlook: the value of those property leases, and their impact on your financial statements under the new standards, is far greater.

  That’s why it’s critically important that your lease accounting technology vendor demonstrate expertise with real estate leases. How can you see that? By looking for the following:

  • The ability to accurately account for a variety of lease payment structures, such as percentage/variable rent.
  • Mechanisms that automate lease accounting adjustments when property leases change during the lease term or are renewed.
  • Lease management capabilities, including critical date alerts and integration with your A/P system to automate payments.
  • Lease abstractors with years of experience and knowledge about the complex terms of property leases, so you can be sure you extract the correct data from your source documents.

  In short, you want a single source of truth that’s kept accurate and up to date by the people who work with your leases every day. With that in place, you eliminate the delays and mistakes that can happen with data moving around between different systems.

  Equipment lease accounting: features to look for

  As we said earlier, an equipment lease is not all that difficult to account for. What’s complicated is the sheer number of them, how they are related to one another, and deciding which ones you are required to report on. Here’s what to look for in equipment lease accounting software:

  • The ability to manage parent/child relationships for asset leases.
  • Tools that make data migration quick and easy.
  • Lease classification functionality that automatically classifies your leases and applies the correct accounting treatment.
  • Easy customization, so you can adjust fields and reports for all the types of assets you lease: everything from airplanes to manufacturing equipment to oil pipelines.
  • A built-in audit trail that ties entries back to the original sources (especially for embedded leases).

  How you benefit from one complete solution

  Today’s APIs make it possible to connect data from all kinds of systems. Your lease accounting solution must integrate with your ERP and potentially multiple GL and AP systems. However, there’s no need to make things more complex than they need to be by keeping lease data in two or even three separate systems.

  With all your lease data in one unified platform, you have a single source of truth and an end-to-end solution that you can always count on to be accurate and up to date. Plus you eliminate the costs required to maintain multiple systems for equipment lease accounting and property lease accounting.

  Here’s the really surprising part: you can pay less for Visual Lease’s complete solution than you might for a partial one. Want to see how it works? Sign up for a demo.

  The post Equipment & Property Lease Accounting: Can One System Do Both? first appeared on Visual Lease.]]> https://visuallease.com/financial-reporting-conferences-recap-fasb-ifrs-accounting/ Thu, 30 Nov 2017 08:00:37 +0000 https://visuallease.com/?p=795

  

  In recent weeks, we’ve been participating in some insightful events with corporate Controllers, CFOs, CAOs, global accounting firms, and other members of the financial leadership community, including the Controller Summit in Boston, FEI’s Current Financial Reporting Issues Conference in New York City, and CBI’s Lease Accounting – Implementing ASC 842 event in Philadelphia.

  At every event, there were common threads discussed concerning the disruption of financial reporting. Not surprisingly, many of these were related to the impact and implementation of the new lease accounting standards, specifically FASB accounting and IFRS accounting concerns. Technology issues related to adopting the new lease standard were also a hot topic of conversation.

  In this article, we will summarize some of the key takeaways about the changes to FASB & IFRS accounting for those of you who were unable to attend.

  Top Lease Accounting Issues for Financial Leaders: FASB Accounting & IFRS Accounting

  Much of the discussion about the impacts of implementing the new lease accounting standards centered around technology issues and specific accounting challenges.

  Technology concerns

  According to Daryl Buck, National Managing Partner of Accounting Advisory Services for Grant Thornton LLP, 90% of companies will need to implement new software in preparation to comply with the new lease standard. Currently half of these companies have not yet selected a software solution for FASB or IFRS accounting. Here are some common areas of concern.

  The demo always works

  Software typically looks great during a 30 minute demo. When you are under the gun to make a choice, you may fail to adequately consider how everything will work with your your data, your policies and procedures, and your specific accounting issues. Implementation might not be discussed at all, yet this becomes a critical pain point for many companies.

  Lesson: Carefully investigate what it will take to get your data into your chosen software. Solutions need to go the extra mile to provide migration tools that simplify and speed the process.

  Learn more: Data Collection Tips for ASC 842 & IFRS 16 Compliance

  Plan for customization

  There’s no such thing as a cookie-cutter company. That’s why no solution will work perfectly for you out of the box. This is especially true for business models such as large horizontal enterprises, those with highly decentralized multiple ERPs, and also those needing to comply additional country-specific accounting standards. Systems may require time-consuming and expensive customization. Even more more traditional organizations, nothing will work 100% out of the box.

  Lesson: Plan for customization in your implementation timeline and budget. Ideally choose technology that’s easy to customize and doesn’t require outside consultants.

  Technology providers are not quite ready to handle all the nuances

  While most companies are behind on implementing the new FASB accounting and IFRS accounting standards for leases, even the technology providers haven’t implemented complete support for every aspect of the new lease standard.

  Systems are ready to interact and transact data, handling 90-95% of lease accounting calculations that involve right of use assets and liabilities. However, more complex calculations are still in development for the majority of providers. Examples include:

  • Sale leaseback transactions
  • Re-measurement and lease modification (accounting for changes to lease contracts during the lease term)
  • Currency spot rate accounting (While you regularly refresh currency exchange rates, in some situations you may want to track specific leases at the historical spot rate and report on the delta.)

  Lesson: There may not be a single product that’s currently prepared to handle every single nuance of the new FASB accounting and IFRS accounting standards for leases. Has your chosen provider had a good track record of implementing feature roadmaps on time as promised?

  Lease accounting challenges

  Here are some important challenges your accounting team must be prepared to manage during (and even after) the transition to the FASB and IFRS accounting changes.

  Enhancing key controls

  It’s no secret that validating accounting data and financial entries is critical to your organization’s financial health. That burden has increased significantly due to the new FASB and IFRS accounting standards. That’s because nearly all leases have been brought onto the balance sheet and there are many new treatments for various types of lease agreements and payments. That means more oversight is needed to ensure accuracy of financial reporting. Large global organizations are setting up Centers of Excellence and bringing in experts to implement a broader and deeper scope of internal controls.

  Lesson: Even if you’re not in a position to add an entire team, you’ll need to make sure your organization has the expertise and the bandwidth to expand your current levels of internal control and validation.

  Identifying embedded leases

  One of the most time-consuming challenges for many companies will be identifying and separating out leases that may be part of other contracts such as service agreements.

  Lesson: Again, you’ll need to plan for the time and the expertise needed to comb through every contract to be sure you’ve identified every lease component that you must roll up onto your balance sheet.

  Interpreting FASB accounting and IFRS accounting changes

  For multinational organizations, it’s essential that you fully understand the differences between the FASB accounting standard and the IFRS accounting standard. There are some significant differences in the rules and treatments that you’ll need to plan for.

  Lesson: Of course you’ll turn to your accounting partners for guidance. But be sure you understand all the implications for your reporting before you implement new technology.

  Watch this blog for an upcoming article on this topic. Sign up for our emails to be alerted when it’s available.

  Preparing for Day 2 lease re-measurement and modification accounting

  In the race to get to compliance with the new standards, many organizations are failing to consider Day 2: the ongoing process of reporting based on the FASB and IFRS accounting standards.

  Especially for real estate and industrial applications, leases change regularly. Components are added and expanded. Renewals and other options are exercised. Variable payments must be calculated. Values like Useful Life and Fair Market Value must be reassessed. Anything requiring changes to your accounting entries must be tracked and calculated. You’ll need the ability to automatically change future entries and disclosures while retaining the existing ones during the transition period.

  Lesson: When preparing for the changes, don’t forget to consider Day 2 lease modification requirements. This applies not only to your technology (ideally a single source of truth used by both accounting and lease administration staff) but also to your policies and procedures. That way you can be sure you are always up to date with accurate entries.

  The key takeaway: take action now

  Don’t wait too long to get started implementing FASB accounting and IFRS accounting changes. Many companies will need the help of outside resources to get compliant. The closer we get to the implementation deadline, you may be hard-pressed to get those resources.

  Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

  Did you miss Visual Lease at one of the recent financial reporting events? Not to worry, it’s easy to see our cloud-based lease accounting & administration technology online. Request a demo at your convenience.

   

  The post Financial Reporting Conferences Recap: FASB & IFRS Accounting first appeared on Visual Lease.]]> https://visuallease.com/sale-leaseback-new-lease-accounting-standards/ Mon, 20 Nov 2017 08:00:04 +0000 https://visuallease.com/?p=793

  

   

  This article was co-authored by Razmig Bolkorjian, CPA, Practice Leader at CNM LLP. “Raz” leads the financial service institution practice at CNM and is responsible for leading technical accounting engagement teams, including analysis and implementation of current new accounting standards, such as ASC 326, ASC 480, ASC 815, ASC 840 and ASC 842.

  What is a sale leaseback transaction?

  A sale leaseback transaction, in essence, is when an owner sells an asset and then leases it back through a long-term lease, therefore generating cash flow and retaining use of the asset.

  Sale leaseback transactions have been a popular technique for monetizing long-term appreciated assets, like real estate.

  How does ASC 842 and IFRS 16 impact sale leaseback?

  The new lease accounting standards (ASC 842 and IFRS 16) modify the accounting considerations regarding whether the sale leaseback transaction is a bona-fide sale or a financing, and in certain cases, will affect the pattern of recognizing the gain or loss on a qualified sale leaseback.

  These new accounting rules introduce a shift in the consideration of which transactions qualify as sale leaseback transactions from a transfer of risk and rewards of ownership assessment, to an assessment of control over the underlying assets.

  Here is an explanation of the impact of the two standards on sale leaseback from EisnerAmper, Blog 0816:

  “In order to recognize the sale transaction, the transaction must qualify as a sale under the revenue recognition standards. Under the new revenue standards, the 5 core principles are as follows:

  • Identify the contract with the customer.
  • Identify the separate performance obligations in the contract.
  • Determine the transaction price.
  • Allocate the transaction price to separate performance obligations.
  • Recognize revenue when performance obligations are satisfied.

  A bona-fide contract would possess all of the following criteria:

  • The parties to the contract have approved and are committed to perform their respective obligations.
  • The entity can identify each party’s rights regarding the goods or services to be transferred.
  • The entity can identify the payment terms for the goods or services to be transferred.
  • The contract has commercial substance (risk, timing, or amount of future cash flows are expected to change as a result).
  • It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. An entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due.

  The key provision of the revenue recognition standard for sales treatment is that there must be commercial substance. The sale must result in a complete change of control from the seller to the buyer and there must not be substantive repurchase options tied to the agreement. The buyer must have paid the transaction price or have the ability and intention of paying the transaction price.

  Also worth noting is that the new accounting standards specifically exclude from sale leaseback accounting those transactions where the lessee obtains legal title of an asset, but does not obtain control of the underlying asset before the asset is transferred to the lessor.

  The transfer of control to the buyer/lessor must also be clear in the lease agreement to not include provisions that revert control back to the seller/lessee. Indicators that a customer has obtained control of as asset include:

  • The seller/lessee has a present right to payment
  • The buyer/lessor has legal title
  • The buyer/lessor has physical possession
  • The buyer/lessor has the significant risks and rewards of
    ownership
  • The buyer/lessor has accepted the asset

  It is not required to meet all of the above indicators in order for control to be deemed transferred, and companies should apply judgment to assess all the facts, together and from the perspective of the buyer/lessor, to make the determination.

  Under the new leasing standards for lessees, leases are classified as either financing or operating. Only an operating leaseback would qualify the sale for immediate profit recognition in a sale leaseback transaction. Finance leases would not qualify as a sale lease back transaction because a finance lease effectively represents a repurchase of the asset sold.

  A qualified sale leaseback would be accounted for as two transactions:
  a) one transaction to account for the sale of the assets and immediate profit/loss recognition (if the subsequent leaseback is deemed an operating lease), and
  b) the second transaction to account for the lease.

  This is a significant change from prior accounting rules, which in most cases required profit on qualifying sale leaseback transactions to be recognized ratable over the lease term (provided the subsequent leaseback was classified as an operating lease).

  Below are the criteria for determining if a lease is a financing lease. If the lease does not have any of the stated criteria, it is considered an operating lease.

  • The lease transfers ownership of the underlying asset to the lessee by the end of the lease.
  • The lease grants the lessee an option to purchase the underlying asset and the lessee is reasonably certain to exercise.
  • The lease term is for the major part of the remaining economic life of the underlying asset.
  • The present value of the sum of the lease payments and residual value guaranteed by the lessee equals or exceeds the fair value of the underlying asset.
  • The underlying asset is of such a specialized nature that it is expected to have no alternative use at the end of the lease term without significant modifications.

  In essence, the lease must not be for such a long length of time and of such significant payment terms that it is in substance a sale of the property back to the lessee. The first 4 criteria are similar to the current standards, albeit without the bright-line objective tests. A new criterion has been added in the new standards where the underlying asset must have alternative uses with only reasonable alterations required to release to another lessee. That would preclude certain industrial equipment or certain improved real estate from sale recognition.

  The standard also states that the buyer/lessor would need to classify the lease as an operating lease for their purposes as well for the sale leaseback to be recognized. A lessor would apply the same five criteria as a lessee to determine lease classification, plus the below two criteria (if either criteria is not met, the lessor treats the lease as an operating lease):

  • The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and any third-party guarantees by third parties equals or exceeds the fair value of the underlying asset.
  • It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy the residual value guarantee.

  Under the new standards, both the sale transaction and the lease transaction will need to be recorded at fair value. Since both transactions are typically consummated as a package, the parties could (at least in theory) negotiate off-market terms on the sale and make up for it with off-market terms on the lease. The guidance requires adjustment of these terms to fair value so that the accounting reflects the commercial substance of the transaction; otherwise the seller/lessee ends up with deferred income or prepaid rent and not the intended result.

  Once fully adopted, the new revenue and leasing standards could, if structured correctly, provide opportunistic seller/lessees to “more or less” have their cake and eat it too. Care needs to be taken to ensure that the “more or less” part of the strategy works. A sale leaseback transaction that does not qualify for sales recognition would be considered a financing arrangement. No profit would be recognized, and the seller would retain the asset on its books as property, plant and equipment (as opposed to a right of use lease asset had the transaction qualified for sale leaseback accounting), even though it no longer legally owns the asset. The cash proceeds would be considered a financing obligation(as opposed to a lease liability had the transaction qualified for sale lease-back accounting).”

  We’ll cover other associated topics relating to sale leaseback and the new leasing standards in future blog posts such as build-to-suit topics and more.

  No Rendering of Advice
  The information contained within this website is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant.

  Presentation of the information via the Internet is not intended to create, and receipt does not constitute, an accountant-client relationship. Internet subscribers, users and online readers are advised not to act upon this information without seeking the service of a professional accountant.

  Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law.

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  The post Sale Leaseback and the New Lease Accounting Standards first appeared on Visual Lease.]]> https://visuallease.com/fasb-lease-data-cant-get-lease-abstraction-process/ Thu, 09 Nov 2017 08:00:43 +0000 https://visuallease.com/?p=788

  

  As your organization begins collecting the necessary data to comply with the new FASB lease accounting rules, it won’t take long before you realize that you won’t get everything from the lease abstraction process. While the bulk of data will be found on your property and other asset leases, you will need to look elsewhere for a number of essential data points.

  Keep reading to learn about data points you won’t find in the lease documents and where to turn to get the information you need.

  Look beyond the lease abstraction process for these lease accounting data points

  These are a few examples of items you’ll need to track down outside the lease abstraction process. Your accounting partners will be able to advise you about which data points are essential for you.

  Intention decisions

  In some cases, the FASB new lease standard requires that lessees document their intentions to execute certain lease options sometime in the future. This may also include an intention to terminate a lease early. These decisions can impact some of the data you will need to report. (Your accounting partners can help you understand how these intentions impact your calculations.)

  Obviously, your company’s intentions will never be spelled out on leases, so you won’t get that information from the lease abstraction process. Instead, consult with real estate leaders and other decision makers to learn their intentions related to lease options. When it comes to equipment assets, such as computer equipment or vehicles, your best source will likely be the team that’s using the equipment. That’s one reason it’s important to track location and usage information for equipment assets.

  Lease commencement dates

  Because property leases are often negotiated far in advance of when the lessee takes possession of the space, the lease itself does not specify the commencement date, or the date that the lease starts. Leases are drafted with a future contingent start date based on when space is ready to be occupied, because no one wants to pay lease payments before they move into a space. The lease commencement date is critically important to your lease accounting because many other data points depend on it, including payment dates, dates for payment increases, required notification dates, and even when the lease terminates.

  Often the commencement date is documented in a commencement letter from the lessor. However, this doesn’t always occur and so you may not find the information through the lease abstraction process. In this case, you may need to turn to other sources to determine when a current lease actually began. Here are some recommendations:

  • Your accounts payable records can provide the date when payments began.
  • You may have records of when you took possession that can help you determine the commencement date.
  • For retail locations, look for the date you began showing sales from the register.
  • For a restaurant, find out the date of the grand opening.
  • Again, your advisory partners can help you make decisions about determining lease commencement dates.

  Useful life of assets

  Calculating depreciation requires you to know how long an asset remains useful, or its “useful life.” This is another data point you can’t get from the lease abstraction process, since leases rarely include that information. For organizations that must comply with the FASB new lease accounting rules, you’ll need to look up the U.S. GAAP standard tables for each specific type of asset. While these standards are not new, the requirement to report most leases on the balance sheet is new. So you may find yourself working with asset types that you did not report on previously.

  Fair market value of property and other assets

  Certain types of leases may contain options that are related to fair market value, or the value of an asset as determined by market conditions. For example, a property lease may specify an option to renew the lease at a rate consistent with fair market value. Or, a vehicle lease may specify an option to purchase the vehicle at fair market value at the end of the lease period. Fair market value also can be a factor in classifying leases; if the total value of lease payments exceeds the fair market value of a lease, it may be considered a finance lease.

  Neither the lessor or the lessee knows for sure what the fair market value of any leased asset will be in the future, so you won’t find that value through the lease abstraction process. Real estate brokers can help with fair market value for property by reviewing comparable properties by submarket, building type and tenant type. Always confirm those numbers with your accounting partners before proceeding.

  Related articles:
  Can You Trust AI for Lease Abstraction?
  Data Collection Tips for ASC 842 Transition and IFRS 16 Compliance

  Helpful sources of lease information

  Your accounting partners

  We have mentioned your advisory partners a few times for a reason! Be aware that they should always be your starting point for any questions and decisions about complying with the FASB new lease standard, including the lease abstraction process.

  Internal resources

  Your own accounting teams, real estate lease administrators, asset management and procurement staff can often fill in the gaps left after the lease abstraction process.

  Lessors

  While your internal resources will be a big help, consider going to the best source of record – the lessor. They must invoice lessees to collect revenue, and they also must perform their own lease accounting. In many cases you’ll find that building owners, banks, equipment manufacturers and even service providers can provide you with accurate records beyond what you’ll collect during the lease abstraction process.

  Your lease software

  The new FASB lease accounting standards now require organizations to track many data points that can’t be extracted during the lease abstracting process. As you may have realized, many of these items are operational data. That’s one reason why lease accounting software that only tracks the financial data can leave you with gaps that impact your timeline to compliance.

  Having a more complete lease software solution that tracks ALL the data you need, including lease operation and management information, closes those gaps and reduces the time and complexity of getting ready for FASB ASC 842.

  Don’t hesitate to reach out to us at Visual Lease. We’re lease experts and we’re here to help you through your IFRS 16 or ASC 842 transition.

  **Visit us at these upcoming events to see Visual Lease in action:

  • Controller Summit, Nov 8-9, Boston
  • Financial Executives International (FEI), Nov 13-14, New York City
  • CBI: Lease Accounting- Implementing ASC 842, Nov 15, Philadelphia**

   

  The post FASB Lease Data You Can’t Get From the Lease Abstraction Process first appeared on Visual Lease.]]> https://visuallease.com/data-collection-tips-for-asc-842-transition-ifrs-16-compliance/ Thu, 02 Nov 2017 08:00:06 +0000 https://visuallease.com/?p=618 Think you have all the data you need for ASC 842/IFRS 16 compliance? Think again. Extracting data for ASC 842 transition or IFRS 16 compliance is more than a numbers...
  The post Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance first appeared on Visual Lease.]]>

  Think you have all the data you need for ASC 842/IFRS 16 compliance? Think again.

  Extracting data for ASC 842 transition or IFRS 16 compliance is more than a numbers game. In addition to the dates and payment amounts associated with your leases, there are more complex quantitative data points that will need to be captured from lease documents. Some will need to be calculated based on specific lease terms, such as breakdowns of lump-sum rent payments and CPI increases.

  While the main source of data will be the leases themselves, there are also qualitative data points that won’t be found in the lease documents, but instead might come from your real estate team or lease administration partners. You may also need help from outside resources to understand the legal and accounting implications of all lease conditions.

  The complexity of capturing and aggregating data for ASC 842 or IFRS 16 compliance is exacerbated when you’re not starting from a single source of truth. Before the new lease standards were announced, many organizations had no central repository for lease information. Now that lease data is moving onto the balance sheet, it’s essential that you collect the right data and ultimately gain more visibility about your leases.

  Keep reading to learn what you may be overlooking, as well as the steps to improve the speed and quality of your data collection efforts for ASC 842 or IFRS 16 compliance.

  Data you may be missing for ASC 842 transition or IFRS compliance

  In most organizations, the accounting teams are driving data collection for ASC 842 or IFRS 16 compliance. The problem is, your accounting managers are focused on the numbers and are not lease experts. So, there are going to be lease terms they won’t understand what to do with, and data they won’t realize they need to capture.

  These are just a couple of examples:

  Lump sum rent payments: it’s not enough to capture an all-inclusive monthly payment amount. That needs to be broken down to show what portion is intended as base rent, as well as portions for taxes, insurance and CAM expenses. That detail is not likely to be found in the lease.

  Intentions: If a lease includes an option to purchase at the end, you need to find out if your business intends to exercise that option. Similarly, you need to know if the business may be planning to end a lease early (if you have an office that’s moving to a new building, for example). These intentions must be identified because they now impact the lease assets and liabilities you’ll need to show on the balance sheet for ASC 842 or IFRS 16 compliance.

  3 data collection steps that ensure complete and reliable data

  To avoid overlooking important data, which can undermine your compliance timeline and the accuracy of your reporting, follow these data collection steps.

  STEP 1: Gather and organize all relevant documents

  Simply locating all your lease documents are can be a major challenge for a global organization with hundreds or thousands of leases. You’ll need a strategy for uncovering all records and possibly a mandate from upper management to help you get cooperation from everyone.

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

  For your most complex leases (typically property leases), you’ll need to gather multiple documents, including addendums and commencement letters, in addition to the master lease. Before beginning to extract data, make sure you’ve considered the entire scope of documents associated with every lease and have the most up-to-date and accurate records. You may need help understanding the links between the various documents, so you can tell which include the relevant data.

  TIP: If you’re missing amendments or other records, lessors may be able to help (they are gathering the same data for ASC 842/IFRS 16 compliance).

  Another source of data may prove challenging for accounting teams when it comes to the ASC 842 transition and IFRS 16 compliance: embedded leases within service contracts. If an agreement includes an implicit or explicit asset that you control the use of, such as equipment or vehicles, that may be considered a lease. You’ll need to collect any contracts that might have embedded leases, and also devise policies to help those extracting data to decide what constitutes a lease for ASC 842 or IFRS 16 compliance.

  STEP 2: Collect the right data

  The last thing you want to do is spend lots of time and resources pouring through lease documents, then find out you missed critical information and be forced to go through them again. Get it right the first time with these tips.

  Understand lease terms well enough to extract the relevant data. For example, there may be different ways to calculate payments that are subject to CPI increases, and a close examination of the lease terms is needed to make sure the amounts are correct.

  Be smart about using automated abstraction tools. If humans have trouble understanding lease terms, then AI/machine learning software will also. Automated tools that use optical character recognition (OCR) to recognize words can’t either- they can only extract simple terms. These tools can speed up the process for the easy data, but you’ll need experts to extract and validate complex terms.

  Learn more: Can You Trust Artificial Intelligence for Lease Abstraction?

  Knowing what to extract is just the beginning. You’ll need to make decisions about how to categorize certain terms. With complex leases (again, your real estate leases) there may be terms that are difficult to put into buckets. Turn to resources that can help you understand the legal and accounting implications of all lease conditions. Your technology vendor and accounting advisory partner should be able to help.

  Get data from your business. Certain qualitative data, especially about your intentions around lease options and obligations, won’t be in the lease documents. That’s also true of leased asset details such as physical location and assigned department. You’ll need to turn to your lease administrators and those using the assets to collect this information.

  Don’t forget about data for ongoing lease management. In the rush for ASC 842/IFRS 16 compliance, you may be tempted to collect only what you need for performing calculations. If you do this, you’re overlooking the benefit you stand to gain from this process beyond merely being compliant. Having all your lease data centrally located and easily accessible provides visibility into your leases that you can use to reduce costs and get better value from your property and other assets.

  Gather the data for lease management as a second layer (or have two teams working concurrently) if you’re worried about meeting the ASC 842/IFRS 16 compliance deadline.

  STEP 3: Data quality audit

  Your data collection effort needs to be both complete and accurate to meet your goals for the ASC 842 transition or IFRS 16 compliance. Errors can happen for many reasons:

  • Manual data entry mistakes (“fat finger” errors)
  • Misunderstandings about lease terms
  • Data that doesn’t import correctly (TIP: be sure your lease accounting system will alert you about data that fails to sync or assign)
  • Aggregation issues when the same data from multiple systems doesn’t match

  Those errors add up to reporting results that don’t make sense. You don’t want those mistakes showing up as you get close to your adoption date for the new lease standard. That’s why you need quality checks throughout the data collection process.

  Spot checks. As you bring data into your repository or lease accounting database, conduct spot audits regularly. For example, have someone look at some of your most complex leases and verify that the data in the system is correct, especially items like renewals and increases.

  Validate data against your assumptions. As you reach milestones, roll up your data, run reports and have your leadership review your findings to see if the numbers feel right. If something jumps out as being way out of line, that’s the time to go back and look for incorrect data that could be impacting your calculations.

  TIP: Your lease accounting software should provide the ad-hoc and drill-down reporting flexibility to slice and dice data as needed to perform validation checks.

  Don’t put off asking for help

  Here’s our last bit of advice and it’s important: if you know you’ll need help with any aspect of the ASC 842 transition or IFRS compliance, now is the time to engage the experts. Get your questions answered, get resources for data collection, and choose your lease accounting system as soon as possible. As the deadline nears, it’s likely you’ll wait longer and even pay more for the limited pool of expertise available.

  Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes

  Don’t hesitate to reach out to us at Visual Lease. We’re lease experts and we’re here to help you through your IFRS 16 or ASC 842 transition.

  Attending the CoreNet Global Summit 2017 Nov 5 – 7 in Seattle? See Visual Lease in action at Booth #722.

  The post Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance first appeared on Visual Lease.]]> https://visuallease.com/can-you-trust-ai-for-lease-abstraction/ Tue, 31 Oct 2017 08:00:00 +0000 https://visuallease.com/?p=611 With deadlines looming, organizations are racing to get the lease data necessary to comply with updated FASB ASC 842 and IASB 16 rules — especially the public companies that have...
  The post Can You Trust Artificial Intelligence (AI) for Lease Abstraction? first appeared on Visual Lease.]]>

  With deadlines looming, organizations are racing to get the lease data necessary to comply with updated FASB ASC 842 and IASB 16 rules — especially the public companies that have a deadline of early 2019.

  Artificial Intelligence (AI) technology for lease abstraction can reduce the time is takes to extract relevant data from piles of hard-copy lease documents. Many organizations are evaluating AI over time-consuming manual lease abstraction, which can take as much as five hours per lease to distill all the qualitative and quantitative data points. When you have hundreds or even thousands of leases in need of abstraction, that can add up to a significant amount of time and resources.

  AI tools can help speed up the lease abstraction process to procure the information you need to meet your end goal: gathering essential data for FASB/IASB lease accounting as well as information for ongoing lease management. But can a technology takeover provide the quality you’re looking for? Can your organization rely on AI tools?

  Keep these six points in mind when considering the use of AI.

  1. AI is only as intelligent as you make it.

  AI software must first train itself to understand and decipher the information you need for lease management and compliance purposes. AI tools can be reliable for extracting important data points that are necessary to carry out your calculations — but they are also very literal and will only abstract exactly what they are told. To go beyond this, AI tools require precise training, sometimes involving tens of thousands of documents to get up to speed.

  When relying on AI, your organization may need to enlist experienced human lease professionals to review what the tool has assembled, as the intelligence is far from error-proof. Some tools, for example, may copy any language that matches a key term or overlook synonyms for a key term, which can entirely derail your data collection.

  2. AI isn’t always AI.

  Because Artificial Intelligence is an emerging technology, there are no real standards for using the term when describing a commercial software product. For example, AI and Optical Character Recognition (OCR) are often used interchangeably, though the terms are not synonymous.

  An OCR system can scan hard-copy text — such as typewritten or handwritten PDF — and interpret it into machine readable text. The process results in the rudimentary extraction of key words and phrases. True AI, in contrast, applies machine learning to the lease abstraction process, “training” itself as noted above in order to improve its success rate over time.

  3. Costs and volume may be a barrier to entry.

  There is a volume requirement to conduct proper AI (machine learning). Because it takes time and a significant amount of work to train an AI tool, that can translate into significant upfront costs to develop a lease abstraction process. It may cost thousands of dollars just to begin putting your records on an AI platform, then hundreds per record to perform the lease abstraction. For this reason, AI is only practical for large, complex asset portfolios rather than small- to mid-sized portfolios.

  4. Critical data points: Think beyond immediate needs.

  To perform the calculations you need to be compliant with the new lease accounting standards from FASB and IASB (IFRS), you need to capture a specific set of data points.

  For certain areas — equipment leases or simple leases for example — AI may be a sensible option for extracting very basic data points like dates or payment amounts. But you will likely need manual intervention to capture the more complex FASB data, or important data that you’ll want to extract for legal and administrative purposes.

  To position your organization for better lease visibility for the long term, you should consider a thorough abstract between 150-200 data points, depending on who is going to be reading the abstract and how the information may be used.

  5. Time savings can be deceiving.

  When comparing manual versus AI-driven lease abstraction, be sure to take into consideration the “human intervention” time that will still be necessary for the latter.

  Manual lease abstraction — It could take up to 4 hours for a full abstract of data from a standard commercial lease, while FASB compliance-relevant data may take 1 hour to extract. An equipment lease could take 30 minutes for a full abstraction, while FASB-only data will likely take less than 15 minutes.

  AI-supported lease abstraction — You’ll gain a head start by automating 5-50% of the lease abstraction process. However, keep in mind that a thorough quality assurance (QA) review conducted by trained professionals will still be necessary. And it is quite difficult to put a time stamp on the QA process.

  6. The human element: Still a requirement.

  Despite its automated properties, AI still requires administration by lease abstraction professionals as mentioned above. These are the professionals who review each and dissect each document to identify the multiple documents within, then organize and drill down each individual component.

  AI can take over the organizational task, but the rest is up to a set of eyes that are keenly focused on the details. If there is an error or oversight, AI does not make corrections. That also requires a professional to go into the documents to manually implement changes.

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

  The most effective approach to lease abstraction: Technology & people working together

  Consider a hybrid strategy, using automated tools to meet the easier data requirements and depending on human experts for more complex lease abstracting and data validation. If you are going to take advantage of automated lease abstraction technology, you still want to have professionals administrating it, as well as overseeing the QA and any complications that may arise.

  As you develop your implementation timeline and choose lease accounting technology, you must have a realistic plan for extracting the data from hundreds or even thousands of lease documents. For many, lease abstraction is the most time-consuming part of the FASB/IASB readiness process, but when used in conjunction with a professional eye, AI tools can help speed along the process for many large organizations.

  The post Can You Trust Artificial Intelligence (AI) for Lease Abstraction? first appeared on Visual Lease.]]> https://visuallease.com/start-now-to-spend-less-on-fasb-iasb-lease-accounting-changes/ Thu, 12 Oct 2017 08:00:56 +0000 https://visuallease.com/?p=596 As organizations worldwide prepare to transition to the new lease accounting standards, FASB ASC 842 & IASB IFRS 16, accounting teams are anticipating a heavy workload to prepare for the...
  The post Start Now to Spend Less on FASB & IASB Lease Accounting Changes first appeared on Visual Lease.]]> As organizations worldwide prepare to transition to the new lease accounting standards, FASB ASC 842 & IASB IFRS 16, accounting teams are anticipating a heavy workload to prepare for the FASB & IASB lease accounting changes— and it might be more than they’re prepared to handle.

  The problem? Some organizations are delaying the inevitable. While many have a plan in place for adoption, others are significantly underestimating what’s needed to ensure compliance, including the guidance and support of outside resources. The new IFRS leasing standard will go into effect for most public companies by early 2019. As 2017 winds down, the demand for resources will increase while expert vendor availability tightens up. And you can guess how that will impact the cost of acquiring these resources.

  Getting started on your FASB and/or IASB transition as soon as possible by appointing your internal and external teams, rallying your people and choosing lease accounting software that’s quick and easy to implement can make all the difference in being ready for the IFRS new lease standard by the effective date — and controlling how much it costs to get you there.

  Preparation for FASB & IASB lease accounting changes: No better time than the present

  According to a recent article in the Journal of Accountancy, 31 percent of executives say their companies are unprepared to comply with the new Financial Accounting Standards Board (FASB) lease rules changes. Similarly, a survey by PwC and commercial real estate services firm CBRE found almost one-fourth (23%) of respondents admitting that they hadn’t begun their lease accounting IFRS 16 adoption efforts yet.

  The delay is somewhat understandable. Many organizations are still regrouping from the implementation of FASB’s new revenue recognition standard, which applies to annual reporting periods beginning after December 15, 2017, and may not be ready to tackle yet another major FASB-related project.

  However, creating an inventory of your leases will involve many departments beyond simply your accounting team, so you need to be realistic about the time, money and resources it will require.

  Securing internal buy-in for FASB & IASB lease accounting changes

  To be ready for FASB and/or IASB adoption by the deadline, preparation starts with determining the internal bandwidth to be dedicated specifically to the IFRS 16 and ASC 842 transition and putting together a mosaic of what this effort will look like. Consider the following points:

  • Who or what team is going to manage the project?
  • How will you assemble and abstract the data?
  • What resources will you need for implementation and training?

  As outlined in a previous post, your accounting department needs a solid collaboration with real estate, procurement and IT to ensure accurate lease data can be collected, calculated, shared and integrated for complying with the new lease standard. These teams need to work together, drawing knowledge from each department’s expertise, to fill in the missing pieces and create a comprehensive strategy for adoption of FASB & IASB lease accounting changes— including identifying the external resources you’ll need.

  Take your accounting department, for example. Early on, you should seek the guidance of an audit or advisory partner as your first touchpoints to help lay the preliminary groundwork for your adoption plan of attack. Schedule a meeting with your advisory partner or a trusted lease accounting technology vendor.

  • Your advisory partner will give you both information and advice that will help in making policy decisions regarding ASC 842 & IFRS 16 adoption.
  • Your lease accounting vendor can give you an overview of how a system works and provide a look at what data you should start thinking about collecting to get compliant with FASB & IASB lease accounting changes.

  As many organizations are discovering, it takes much more than simply your accounting team to plan for the coming changes.

  Lining up the right external resources

  As time passes, the competition for external vendors — already a limited pool — is exponentially increasing. To make sure your company has the help it needs for adoption of ASC 842 & IFRS 16, it is important to secure your resources now and avoid settling for a less-than-ideal fit when it comes to crunch time.

  The earlier you start the search process, the greater the benefits:

  • More power over scheduling and vendor selection.
  • A better picture of what to expect during the process.
  • Guidance and best practices in terms of the overall project and any integration implications.
  • A clearer understanding of what your policy decisions need to be.
  • More control over your software implementation timeline.

  The benefits of a lease accounting system

  With your teams working together on the FASB & IASB lease accounting changes, is there still a need to purchase new technology? Absolutely. Unless you want the hassle of running calculations every time you need to produce a report — whether quarterly or annually — lease accounting software will improve the efficiency and accuracy of the process by updating and automating recurring reporting. And the sooner you have automation in place, the sooner your company will be ready for FASB & IASB adoption.

  The new standards mean a more complex balance sheet with more data to collect and process, increasing the volume of accounting you need to do. Many companies are adding hundreds of asset leases (at a minimum) onto the balance sheet. A lease accounting system will keep those leases and related data in an accessible, centralized location, allowing you to run calculations and report on your enterprise lease information as needed.

  Lease accounting software will also make the adoption process proceed more quickly, so your staff can return their focus to their primary responsibilities.

  The bottom line? Protect yours

  Make no mistake: the FASB and IASB lease accounting changes call for significant effort — and more complex and time-consuming analyses than many businesses are anticipating.

  With time drawing short for FASB & IASB adoption and expert help becoming more difficult to engage, the process will continue to grow in complexity and cost the longer you delay. By preparing now, and leveraging available technology and resources, you will gain a clearer idea of what to expect in the coming months — and ultimately, save money and gain peace of mind without the last-minute scramble as the deadline nears.

  If you haven’t already, start the discussion today to enact a plan for a smooth adoption of the new standards.

  The post Start Now to Spend Less on FASB & IASB Lease Accounting Changes first appeared on Visual Lease.]]> https://visuallease.com/fasb-lease-accounting-changes-how-to-assemble-your-readiness-team/ Thu, 05 Oct 2017 08:00:06 +0000 https://visuallease.com/?p=594 Changes are coming — is your organization ready? The Financial Accounting Standards Board (FASB) is gearing up to align U.S. standards with global accounting standards, increasing transparency in financial reporting...
  The post FASB Lease Accounting Changes: How to Assemble Your Readiness Team first appeared on Visual Lease.]]> Changes are coming — is your organization ready?

  The Financial Accounting Standards Board (FASB) is gearing up to align U.S. standards with global accounting standards, increasing transparency in financial reporting and altering the way organizations account for their leases. For many organizations, adherence to these new FASB lease accounting changes (ASC 842) or IASB changes (IFRS 16) also creates a greater compliance burden.

  While the liability of adopting new FASB lease accounting changes technically falls onto accounting, the accounting department is not in it alone. Organizations will need to rely on other stakeholders — real estate, procurement and IT departments — to help implement the changes and stay in compliance. By including other stakeholders early in the planning process, your organization will be better prepared for a seamless transition.

  Start by lining up key players to collaborate with your accounting department to achieve and ensure compliance with FASB lease accounting changes.

  Real estate: Your first touchpoint for FASB lease accounting changes

  With the FASB lease accounting changes, there’s a shift happening and real estate figures are hitting the balance sheet. The real estate department, historically in charge of managing and administering those numbers, is a critical source when it comes to identifying your leases and related data.

  The FASB new lease standard will require your organization to provide more data regarding its real estate, so it makes sense that the department should understand what’s needed, why it’s needed and how to make sure it’s done correctly. While real estate might hyper-focus on site selection and facilities management, your accounting department can do their part to make their colleagues more adept on the deeper financial and accounting aspects of real estate. Ultimately, they will have a hand in using, and possibly even managing, the lease accounting system.

  Your real estate department should also know, at a high level, what’s happening from an operating versus capital lease shift perspective and how it is driving a digitization of leases into the financial realm. In an operating lease, the real estate team signs and manages all the leases before the expenses are pushed over to the accounts payable team each month to pay the bills. They never actually hit the balance sheet that accounting manages. So now as we shift into capital leases, the data will go straight onto the balance sheet, bringing accounting into the fold.

  In addition, real estate can provide accounting with guidance and input on different renewal options, how they look or what would work best. Accounting sees the whole portfolio in terms of numbers. But how will that roll into the balance sheet with the new FASB lease accounting changes? From equipment to facilities to real estate, they’re focusing on these elements as data points. But real estate can provide a new perspective on how real estate leases function and offer missing information that hasn’t previously been tracked.

  While there may be substantially fewer real estate leases compared to equipment, in terms of risk and obligation, real estate might represent half of the expenses in your leased portfolio. Financially, there is now a need for a working partnership between accounting and real estate because of the FASB lease accounting changes.

  Procurement: An extra set of eyes

  Whether you’re an accounting executive, a product manager or a salesperson, your priority is your day-to-day tasks. So, if you need a new vendor or a new service, the procurement team is there to assist. Procurement helps evaluate and qualify different vendors as well as the related costs. They guide everyone through the process right down to the signature. In many cases, they’re comparable to a project manager, bringing various teams together to help them make a decision. They help to drive the process or run a project. And they also play an important role in readiness for FASB lease accounting changes.

  Many procurement teams are involved in the existing asset management, whether that’s real estate, office equipment, IT items or maybe even fleet. Chances are, at some point they’ve adopted a system to track and manage those fixed assets. It could be a very basic spreadsheet that’s tracking your fifty property leases and their terms. This is an area where you would want procurement’s involvement with accounting. They have visibility that your accounting team may lack into the other assets or other successes across the portfolio.

  And with an eye on organization and detail, the procurement team may notice an overlap in a lease management and lease accounting projects. Their input can prove to be valuable in terms of ensuring compliance with FASB lease accounting changes.

  IT: The glue that makes everything stick

  It is easy to overlook the fact that real estate is just looking at real estate, accounting is just considering the balance sheets, and procurement is focused on asset management. But the IT department holds all those pieces together. IT is thinking through the components, databases and spreadsheets. How do we get this information to the accounting system? How do we map it to our current cost center’s expense codes so that every single vendor has a pay code attached to it?

  IT understands systems integration. It is IT’s job to ensure that data flows from the source of record — the lease management — to a lease accounting system such as an ERP system. They are heavily invested in how the integration works, investigating all avenues and overseeing a seamless connection.

  IT is an essential piece of tracking, storing and moving critical data. And with IT handling the back-end details, you’ve assembled a well-rounded team to adhere to the FASB new lease accounting rules.

  Ready? Set. Go!

  With the FASB lease accounting changes on the horizon, it takes more than your accounting team to ensure that your organization can effectively integrate information, share data and comply with the new standards. By fostering early collaboration with real estate, procurement and IT, your accounting department can pave a smoother path to adopting the new standards and avoiding compliance penalties.

  The post FASB Lease Accounting Changes: How to Assemble Your Readiness Team first appeared on Visual Lease.]]> https://visuallease.com/companies-progressing-adopting-new-leasing-standards/ Mon, 11 Sep 2017 19:43:35 +0000 https://visuallease.com/?p=588 The new FASB and IASB leasing standards go in effect in 2019. And one of the provisions requires a retrospective accounting of lease costs back to 2017. Recently PwC and...
  The post How Are Companies Progressing in Adopting the New Leasing Standards? first appeared on Visual Lease.]]> The new FASB and IASB leasing standards go in effect in 2019. And one of the provisions requires a retrospective accounting of lease costs back to 2017. Recently PwC and CBRE Group issued their latest report on companies progress on implementing the new standards. The results are troubling. Of the 600 companies surveyed, 23% haven’t started the conversion process, while 52% are in the assessment phase only. Of the 23 Percent, most (73%) are private companies with fewer than 1000 leases and a 2020 compliance deadline.

  There is some speculation that because of the new revenue recognition standard that is coming on line with the new leasing standards, that the new leasing standard may be delayed, although this is unlikely.

  Nearly half of the companies that have begun implementation report that they underestimated the level of effort and resources required. Most of those surveyed say the biggest challenges relate to data collection and systems upgrades.

  Most companies (66 percent) plan to make some type of system change, with 43% reporting that they will acquire a whole new lease management system. About 25% of the companies worry they will run out of time for system installation and data refresh.

  In terms of costs, 43% of companies expect transition costs of less than $250,000, but about half of these companies don’t expect to change their current system.
  Most of the survey respondents (72%) expect to depend on existing staff, while 23% are using consultants. The vast majority of respondents (85%) will use at least four dedicated staff to implement the transition.

  So what did the survey have to say about expected benefits of the new standards? The respondents reported the following:

  • Only one third expect to improve lease reporting
  • 29% didn’t expect any improvements
  • 10% weren’t sure.

  This is a discouraging finding given the enormous effort in time and resources. I suspect that benefits will become more obvious over time.
  Other findings:

  • 66% of the responding companies have formed a dedicated working group to manage the transition process.
  • Few companies have changed their lease/buy evaluation process. Only 4% have revised their criteria for real estate investment, and only 9% for other assets.
  • 13% of the respondent companies expect to renegotiate existing debt covenants.
  • Fewer than 18% have set up new lease accounting processes and controls.

  Conclusion: As expected, the transition to the new leasing standards will require greater effort and resources than initially thought. The fact that system upgrades and data conversion has emerged as the greatest challenge is not surprising. I continue to believe that the unintended consequences of this change have yet to come into focus. Adding 150 trillion dollars in new debt and assets to corporate balance sheets is a mega-change that will certainly affect investor behavior. Time will tell!

  The post How Are Companies Progressing in Adopting the New Leasing Standards? first appeared on Visual Lease.]]> https://visuallease.com/2017616organizational-structures-in-cre/ Fri, 16 Jun 2017 17:49:26 +0000 http://visuallease.wpengine.com/?p=201 How do you organize your CRE department? The structure of the CRE organization should directly correspond to key processes such as leasing, construction, design and facilities management. Organizational structure varies by the size of the real estate portfolio, the type of industry, the level of outsourcing and the geographic dispersion of the real estate portfolio.
  The post Organizational Structures In CRE first appeared on Visual Lease.]]>

  In the last Blog post, I addressed the subject of process management in the context of CRE management. Process management is directly tied to organizational structures. In fact, the structure and staffing of the CRE organization should directly correspond to key processes such as leasing, construction, design, facilities management, etc. Organizational structure varies by the size of the real estate portfolio, the type of industry (retail, financial services, manufacturing, etc.) the level of outsourcing, and the geographic dispersion of the real estate portfolio.

  The latest trends in CRE organizational structures provide insights to the topic.  In a report by the research firm CEB (now part of Gartner), five key trends in CRE organizational structure were identified:

  1.    Most Corporate Real Estate (CRE) functions with a portfolio size greater than 10 million square feet are centralized. CRE functions with portfolios less than 10 million square feet are split between centralized and hybrid (i.e., managed centrally and executed locally). Very few CRE functions are primarily decentralized.

  2.    Few organizations manage activities wholistically at the local level; the most common locally managed activities are facilities and office services.

  3.    Most CRE functions have a threshold project size, above which projects must be managed centrally. For portfolios greater than 10 million square feet, the median threshold is $50,000–$60,000. For portfolios less than 10 million square feet, the median threshold is $100,000.

  4.    CRE functions with portfolios greater than 10 million square feet have had more structural changes in the past five years, with over 90% having at least two changes. CRE functions with portfolios less than 10 million square feet have had fewer changes, with 63% having two or less changes in the past five years.

  5.    Leaders of CRE frequently change organizations. Median tenures for portfolios greater than 10 million square feet is three years, while for portfolios less than 10 million square feet, the median is 1.5 years.

  Most CRE organizations maintain the following organizational disciplines:

  • Real estate negotiation
  • Construction management
  • Design management
  • Facilities management
  • Lease administration
  • Strategic planning
  • Financial analysis

  In many cases, the functional managers oversee and supervise the work of outsourced contractors such as tenant representatives, interior design consultants, construction contractors, etc. And, as mentioned earlier, most of these activities are either insourced or outsourced (or both) and are governed by explicit processes and supported by software.

  Some CRE organizations also have responsibilities for environmental management and physical security. Others have the added responsibility for employee wellness, since most corporate wellness programs focus on health clubs or internal physical fitness facilities. Both of these areas closely align with CRE’s contracting or facilities management responsibilities.

  Professional development and training are key functions that are essential to organizational performance. I would recommend ensuring that staff members include professional development goals in their annual objectives, with a balance between technical and management skills. I would stress communication skills while striving to give staff members opportunities to prepare and deliver presentations. In this regard, I would encourage staff members to present at professional forums such as CoreNet and IFMA. I would also encourage staff members to enroll in professional development courses at these forums.

  Organizational structure and development are key responsibilities of the CRE manager. CRE executives must review their organizational structure periodically and ensure that the organization continues to align with business strategy and customer requirements. Questions to ask include: Do I have the right skill mix? Do we have the necessary reporting relationships and span of control? Have we built good team behaviors? Is there a high level of trust in the organization?  Are the staff members adequately provisioned and supported? These are some of the main questions that the CRE managers need to ask periodically to ensure a high performing organization.

  The post Organizational Structures In CRE first appeared on Visual Lease.]]> https://visuallease.com/2017417searching-for-the-vireos/ Mon, 17 Apr 2017 21:39:18 +0000 http://visuallease.wpengine.com/?p=197 In the latest issue of the LEADER, the official publication of CoreNet, two of my former colleagues, Mike Joroff and Frank Becker, co-authored an article entitled, “Exploit Change and Uncertainty to Drive Corporate Value.” Becker and Joroff collaborated with me on several projects, including Office 88 (Becker-1983) and the Agile Workplace (Joroff- 2003) The authors make the case that many of the assumptions about the office, technology, and work need to be updated and revised to reflect the new trends visible in the global workplace.
  The post Searching for the “Vireos” first appeared on Visual Lease.]]>

  In the latest issue of the LEADER, the official publication of CoreNet, two of my former colleagues, Mike Joroff and Frank Becker, co-authored an article entitled, “Exploit Change and Uncertainty to Drive Corporate Value.” Becker and Joroff collaborated with me on several projects, including Office 88 (Becker-1983) and the Agile Workplace (Joroff- 2003) The authors make the case that many of the assumptions about the office, technology, and work need to be updated and revised to reflect the new trends visible in the global workplace.

  One of the most interesting concepts in the article is the notion of “vireos.” Joroff and Becker define vireos as the opposite of “black swans” which are metaphors that describe hard-to-predict events that come as jarring surprises and have a major impact on the course of the economy or social events (think 9-11). Vireos are objects, actions, and ideas in our current environment that we do not see, but if we did see them they might give us a much better grasp of a possible future. A vireo gets its inspiration from the North American white-eyed vireo, a bird with a melodic song that is very hard to find, unless one actively looks for it hidden in its surroundings. One example of a vireo is the concept of “anytime, anywhere” work style. This was evident at least 25 years ago, if observers noticed how college students used the internet to work virtually anywhere.

  I can think of a number of “vireos” that may impact the workplace of the near future. For example, with the advent of sophisticated robotics, we may see many job functions in corporate real estate be supplanted by robots. I read about the possibility of robo-bosses, robots that oversee and supervise a group of employees like call center administrators. Just as we have autonomous cars, we may witness autonomous buildings, which conduct self-maintenance and repair using sophisticated software and robotic maintenance crews. Robots may replace janitorial staff and other low level worker activities in building operations.

  Another vireo is the use of 3-D video in the marketing of commercial property. Virtual tours of available office space is becoming a standard brokerage marketing tool. 3-D video tours will evolve as a continuation of this phenomenon. Adapting gaming technology in lease negotiations is another vireo. A CRE leasing manager could develop a lease in real time with a broker and a landlord using such applications. Such an innovation could reduce the leasing process by 80%-90%.

  What about facility management? The vireos here are the latent possibilities of the Internet of Things (IoT). With every system and subsystem of the building’s infrastructure having an Internet connection, building management can play a monitoring role only, as the building self-regulates and adjusts within prescribed parameters. And owners will be able to manage and monitor portfolios remotely across vast geographies.

  So what are the vireos in your market and environment? Being alert to emerging trends is a critical skill for the CRE manager, who must constantly “look around the corner” to see what’s coming before it arrives and it’s too late to react.

  The post Searching for the “Vireos” first appeared on Visual Lease.]]> https://visuallease.com/2017310cre-and-business-networking/ Fri, 10 Mar 2017 19:22:22 +0000 http://visuallease.wpengine.com/?p=195 In 1972, when I first took on a real estate management job at Xerox in Chicago, one of my most important tools was my Rolodex. For the younger reader of this blog, I should explain that the Rolodex was a simple filing of business cards or small index cards, arranged in alphabetical order, and containing names, phone numbers, and mailing addresses of service firms, colleagues, and other contacts. I would use the Rolodex at least 2-3 times a day to look up service people who I might need in an assignment or project, or check in with contacts who might help as a reference.
  The post CRE and Business Networking first appeared on Visual Lease.]]>

  In 1972, when I first took on a real estate management job at Xerox in Chicago, one of my most important tools was my Rolodex. For the younger reader of this blog, I should explain that the Rolodex was a simple filing of business cards or small index cards, arranged in alphabetical order, and containing names, phone numbers, and mailing addresses of service firms, colleagues, and other contacts. I would use the Rolodex at least 2-3 times a day to look up service people who I might need in an assignment or project, or check in with contacts who might help as a reference.

  Today we have several automated tools that replace the old Rolodex. Beyond your contact list, you have a myriad of contact resources on the Internet. Networks of contacts provide an invaluable resource for information and support. A well-developed personal business network can provide fast input on various aspects of your responsibilities. For example, you may need a trustworthy opinion on a broker you’re considering to hire for a leasing project. You may need a second opinion on a software application. You may need a local insight on a distant market that is the target of a new leasing project. All these issues and needs can be readily accessed through your personal network.

  So what are the key elements of the CRE business network? My suggestion is to organize your network into categories. I suggest these five categories: 1.) Your organization network. This would include key members in your department and company. 2.) Professional network. This would include associations like Corenet, IFMA, and individuals in the CRE profession. 3.) Industry network. This would include brokers, architects, engineers, in various aspects of the real estate, construction, and building industry. 4.) Social network. This includes friends, family members, school mates and associates that you have a social versus professional relationship with. 5.) Avocation network. This includes friends or contacts in those activities that are a part of your informal life such as health clubs, hobby groups, sports teams, etc.

  There are guiding principles that underscore effective networking. The first principle is one of trust. It’s paramount that you maintain a high level of integrity in your behavior within the various networks in which you’re active. Along with trust and integrity is the issue of reliability and consistency. To prosper in your networks, it’s wise to maintain occasional contact and to “touch base” on a regular basis. For some contacts an annual call is sufficient. For others, a monthly call may be necessary. Networking is a form of marketing, and like marketing, a good networker is a good communicator.

  I strongly urge aspiring CRE professionals to maintain active membership in one of the leading CRE associations like Corenet Global. These entities provide outstanding opportunities for networking and attendance at regional or global meetings is a great place to make contacts and to learn. I made a point of giving presentations on occasion at Corenet meetings. And by doing so you engage the attendees and enhance your personal brand.

  Professional networking is a critical skill and practice for the CRE professional. A good network of various components described above will serve you well as both a professional and a manager. Developing good networking skills and nurturing your various networks over the span of your career will certainly enhance your success and enrich your career with long standing contacts and friendships.

  The post CRE and Business Networking first appeared on Visual Lease.]]> https://visuallease.com/2017223selecting-a-design-service/ Thu, 23 Feb 2017 16:45:48 +0000 http://visuallease.wpengine.com/?p=194          In an earlier blog post I addressed the subject of outsourcing corporate real estate services. One of the key services that is central to the real estate process is the need for design services, typically interior design services. Maintaining a design team internally is expensive and unnecessary. For some organizations having a design professional as a member of the CRE staff is advisable for the purposes of supervising the  design contract firm and evaluating designs in various stages of development.
  The post Selecting a Design Service first appeared on Visual Lease.]]>

  In an earlier blog post I addressed the subject of outsourcing corporate real estate services. One of the key services that is central to the real estate process is the need for design services, typically interior design services. Maintaining a design team internally is expensive and unnecessary. For some organizations having a design professional as a member of the CRE staff is advisable for the purposes of supervising the  design contract firm and evaluating designs in various stages of development.

  So what are the key steps in selecting a design firm? The first priority is to review current office design standards to insure adequacy relative to space efficiency, corporate culture, technology support, and cost. Are the standards supportive of office flexibility and work agility? Are the standards consistent with HR policies? Do the standards support safety and security concerns? Are they reasonably flexible to be applied in different markets and locales? Many CRE managers will engage a design firm to manage the standard update as a preliminary step in selecting a design services firm.

  The scope of the design firm contract will vary by organization, but typically will include the following deliverables:

  ·      Test layouts in support of lease negotiations: Most commercial lease negotiations will require test layouts to insure that various space requirements will fit the floor plan of the subject leasehold.

  ·      Once the site is selected, the design firm will complete preliminary layouts including workstations, conference and training rooms, and specialty areas (such as mail rooms, server rooms, reception areas, and perhaps space for physical fitness, lunch rooms, etc.)

  ·      In many cases the design consultant will work closely with the broker or tenant rep during lease negotiations to insure adequacy relative to work letter, tenant improvement allowances, or other landlord offerings.

  ·      After preliminary designs are approved, the design consultant will complete final designs including color schemes, furniture layout, acoustical designs, lighting schemes, and communication cabling schematics. A key element in the design deliverable will be security provisions such as card key access, closed circuit TV monitoring, fire and perimeter protection, etc.

  ·      For many companies, the CRE team will require input from the design consultant on alternative workplace features such as drop-in offices, collaborative spaces, and other features in support of a mobile workforce.

  ·      For national companies, it will be important to select a design organization with sufficient capacity to support geographically distributed projects to minimize long distance travel. Most of the larger design organizations have geographically distributed offices in the major capital cities. For international firms it’s advisable to contract with design firms that are local to the designated project city. This will insure that the project design will conform with local codes, standards, and covenants. Many European countries have strict environmental and human resource laws that must be addressed in office designs. The local design consultant should address these factors as part of the design service.

  ·      One final consideration: The design firm should insure that final designs are delivered to the client in digital format so that layouts can be imported to the lease database. This will facilitate future planning and link design renderings with lease data.

  Conclusion: Selecting a design firm is a key step in the facility management and leasing process. The CRE manager should invariably follow best practices in the sourcing process to include the development and issuance of an RFP (request for proposal), consulting with other CRE managers and real estate advisors on candidate firms, and then finally applying a disciplined interview and selection process. Over time the selected design firm will learn the priorities and culture of the client CRE organization and apply this knowledge to make the design process more efficient and collaborative.

   

  The post Selecting a Design Service first appeared on Visual Lease.]]> https://visuallease.com/20161027corporate-real-estate-cre-versus-facility-management-fm/ Thu, 27 Oct 2016 20:31:02 +0000 http://visuallease.wpengine.com/?p=188 From time to time clients raise the question of the difference between corporate real estate and facilities management. In essence, they’re asking why we have two different professional designations since they both seem to have the same responsibilities. But the two professions have distinct differences and responsibilities. Here we explore these differences and attempt to bring clarity to the issue.

   

  The post Corporate Real Estate (CRE) Versus Facility Management (FM) first appeared on Visual Lease.]]>

  From time to time clients raise the question of the difference between corporate real estate and facilities management. In essence, they’re asking why we have two different professional designations since they both seem to have the same responsibilities. But the two professions have distinct differences and responsibilities. Here we explore these differences and attempt to bring clarity to the issue.

  Facilities management is primarily an operational role. Facilities managers have the responsibility of managing the day to day operations of enterprise facilities including maintenance, repairs, utilities, energy management,  landscaping, furniture acquisition, and in some cases physical security. Facilities managers are typically members of professional organizations such as IFMA (International Facilities Management Association), which offers training and certification associated with facilities management disciplines.

  Corporate Real Estate (CRE) is distinct from FM in that it is primarily a transactional responsibility with focus on leasing of facilities for the enterprise including office, warehouse, data centers, manufacturing, and research facilities. CRE professionals manage the life cycle of property, beginning with site location, building design, acquisition, disposition, and in most cases leasing versus owning company properties. Over time, CRE has become more strategic in its role as steward of the enterprise portfolio; developing long range plans to insure efficiency and cost effectiveness in the portfolio. In the last decade CRE has assumed the role of workplace manager and developed workplace strategies such as desk sharing, office hoteling, and various mobility strategies such as co-working and telecommuting.

  CRE professionals tend to join associations which focus on real estate management versus facilities management. The most prominent CRE association is Corenet, an international association with tens of thousands of members worldwide. Corenet was formed from the merger of the International Development Research Council (IDRC) and the National Association of Corporate Real Estate (NACORE). Similar to IFMA, Corenet offers professional training and certification in subjects unique to CRE management.

  In many cases, the CRE executive has the responsibility for facilities management and will have a separate FM staff as part of the CRE organization. In addition to leasing the CRE organization will have office design capabilities, engineering, environmental expertise, and IT management capability usually staffed from the IT organization.

  For both CRE and Facilities Management responsibilities, it’s crucial that all staff members have a good knowledge and understanding of the new FASB lease standards. While these standards will be more relevant to the CRE managers, who are directly involved in property leasing, it’s important to recognize that the standard applies to all leasing including equipment leasing. FM managers lease various equipment such as vehicles, maintenance equipment, landscape equipment, etc so FM must be cognizant of the FASB standard as well.

  Corporate Real Estate and Facilities Management are distinct managerial disciplines, but closely aligned. It’s important that the two disciplines collaborate since     FM should be involved in the property leasing operation to provide input on maintenance and repair issues with prospective properties, input on the energy efficiency of the prospective properties, and other building operational factors. It’s wise to have some degree of cross training between CRE and FM; to enhance the level of collaboration based on common knowledge and understanding of the critical success factors for both disciplines.

   

  The post Corporate Real Estate (CRE) Versus Facility Management (FM) first appeared on Visual Lease.]]> https://visuallease.com/2016104charging-back-occupancy-costs-why-its-a-good-idea/ Tue, 04 Oct 2016 19:32:06 +0000 http://visuallease.wpengine.com/?p=187 There’s always a dispute within the organization aboutthe issue of chargebacks, particularly facility occupancy costs. Department heads typically question the need for charging back occupancy costs, since they don ‘t feel they have any direct control over these overhead costs. But occupancy costs are directly linked to staffing, so it’s logical to burden a department with its share of occupancy costs relative to staffing levels. The argument for chargebacks centers on the need for reinforcing cost containment, as well as maintaining a level of fairness in the organization.
  The post Charging Back Occupancy Costs: Why It’s a Good Idea first appeared on Visual Lease.]]>

  There’s always a dispute within the organization aboutthe issue of chargebacks, particularly facility occupancy costs. Department heads typically question the need for charging back occupancy costs, since they don ‘t feel they have any direct control over these overhead costs. But occupancy costs are directly linked to staffing, so it’s logical to burden a department with its share of occupancy costs relative to staffing levels. The argument for chargebacks centers on the need for reinforcing cost containment, as well as maintaining a level of fairness in the organization.

  What are the typical costs included in the chargeback? Certainly rental is a primary cost along with utilities, maintenance, insurance, leasehold improvement amortization, and capital depreciation related to furniture and equipment. These costs should be accessible from the lease management system, and department P&L statement. Usually, staffing numbers are available from the department operating statement. In my experience, the finance department would develop a cost per person, and then charge a department P&L with the product of number of employees times the chargeback rate. In my opinion it’s unnecessary to differentiate space allocations based on different office sizes. A standard cost per person is sufficient for the purposes of chargebacks and avoids arguments over space per person differences.

  Some years ago our group worked with the Institute of Management Accounting in an effort to develop a broader chargeback metric that was called “workpoint accounting.” This metric included both occupancy costs and fully loaded IT costs such as network costs, prorata share of equipment costs, etc. The idea behind this broader metric would be to account for cost per person regardless ofwhether employees were assigned a workstation or whether they worked on a mobile basis. The effects of this chargeback were quite compelling and made a strong financial case for telecommuting primarily as a result of reduced occupancy cost per person. At the time, the Agile Workplace project at Gartner did several case studies using the Workpoint accounting metric. I recall that in the case of Gartner’s headquarters in Stamford, several scenarios assuming different levels of desk sharing and telecommuting reduced the cost per person dramatically from $19 K per employee down to $15 K per employee. (Total occupancy plus IT costs)

  Charging back occupancy costs has several benefits:

  ·      Provides incentives to conserve space.

  ·      Provides metrics to analyze desk sharing and telecommuting strategies

  ·      Provides benchmarks to analyze occupancy costs across the portfolio.

  ·      Provides a tool to plan new facilities based on headcount projections

  ·      Identifies disparities across different department occupancies; and exposes space inefficiencies.

  Conclusion: Occupancy cost chargeback, is an effective tool for allocating overhead costs to different staff groups. Some organizations strive to develop a P&L statement by department, and having a cost component for occupancy insures a complete picture of profitability. But chargebacks assume that the organization has a robust lease management systemto identify space, and associated leasing costs. It also assumes the organization has an effective human resource system that tracks staffing levels by location.

   

  The post Charging Back Occupancy Costs: Why It’s a Good Idea first appeared on Visual Lease.]]> https://visuallease.com/2016922sodexo-study-understanding-the-image-of-cre-as-a-profession-and-career-path/ Fri, 23 Sep 2016 00:22:00 +0000 http://visuallease.wpengine.com/?p=186 In March of this year, Sodexo released a study of the corporate real estate profession, focusing on its image and value as a viable career path. Having practiced in the profession for over twenty-five  years, I experienced first  hand the challenges and rewards of corporate real estate as a junior manager, a senior executive and as a broker and consultant . For many years, corporate real estate didn’t enjoy the cache or prestige of other corporate functions such as marketing, finance, and even Information Technology. But this is changing with the advent of new leasing standards and workplace strategies.  So it was with this personal back ground I took a special interest in the Sodexo survey and report.
  The post Sodexo Study: Understanding the Image of CRE as a Profession and Career Path first appeared on Visual Lease.]]>

  In March of this year, Sodexo released a study of the corporate real estate profession, focusing on its image and value as a viable career path. Having practiced in the profession for over twenty-five  years, I experienced first  hand the challenges and rewards of corporate real estate as a junior manager, a senior executive and as a broker and consultant . For many years, corporate real estate didn’t enjoy the cache or prestige of other corporate functions such as marketing, finance, and even Information Technology. But this is changing with the advent of new leasing standards and workplace strategies.  So it was with this personal back ground I took a special interest in the Sodexo survey and report.

  In a few words, the study did not reveal many surprises. Less than half of the respondents (43.8%) were end users, while the balance were service providers, brokers, and other players in the real estate industry. Nearly 70% of the respondents were male, and the vast majority were seniors (ages 50-59). One surprise was the response to the question: What are  the most important skills in a CRE career? The answer: not technical skills, but interpersonal skills (93%), leadership skills (75%), and analytical skills (74%).

  In terms of compensation, the respondents were generally satisfied with their compensation (54%) while 22% reported initially low salary, but rapid growth. The respondents were generally satisfied with the fast pace of CRE as a career, as well as its flexibility, work hours, and work life balance.

  In terms of leadership, the respondents were generally dissatisfied with leadership development with 45.2% agreeing that “the CRE profession is in need of strong leaders.” However the respondents agreed that “there is an opportunity within the CRE profession to become a leader,” (52.9%). The other interesting finding is that the respondents agreed that the profession offered long term tenure (57.3%) and was not considered to be a transitional or intermittent career move (60.3%)

  In most cases the respondents felt generally satisfied with their image in their organization and the broader market place. They felt appreciated within the department, by external clients, and within the corporate organization.

  In general the respondents were dissatisfied that their function had received any degree of promotion or publicity in company media, news releases, web pages, etc . In essence the CRE function was invisible, and kept low key. From my own experience, this lack of exposure in company media, was probably linked to a concern about negative press about real estate, its impact on the environment, its cost, etc. In summary the report put forward a series of recommendations to promote the CRE profession in the broader labor market including “better emphasis on accreditation and education,” better links to the community, ”focused media on what CRE means from a career standpoint.”

  The report concluded with a series of insights and implications. The more interesting findings included:

  ·      Soft skills remain more important than technical skills

  ·      Work-life balance is excellent but offset by the industry’s fast pace.

  ·      CRE is in need of leaders but provides opportunities to grow and advance

  ·      There is a need for greater innovation

  ·      There is a high level of knowledge and appreciation of the CRE profession among clients and the corporate organization

  ·      The CRE profession offers many opportunities for personal growth

  My bottom line on the report: no surprises but encouraging indicators that the CRE profession is maturing and becoming more self-aware as a long term career option.

  Click here for a copy of the report. 

   

  The post Sodexo Study: Understanding the Image of CRE as a Profession and Career Path first appeared on Visual Lease.]]> https://visuallease.com/201696the-future-of-corporate-real-estate-an-alternate-view/ Tue, 06 Sep 2016 18:38:02 +0000 http://visuallease.wpengine.com/?p=185         In June of this year, Corenet Global published a report entitled, “The Future of Corporate Real Estate.” The report covered several major trends which would influence the corporate real estate function. Such trends as sustainability, advanced information technology, globalization, the “gig economy”, urban development, workplace changes, etc. would all have a major impact of the future of corporate real estate.
  The post The Future of Corporate Real Estate – An Alternate View first appeared on Visual Lease.]]>

            In June of this year, Corenet Global published a report entitled, “The Future of Corporate Real Estate.” The report covered several major trends which would influence the corporate real estate function. Such trends as sustainability, advanced information technology, globalization, the “gig economy”, urban development, workplace changes, etc. would all have a major impact of the future of corporate real estate.

  These trends will certainly have an impact, but I suspect there are unforeseen changes which may emerge that will affect the corporate real estate profession at its core. Here are five developments that may have an impact:

  ·      CRE becomes the over-all contract manager of the enterprise. CRE deals extensively today with contracts, particularly lease contracts, construction, architectural services, etc. As lease and contract management software evolves, it is quite likely that CRE could become the central manager of all contracts including IT contracts. This will be a sea change for the profession and will have profound implications for organizational structure and responsibilities. It’s possible that CRE and IT could merge into a single asset management entity. There has been some evidence already; particularly with firms that are IT intensive, and see efficiencies in having a single point of control for all contracts.

  ·      The entire CRE function becomes a candidate for wholesale outsourcing. Companies want to eliminate non-core functions wherever possible, and real estate and facility management have been the target for major outsourcing over the last two decades. Large global service firms like JonesLangLaSalle, and Cushman & Wakefield have the resources, coverage and technology to manage all aspects of the CRE function, and it’s perhaps only a matter of time when enterprise management adopts a total outsourcing model.

  ·      Many of the CRE tasks will be automated, through the use of sophisticated systems, natural language recognition software, and various uses of robotics. Any task that is repetitive will be eligible for automation solutions. It’s conceivable that 70-80% of the leasing process will be accomplished by an automated process, so that the time and effort to conclude a commercial lease contract will be hours rather than today’s days and weeks. Consider how the mortgage process has been automated like “Rocket Mortgage” which offers “push button” mortgage services.

  ·      The smartphone becomes the central tool for virtually all CRE activities and data management. The CRE executive will be able to retrieve data on virtually all aspects of the enterprise portfolio. And data input will a simple matter in most cases of scanning, or voice input.

  ·      Security and Safety will surpass sustainability as a CRE priority. With the possibility of a major terrorist attack like 9-11, senior management will double the resilience of the enterprise, and much of the security upgrades will be the responsibility of CRE. This will be particularly the case in global markets such as mainland Europe and Asia.

  These developments are admittedly speculative, but possible. CRE represents a major cost center, asset class, and influence on workforce recruitment and productivity via workplace strategies. One thing’s for certain: change will happen in ways unimaginable today. Planning for the unexpected is becoming a core competence for the wise CRE executive.

  The post The Future of Corporate Real Estate – An Alternate View first appeared on Visual Lease.]]> https://visuallease.com/2016727some-thoughts-regarding-workplace-security/ Wed, 27 Jul 2016 19:44:49 +0000 http://visuallease.wpengine.com/?p=183 Security and safety is now high in the minds of CRE managers, because of the eruption of violent terrorist attacks worldwide. It seems a day doesn’t go by when some violent outbreak takes the lives of multiple victims. In many companies the CRE executive is responsible for physical security and thus, must develop a plan for insuring the safety of people and assets in the workplace. Typically the IT department has responsibility for information security, but it’s wise for the CRE executive to coordinate with the CIO on security. So what are the key priorities that need to be addressed in a workplace security plan?
  The post Some Thoughts Regarding Workplace Security first appeared on Visual Lease.]]>

  Security and safety is now high in the minds of CRE managers, because of the eruption of violent terrorist attacks worldwide. It seems a day doesn’t go by when some violent outbreak takes the lives of multiple victims. In many companies the CRE executive is responsible for physical security and thus, must develop a plan for insuring the safety of people and assets in the workplace. Typically the IT department has responsibility for information security, but it’s wise for the CRE executive to coordinate with the CIO on security. So what are the key priorities that need to be addressed in a workplace security plan?

  ·      Perimeter security- It’s helpful to think about physical security as a series of concentric circles. The outer most circle will define the outward most dimension of physical access. In most instances, this would be the front entrance to the office but some facilities are situated on a campus, and thus, access may extend to the parking lot or even a general front gate of the campus.  For most office locations the front entrance will be the primary point of access, and would require some measure of control, either a card reading device in combination with a receptionist during normal business hours. 

  ·      All employees are provided with an ID card that also serves as a key to enter via a card reading access point. Some companies require both a card reading and pass code to allow ingress.

  ·      The next layer of security is for controlled access to sensitive areas within the office area such as server rooms, records storage, mail rooms, or other areas that contain business confidential information. These areas will require card access, programmed for specific individuals.

  ·      The security system is usually both an access control and fire and smoke detection system.  The CRE executive will plan on periodic drills to test system integrity as well as prepare workplace staff for appropriate evacuation protocols.

  ·      Security standards and procedures. Most likely the human resources department will be responsible for developing and maintaining security standards, but the CRE executive will need to insure that physical security is addressed in the procedures. Such procedures will define levels of security, access provisions,  and disaster recoveryprotocols. In terms of disaster recovery, it’s wise to conduct periodic drills to prepare employees for “what if” scenarios. I recall the 9/11 attack in NYC and how one company evacuated its staff to a disaster recovery siteand was fully operational within hours after the attack.

  ·      Work-at-home security and safety. Many companies now provide for home working, and thus, must be mindful of security and safety provisions. Employees must be guidedto insure a safe and secure work area at home. This would include the ability to secure company confidential informationand company assets such as laptops, printers,etc. I recall that the HR department would require at leastone inspection of the employee’s home work area for both security and safety compliance. This was required by the company’s insurance provisions.

  Summary: Workplace safety and security is a top priority for the CRE executive. In most cases the building owner will provide the necessary perimeter and fire detection technologies. But the CRE executive must insure that interior office security and safety is covered along the lines outlined above.  Having a security plan and conducting periodic drills will insure that most security and safety risks are adequately addressed. 

  The post Some Thoughts Regarding Workplace Security first appeared on Visual Lease.]]> https://visuallease.com/2016620cre-organizational-models/ Mon, 20 Jun 2016 23:32:48 +0000 http://visuallease.wpengine.com/?p=179 In the last several Blog posts, I’ve explored the various steps in becoming a CRE executive.  Today I want to address the question of CRE organization. There is no one organizational model that is ideal. But there are various structures thatfit the needs of most business entities.
  The post CRE Organizational Models first appeared on Visual Lease.]]>

  In the last several Blog posts, I’ve explored the various steps in becoming a CRE executive.  Today I want to address the question of CRE organization. There is no one organizational model that is ideal. But there are various structures thatfit the needs of most business entities. Below I explore three popular models:

  Functional: Here the organization is structured around the major disciplines needed to manage a CRE portfolio. These would include design, those actions needed to create the interior layouts for a particular office location. In many cases the design manager serves as a procurer of interior design and architectural services. Some companies maintain master agreements with design firms, while others recruit on an as needed basis. The next discipline would be leasing specialists. These individuals conduct site searches and then negotiate lease agreements with several building owners, and then finalizing a deal with the most competitive arrangement. The third discipline would be project management. This role oversees the build out of a project whether it’s an office, retail, or industrial site. The project manager also supervises the work of a contractor as well as orchestrates the move of the tenant organization.  The final discipline is facility management. These individuals take over from project managers, and manage all on -going tasks related to the occupancy of the leasehold including maintenance, security, safety, and overseeing the services of the building owner. Most CRE organizations also require a lease administration group who manages the lease portfolio, relating to lease and escalation payments, lease abstracting and the day to day administration of the lease management system.

  Outsourced: Here most or all of the key CRE disciplines outlined above are outsourced to one or more contractors typically on a geographic basis. Many of the major real estate service firms such as Jones Lang LaSalle, Cushman and Wakefield, or other full service firms can provide not only the transactional services such as leasing, but can offer the other services as an integrated capability. Outsourcing has grown in popularity as companies attempt to limit the size of internal non-core staffing. The role of the CRE organization is to focus on planning, budgeting, strategy, and to supervise the work of the outsourced services. Some CRE organizations are decentralized to the business units, and the CRE executive interacts with the unit CRE groups as well as corporate staff on matters of policy, capital approvals, and functional oversite.

  Hybrid CRE Organization:  This model combines the functional orientation with the outsourced model. The hybrid model is typically a small group of specialist managers who oversee the activities of the outsourced service firms. In some cases, the CRE group is aligned with the IT group, particular if there is an intense orientation toward IT infrastructure and services such as a “cloud computing” company that maintains a large portfolio of data centers. Another situation requiring specialized services is retail. Store location requires specialized capabilities that analyze market demographics and other variables important to a big box retailer.

  Conclusion: There is no one organizational model that will suit every company. Organizational structure is as much about company culture, as functional needs. With advances in information technology, there is a clear trend to minimize staffing, and rely on service contractors in conjunction with powerful management systems to eliminate the need for multiple layers of CRE organization.  The astute CRE executive will be a skillful outsourcer of CRE services and user of information technology. Keeping the CRE organization lean and technology enhanced is clearly a winning strategy in today’s global and competitive environment.

   

  The post CRE Organizational Models first appeared on Visual Lease.]]> https://visuallease.com/201668the-making-of-a-corporate-real-estate-executive-part-3/ Wed, 08 Jun 2016 17:03:27 +0000 http://visuallease.wpengine.com/?p=178 In our continuing series about how to become a CRE executive, the conversation would be incomplete without a brief review of the IT basics relating to CRE management.
  The post The Making of a Corporate Real Estate Executive – Part 3 first appeared on Visual Lease.]]>

  In our continuing series about how to become a CRE executive, the conversation would be incomplete without a brief review of the IT basics relating to CRE management. The CRE executive will need to become a close collaborator with counterparts in the IT organization. Knowing the IT vocabulary is the first step in building this partnership. There are two major categories of CRE related IT

  First, are the IT issues relating to buildings. This would include broad band cabling, WIFI capability, communications gear such as PBX and DSL services, and the array of servers, routers, file storage, and other IT equipment needed for modern office operations. In most cases the IT organization will have the primary responsibility for IT provisioning, however, the CRE organization must provide the appropriate physical infrastructure for the IT equipment and cabling.  Physical security is a priority, and in many cases the CRE organization is tasked with providing the necessary security infrastructure including sensors, card readers, and where necessary surveillance TV cameras. Many CRE organizations are responsible for guard services which are typically contract services.

  The other major category of CRE related topics is the whole range of software applications designed to manage the various CRE processes. It is wise for the aspiring CRE executive to become familiar with the key applications and to gain an understanding of their functionality and cost. I wrote a blog post a year ago (IWMS Priority Applications: What’s Important? What Can Wait?-July 2015) about prioritizing these applications. To summarize, I suggested that I would begin with a robust lease management system since the foundation of CRE operations begins with the lease portfolio. The next priority is space management functionality. Here the application gives the user the ability to create blocking and stacking designs from the building layouts, and keyed to personnel data.

  The third category of functionality is building maintenance management, which provides records of building maintenance tasks, both preventive and predictive. The final category of functionality is a robust project management module. Here the application arrays all the key tasks in various building and leasing projects, and ties project milestones to a preplanned schedule. These various modules can be procured separately and tied to a common data base via middleware. Or the CRE group may opt to acquire an integrated solution (IWMS) where the various modules are fully integrated into a single enterprise level software solution. Another major decision is whether to license the software and operate within your server environment or whether to “rent” the software via a cloud provider. Your IT organization can give you advice on the best approach, although cloud solutions are clearly becoming the preferred alternative.

  The final category of IT related topics which need to be fully understood by the aspiring CRE executive is the whole subject of data center facilities. With the advent of cloud computing, and the growth of virtualization, data center growth has exploded over the last ten years. The modern data center is a highly complex and sophisticated structure, requiring significant investment in electrical power, HVAC, cable management, and redundant back- up generators and UPS systems. It’s not uncommon to see data center construction costs exceeding $1000 per square foot for a highly redundant, and fault tolerant center. From my experience the IT organization will take the lead on a data center project, but the CRE organization will play a key role in site selection, leasing, and building design so it’s important to gain a basic understanding of data center design, infrastructure, and the priorities for site selection.

  As I mentioned in my last blog post on becoming a CRE executive, there are many roads to achieving a position as head of corporate real estate.  It’s critical that the subject of IT become a key knowledge base for the aspiring CRE executive.  IT is transforming the nature of work and the workplace. I don’t think it’s an exaggeration to assert that the successful CRE executive of today must be a reasonably knowledgeable information technologist to compete in the modern digital era.

  The post The Making of a Corporate Real Estate Executive – Part 3 first appeared on Visual Lease.]]> https://visuallease.com/201661the-making-of-a-corporate-real-estate-executive-part-2/ Wed, 01 Jun 2016 20:06:31 +0000 http://visuallease.wpengine.com/?p=177 Entering a career in Corporate Real Estate can take many paths. During my career I met countless CRE executives with myriad backgrounds. Some moved from real estate services such as brokerage or consulting. Others came into the profession as architects or engineers. A popular avenue is facility management, since the disciplines of property and maintenance management are a natural stepping stone to real estate management.
  The post The Making of a Corporate Real Estate Executive – Part 2 first appeared on Visual Lease.]]>

  Entering a career in Corporate Real Estate can take many paths. During my career I met countless CRE executives with myriad backgrounds. Some moved from real estate services such as brokerage or consulting. Others came into the profession as architects or engineers. A popular avenue is facility management, since the disciplines of property and maintenance management are a natural stepping stone to real estate management. I recall one executive who was a senior vice president responsible for corporate manufacturing. He was close to retirement and requested a role as the head of real estate services. He had no knowledge or experience in corporate real estate but as a seasoned senior executive he was imminently qualified to lead a major corporate function. What I recall is how much he enjoyed the specifics of corporate real estate, particularly the various deals that required his review and approval. I had written a thesis as part of my MBA which made a case for my company to enter the real estate development business. The senior executive read the thesis and invited me to corporate headquarters to launch a real estate development program. We formed a development subsidiary and subsequently entered into a number of joint venture developments, anchored by the company’s sales and marketing branches. Thus, the executive parlayed his senior management skills and experience into a major development strategy.

  Perhaps the most important knowledge base required for a career in corporate real estate management is the subject of corporate finance. It’s imperative that the executive has a good working knowledge of discounted cash flow, accounting, and balance sheet structure. This is particularly true now with the advent of new lease accounting standards which require that all leases of one year or more in term be placed on the balance sheet as both assets (value in use) and corresponding liabilities. There are various professional development courses offered by universities and professional organizations such as Corenet that cover the basics of real estate finance and accounting. Some of these courses are offered on line so there are several options for the aspiring CRE executive to gain a working knowledge of real estate finance.

  Another avenue for gaining knowledge of commercial real estate is to study for a real estate brokerage license in your local area. In fact, you may want to spend some time as a commercial broker to gain experience and learn first hand the rudiments of commercial leasing and deal structuring. One option is to seek a summer internship in corporate real estate. I worked with a number of summer interns over the years, and I recall how beneficial the experience was for both the interns and the CRE department. Many of these interns went on to successful careers in corporate or commercial real estate.

  Another critical knowledge domain for the aspiring CRE executive is the subject of market analysis. CRE executives must have a working knowledge of real estate market dynamics; the effects of supply and demand on pricing, absorption, and property value. Many of the large real estate brokerage firms provide quarterly market reports on line. It’s a useful exercise to study these reports to become familiar with the terminology and key variables in real estate market analysis.

  In summary, I’ve touched on a few of the knowledge areas that must be mastered along the road toward becoming an effective CRE executive. I’m frequently asked if taking a formal course in real estate finance and marketing is the right strategy for entering the CRE management arena. I would certainly endorse this approach; although such an option requires significant investment in time and expense. I prefer the option of learning on the job, supplemented with short courses offered by such associations as Corenet or IFMA.

  In my next blog post I’ll delve into the subject of real estate technology and what the aspiring CRE executive needs to know for starters.

  The post The Making of a Corporate Real Estate Executive – Part 2 first appeared on Visual Lease.]]> https://visuallease.com/201659metrics-to-manage-portfolio-performance/ Mon, 09 May 2016 18:01:57 +0000 http://visuallease.wpengine.com/?p=175 Performance management in corporate real estate has matured rapidly over the last ten years due primarily to the evolution of sophisticated real estate management systems. With the advent of integrated workplace management systems(IWMS), and now cloud based point systems (like Visual Lease), CRE organizations have a wide range of options in the type and utility of portfolio management systems.
  The post Metrics to Manage Portfolio Performance first appeared on Visual Lease.]]>

  Performance management in corporate real estate has matured rapidly over the last ten years due primarily to the evolution of sophisticated real estate management systems. With the advent of integrated workplace management systems(IWMS), and now cloud based point systems (like Visual Lease), CRE organizations have a wide range of options in the type and utility of portfolio management systems. A key feature of these systems is the ability to customize performance management to fit the specific needs of the organization. For example, some organizations prefer to have the performance measures be “role based.” Here, the system provides different metrics that are specific to different roles in the CRE organization: leasing specialists, project managers, maintenance managers, etc.

  Here are my top performance  metrics that are generally applicable for most corporate real estate portfolios:

  ·      Cost per square foot. Perhaps the most general performance metric of a corporate real estate portfolio is the unit cost per square foot. This would reflect the annual total cost of the portfolio. Separate costs for leased facilities and owned properties are usually presented. For owned properties, I recommendestablishing market values to assess marketability. These assessments can usually be completed by your real estate advisors, on a periodic basis.

  ·      Square foot per employee:  This will reflect the efficiency of the office portfolio on an annual basis. For organizations that have adopted shared office techniques like office hoteling, the ratio should be lower than for traditional 1:1 (workstation per employee) utilization.

  ·      Leasing Churn: This metric reflects the percentage of leases renewed, retired, or extended on an annual basis. The higher the churn rate, the less efficient the portfolio. Ideally, CRE managers prefer to stabilize the portfolio with selective options, or longer lease terms. Lease term should now be considered in the context of the new FASB standard which puts the net present value of all leases of more than 1 year on the balance sheet as assets and corresponding liabilities. (beginning in early 2018) The longer the lease, the higher the values, so tradeoffs between stability and churn will have to be made.

  ·      Escalations as a percentage of total annual rental:  This metric will reveal whether a specific lease is abnormally costly as a result of excessive CAM or other charges. It will flag the lease for a potential audit to determine if there are over-charges from the landlord. One possibility is the landlord is erroneously including capital expenditures in the CAM calculation which would greatly inflate the cost.

  ·      Employee satisfaction with the work environment:  Consistent with the use of the “balanced score card,”  CRE managers should survey representatives from the employee base on their satisfaction with the work environment. Normally, surveys are conducted bi-annually, on representative facilities. The degree of satisfaction will provide insight on office standards, décor, and services. In my own experience, these surveys combined with cost and utilization metrics cited above, give useful perspectives on prioritizing leasing actions.

  ·      Sustainability:  Portfolio performance metrics would be incomplete without measuring the environmental quality of the portfolio. Here attention should be paid to the energy efficiency, carbon footprint, or other indicators that reflect the environmental quality of the portfolio. Many corporations today place significant emphasis on sustainability; so it’s wise to include some rating system in the portfolio performance dash board.

  Conclusion:  Performance metrics give the CRE manager and his team the necessary indicators on how the portfolio is performing on a cost, utilization, environmental ,and customer (employee) satisfaction basis. These metrics should be readily available from the Lease Management system amplified with survey and environmental data, and customized to meet the priorities of the organization. The old adage, “You can’t manage what you can’t measure,” certainly applies to real estate portfolio management.

  The post Metrics to Manage Portfolio Performance first appeared on Visual Lease.]]> https://visuallease.com/201652space-management-and-allocations/ Wed, 27 Apr 2016 15:49:00 +0000 http://visuallease.wpengine.com/?p=174 Space (square footage) is the universal unit in corporate real estate management. It defines the basis for rental, allocation of costs to different occupant groups, is the primary factor in developing space requirements for different utilizations such as offices, work stations, conference rooms, storage spaces, etc.  Most companies develop a set of space standards as a means to design office layouts, allocate space to various functions, and use to forecast space demand over time.
  The post Space Management and Allocations first appeared on Visual Lease.]]>

  Space (square footage) is the universal unit in corporate real estate management. It defines the basis for rental, allocation of costs to different occupant groups, is the primary factor in developing space requirements for different utilizations such as offices, work stations, conference rooms, storage spaces, etc.  Most companies develop a set of space standards as a means to design office layouts, allocate space to various functions, and use to forecast space demand over time.

  In today’s mobile era, with the use of smart phones, WIFI, and mini-pads, work style has become universally mobile. Typically, most office spaces are unassigned, except those job functions which require on-going office accommodations and complex information technology such as call center employees, administrators, stock traders, etc. Managers usually require private offices in their role as supervisors, but this is rapidly changing as Millenials move into management positions and typically prefer the informality of open plan workstations. With the advent of office hoteling (i.e. unassigned workstations used on a reserved basis) the ratio of headcount to office space has increased significantly, with ratios of 2:1, and even 4:1 employees per workstation is now common.

  So what are the various techniques to plan and allocate office space? First, there’s the issue of space definition. BOMA (The Building Owners and Management Association) has developed space definitions which are broadly used in the commercial office industry. BOMA’s original space standard was published in 1996. An update was released in 2010 referred to as “Version B.” The original 1996 version is referred to as version “A.” In both cases the standard defines usable, rentable, and gross space. It also clearly defines common areas, which form the basis for CAM or common area maintenance charges. The new standard includes definitions for storage space such as basement spaces, and also outside spaces such as balconies, etc commonly used in tropical markets.

  Most CRE managers and commercial office landlords subscribe to the BOMA standards, which are used in the calculation of rentable space. Space measurement is universal in most US markets with the exception of Manhattan, where it seems as if the rentable space is anything the landlord says it is.

  The first step in developing a space plan is to reach agreement on a planning factor usually expressed as square footage per employee. If the organization has a high number of mobile employees, then a ratio of 4:1 or 5:1 (square foot per employee) is used. With an office of primarily stationery employees such as a call center, or trading floor, then the ratio would be 1:1. Other standards would include space for conference rooms, training rooms, storage, etc.  A design consultant usually is engaged to translate the space forecast into a space layout.

  In terms of chargebacks, most CRE managers allocate space and cost on the basis of employee utilization. Occupancy costs are fully loaded with rent and associated costs and then allocated on a pro rata share to the user organizations. In most cases, the standard ratios cited above are used in the calculation. For example, if the ratio is 2:1, and the company standard is 100 sq. ft per workstation, then the allocation is 50 sq. ft per employee times the number of employees times the fully load occupancy cost per square foot. Occupancy cost will vary by organization depending on whether the rental is net rent versus gross rent. With net rent other occupancy costs will need to be added such as utilities, taxes, insurance, maintenance, and capital amortization. With the new FASB standard, rental will now appear on the balance sheet as both assets and liabilities. For purposes of chargeback, it will be the straight line amortization of rental that goes into the calculation for operating leases, and a separate line item for interest expense relative to financing leases. Chargebacks can be set up in the lease management system, so that monthly allocations are automatically charged to other units within the organization or to separate sub-tenants.

  Space management is one of the critical responsibilities of the CRE executive, and having a robust lease management system that ties with the space management module is a key to a successful real estate andfacilities management program.

          

   

  The post Space Management and Allocations first appeared on Visual Lease.]]> https://visuallease.com/201645the-impact-of-millenials-on-real-estate/ Tue, 05 Apr 2016 22:42:45 +0000 http://visuallease.wpengine.com/?p=173 Back in November of last year I cited a study by CBRE that seemed to debunk several myths about the Millennial generation and the office environment. The essence of the study was that while Millenials had certain preferences and attitudes about the workplace, in general there was little difference between the generations about their desire for workplace flexibility, preferences for urban settings, more collaboration, and more autonomy.  However, in a recent article about Millenials in the March 15 issue of Fortune magazine, the theme of the article is about how to attract and retain the Millennial generation. 
  The post The Impact of Millenials on Real Estate first appeared on Visual Lease.]]>

  Back in November of last year I cited a study by CBRE that seemed to debunk several myths about the Millennial generation and the office environment. The essence of the study was that while Millenials had certain preferences and attitudes about the workplace, in general there was little difference between the generations about their desire for workplace flexibility, preferences for urban settings, more collaboration, and more autonomy.  However, in a recent article about Millenials in the March 15 issue of Fortune magazine, the theme of the article is about how to attract and retain the Millennial generation. This is a different question than the focus of the CBRE survey, and it raises questions about how Millenials will influence the locationand layout of office space as a way to attract the Millennial worker. As a reminder, Millenials are defined as those born between 1981 and 1996.

  I’ve written about co-working as a good model to define the Millenial preference for workplace location and design. Specifically Millenials   first and foremost  demand flexibility in the workplace. This would mean that Millenial workers would be offered maximum flexibility in where and when they work. In essence Millenials wantmaximum work/life balance. The Fortune article quotes an HR executive from PWC who said that their surveys reflected that95% of their Millenial workforce demanded workplace flexibility and that  a quarter of the Millenials surveyed said that their work/life balance was still difficult to maintain, despite policies that offered telecommuting, flexible work schedules, and other practices aimed at improving work/life balance.

  Millenials prefer urban locations for both living and working. Thus, corporate real estate executives should consider urban locations for future office sites to attract the young professional worker. Urban redevelopment in most major cities has been prompted in part by the MIllenial demand for funky urban settings. This is particularly true for such urban markets as Silicon Alley in New York and the South of Market development phenomenon in San Francisco.

  Another key to the Millenial demographic is the high value they place on environmental issues. Millenials are motivated by a sense of purpose, and one key value that they would look for in an employer is the commitment to sustainability. Maintaining high environmental standards in office design and operations will be a plus when recruiting Millenials.

  The Millenial generation has little patience for hierarchy and status. This attitude suggests that office design needs to reduce the traditional focus on hierarchy as a measure of office size or type. Enclosed offices are becoming obsolete, and even CEOs now opt for an open office to project an egalitarian and non-hierarchical image. In many cases, non assigned workstations have become the norm, where office workers use reservation apps to reserve a workstation or conference room. The Millenial generation is highly tech savvy and thus, offices must be equipped with the latest in network technology to include WiFi, broadband connectivity, and high speed printing capabilities.

  Perhaps the single most important variable in the Millenial workplace conversation is the notion of corporate culture. The Fortune issue cited above which focuses on the 100 best companies to work for, cites corporate culture as the most important variable in attracting the young professional. Workplace design goes a long way in establishing and sustaining a corporate culture.  Thus, how a workplace is laid out, its décor, its perks suchas health facilities and food courts, and its focus on collaborative spaces all taken together reflect a culture of teamwork, purpose, and wellness, all values that are important to Millenials.

  The corporate real estate manager has a critical role to play in attracting and retaining a quality workforce. And the primary target of these new recruits is the Millenial. Thus, designing a corporate real estate strategy that is Millenial friendly should be a top priority for corporate real estate.

          

                    

  The post The Impact of Millenials on Real Estate first appeared on Visual Lease.]]> https://visuallease.com/2016324co-working-revisited-what-are-the-drawbacks/ Thu, 24 Mar 2016 10:35:04 +0000 http://visuallease.wpengine.com/?p=171 In my last Blog posting I covered the subject of co-working; an office concept which entails using office space on a shared basis. Unlike executive suite operations such as Regus serviced offices; co-working is less formal, collaborative and aimed at the millennial generation. Co-working is growing rapidly in most major urban areas, particularly in central business districts. The outlook for growth is stunning, with nearly 2000 locations anticipated within five years. One of the most successful operators, Wework,  now has a market cap of over $5 billion, with no slowing in growth expected.

  But co-working is not without its drawbacks. 

  The post Co-Working Revisited: What are the Drawbacks? first appeared on Visual Lease.]]>

  In my last Blog posting I covered the subject of co-working; an office concept which entails using office space on a shared basis. Unlike executive suite operations such as Regus serviced offices; co-working is less formal, collaborative and aimed at the millennial generation. Co-working is growing rapidly in most major urban areas, particularly in central business districts. The outlook for growth is stunning, with nearly 2000 locations anticipated within five years. One of the most successful operators, Wework,  now has a market cap of over $5 billion, with no slowing in growth expected.

  But co-working is not without its drawbacks. Here are the major issues I encountered in researching the topic:

  ·      Interruptions: Perhaps the greatest complaint cited in co-working is the distractions from working in group settings. While private work spaces are available, the incremental cost can be prohibitive for the individual entrepreneur. Also for small work teams, the ability to have private meetings is limited.

  ·      Security: Co-working facilities have limited security which raises the specter of theft. And many co-working facilities have limited storage capacity for laptops, files, supplies, etc. In addition unless the individual can use private workspace or conference facilities, the issue of private conversations or phone meetings is typically compromised.

  ·      Legal issues: Co-working arrangements are more like health club memberships rather than traditional lease agreements. On one hand this provides a level of flexibility for the co-working user to cancel on short notice, but it also could result in inconvenient termination by the co-working operator.

  ·      Inconvenient individual office assignments: In most cases the co-working user does not have an assigned office location. This means that unless the user arrives early to secure the most desired location, they may end up next to the front entrance or some other undesirable location. Assigned locations typically require an incremental cost.

  ·      Undesirable co-working neighbors. Another complaint that comes up in the dark side of co-working is the problem of working with jerks. These are the users who are loud, profane, and just basically obnoxious.

  ·      Lack of team culture: Another complaint about co-working is the inability of work teams such as a corporate sales team, or research groups to develop a sense of identity and culture typically characteristic in traditional office environments. Additional cost would be required to secure dedicated space such as a separate team room, but this diminishes the practicality of operating in a co-working space.

  There are many advantages to co-working, and for many younger free-lancers the co-working alternative provides the services, infrastructure and collegiality, that is missing in a work-from- home set-up. For corporate users, co-working provides another location alternative for its mobile workforce. But potential users of co-working space should carefully evaluate their circumstances, priorities, and needs before committing to the co-working alternative.

  The post Co-Working Revisited: What are the Drawbacks? first appeared on Visual Lease.]]> https://visuallease.com/201636co-working-alternative-to-telecommuting/ Sun, 06 Mar 2016 19:25:17 +0000 http://visuallease.wpengine.com/?p=170 The primary driver of this growth is the rise of the contingent worker, which represents about one third of the US workforce according to government estimates. With the advent of mobile technology and cloud computing, millennials, those between the ages of 20-35, seek non-traditional work environments as well as a sense of community. Co-working meets these needs by offering informal and edgy workplaces, and a spectrum of services that might include WiFi, marketing training, social events, and even conferences aimed at the young, independent entrepreneurs.
  The post Co-Working: Alternative to Telecommuting?? first appeared on Visual Lease.]]>

  One of the early research notes I wrote at Gartner in 1999 was on the executive suite operator, Regus. I was intrigued with this company in the context of mobile office alternatives. Regus provided high end fully serviced and provisioned office space for individuals or small groups on various pricing schemes. Regus was growing quickly butsuffered from the tech bust in the early 2000’s and went bankrupt in 2003. Regus has since recovered and is now one of the leading providers of executive suite offerings.

  I recently revisited the subject of co-working and discovereda huge industry that spans the globe with over two thousand locations, principally located in major metropolitan areas such as New York, Chicago, San Francisco, London, Hong Kong, etc. Co-working as distinct from executive suites like Regus, was invented in 2005 by an entrepreneur, Brad Neuberg, who started a cooperative called the “Hat Factory.” It was a small team of tech workers who formed the nucleus of the co-working site and now the concept has grown exponentially with over 2000 co-working locations worldwide.

  The primary driver of this growth is the rise of the contingent worker, which represents about one third of the US workforce according to government estimates. With the advent of mobile technology and cloud computing, millennials, those between the ages of 20-35, seek non-traditional work environments as well as a sense of community. Co-working meets these needs by offering informal and edgy workplaces, and a spectrum of services that might include WiFi, marketing training, social events, and even conferences aimed at the young, independent entrepreneurs.

  One of the fastest growing co-working companies is WeWork, founded in 2010, by Adam Neuman and Miguel McKelvey in New York City. WeWork is now the fastest growing lessee in the United Sates. It now has over 52 locations and is reported to be adding 3-5 locations per month.  With 45,000 members, WeWork recently received new financing of $355 million, and is valued at over $1 billion. It enjoys a 40% profit margin, with a 98% occupancy. Investors include JP Morgan Chase, Goldman Sachs, and Mort Zuckerman who is also a key board member. WeWorkprovides a broad spectrum of services and amenities, including free beer, as well as offering group health insurance.  Pricing starts at $45 per month for entry level membership up to $500 per month for a private individual office.

  WeWork is diversifying by planning entries into other markets. It’s reported that they have several follow on services in the works, including “WeLive” combining office space with micro-apartments, and “WeSleep” an Air-B&B like hotel concept.

  One possible market for co-working is the corporate real estate market which could use a co-working service as an extension of its office locations. Sun Microsystems pioneered this concept back in the 1990s with its “network of places” program. Sun opened telework centers in major metro areas as alternative office locations for its mobile workforce. The federal government has also established telework centers in and around major metro areas as a way to reduce commute time.

  There’s no question that co-working fills a real need for the young independent worker who desires non-traditional work environments and the social benefits of working with others. It’s rapid growth underscores the problems with telecommuting or work from home such as loneliness, lack of stimulation, and the absence of colleagues and mentors. 

   

  The post Co-Working: Alternative to Telecommuting?? first appeared on Visual Lease.]]> https://visuallease.com/2016226expanding-the-cre-charter/ Thu, 18 Feb 2016 15:35:00 +0000 http://visuallease.wpengine.com/?p=169 For some large companies, the charter of CRE has expanded to include physical security, sustainability, and now even the charter may include company wellness programs. In an open online survey conducted by CoreNet Global, a strong majority of respondents – 80 percent -- said that corporate wellness initiatives represent a "significant trend," while only 20 percent said that they were a "passing fad."
  The post Expanding the CRE Charter? first appeared on Visual Lease.]]>

  In my last Blog entry I discussed the future of the corporate real estate profession. The central role of the corporate real estate executive has been to manage the company’s real estate portfolio including property acquisition, disposition, leasing, and the day to day operations of facility management. For some large companies, the charter of CRE has expanded to include physical security, sustainability, and now even the charter may include company wellness programs. In an open online survey conducted by CoreNet Global, a strong majority of respondents – 80 percent — said that corporate wellness initiatives represent a “significant trend,” while only 20 percent said that they were a “passing fad.”

  And, more than 62 percent reported that their companies had instituted wellness initiatives in the last six months; 38 percent said that they had not.

  And my recent dinner meeting with a group of CRE leaders reinforced this interest, where it was the main agenda item.

  With intense competition for talented employees, it ‘s likely that companies would institute programs that would support the health and well being of their employees. These programs typically would include smoking cessation training, substance abuse, physical fitness facilities, company sponsored events such as road races, and other activities that add to the employee’s physical fitness. Some wellness programs also provide counseling, yoga, and other activities that address the mental as well as physical health of the employee.

  Wellness programs result in healthier employees, reduced absenteeism, and higher productivity. There is substantial evidence that wellness results in improved employee recruitment and retention, and improved financial performance.

  From my experience, a company wellness program is best managed by the human resources organization. There is most likely a manager or executive responsible for the program who reports into the human resourcesdepartmentand may have counterparts in the operating divisions that oversee local wellness initiatives.

  But what is the role of the CRE organization in company wellness? Most likely, CRE management would serve in a support role, particularly in managing the facilities needed for employee wellness activities. These would include the provision of physical fitness facilities, the contracting with local health clubs, and possibly the contracting with consultants that would serve as on site coaches or counselors.

  There are certainly examples where the CRE organization has direct responsibility for company wellness, but this would be the exception. The CRE organization is better aligned with sustainability initiatives such as energy management, and environmentally oriented construction such as the LEED (leadership in energy and environmental design) standard.       

  Another area of focus that is closely aligned with the CRE mission is physical security. This would include the development of physical security standards for company facilities as well as the provision of security technologies such as card reading devices, closed circuit TV monitoring, and perimeter alarm systems.

  The CRE department is already challenged to meet disruptive changes in the real estate market, the most urgent example is the imminent change in FASB/IASB leasing standards. As the economy goes through a possible downturn in the months ahead, there will be a significant demand to rebalance the company portfolio through subleasing and dispositions. My advice to CRE managers is to maintain your current charter, and decline efforts to add to your responsibilities such as company wellness initiatives at least in the near term. While a popular trend, company wellness is best managed by those responsible for employee recruitment and retention.

   

   

  The post Expanding the CRE Charter? first appeared on Visual Lease.]]> https://visuallease.com/2016212the-uncertain-future-of-the-corporate-real-estate-profession/ Fri, 12 Feb 2016 17:42:35 +0000 http://visuallease.wpengine.com/?p=168 Earlier last week I attended a dinner in San Francisco of a group of corporate real estate executives. During the evening I had a chance to speak with several of the attendees, and queried what were the major issues being discussed by the group at their 2 day meeting. A number of topics came up including the subject of Corporate Wellness, Sustainability, and Strategy.
  The post The Uncertain Future of the Corporate Real Estate Profession first appeared on Visual Lease.]]>

  Earlier last week I attended a dinner in San Francisco of a group of corporate real estate executives. During the evening I had a chance to speak with several of the attendees, and queried what were the major issues being discussed by the group at their 2 day meeting. A number of topics came up including the subject of Corporate Wellness, Sustainability, and Strategy. But the most urgent question on their discussion list was “what is the future of the corporate real estate profession.” This question led to a number of speculations but no real consensus.

  Perhaps the greatest concern was one of irrelevance. Would the growth of outsourcing, and shared services render the role of the internal real estate profession as superfluous or irrelevant? Real estate and facilities management is not a core activity in many companies, (so the argument goes) and there are senior executives who want to eliminate or outsource non-core functions. Another concern is the possibility that another corporate function such as Information Technology or Human Resources would absorb the real estate function and depend primarily on outside service firms for transactional support.  A third possibility is the emergence of specialty service firms who combine technology services with real estate and facilities management services. This scenario is popular with companies who outsource much of their IT activities and are partial to the outsourcing model to reduce operating cost.

  I think this concern is unrealistic if not disingenuous. Real estate represents the second highest cost for most companies. As new companies emerge, they will need real estate of some kind for product development, workplaces, and manufacturing. Service firms alone cannot fully understand the needs and unique cultures of most companies, and at a minimum, management will need executives with the domain knowledge and experience to direct and manage outside service firms. If anything, the corporate real estate profession will grow with globalization, as international firms expand into global markets.

  The relevance (and growth) of the corporate real estate function and profession will be highly correlated to the degree with which the function is closely tied to the business strategy of the enterprise. Thus, it is a matter of success whether the corporate real estate executive focuses on strategy and process versus transactions and operations although these functions are critical.There are many examples where the corporate real estate function developed strategies which delivered substantial cost reductions, asset  enhancements, or progressive and flexible workplace environments. These are the corporate real estate professionals who earn a place at the senior management table, and prosper. Those who focus only on transactions and day to day operations become candidates for outsourcing. The choice is clear, and many at the dinner the other night were professionals who exemplified these principles of strategic leadership.

  The post The Uncertain Future of the Corporate Real Estate Profession first appeared on Visual Lease.]]> https://visuallease.com/2016125some-thoughts-about-the-corporate-real-estate-organization/ Mon, 25 Jan 2016 18:43:52 +0000 http://visuallease.wpengine.com/?p=167 A major question I am asked on occasion is what is the best way to organize the corporatereal estate function.  There are several fundamental principles that should be considered to answer this question.
  The post Some Thoughts about the Corporate Real Estate Organization first appeared on Visual Lease.]]>

  A major question I am asked on occasion is what is the best way to organize the corporate real estate function.  There are several fundamental principles that should be considered to answer this question.

  • First is what is the scope of the real estate function?
  • Does the scope include only transactions?
  • Or is the function broadly responsible for planning,  budgeting, and managing the acquisition, disposition and on-goingmanagement of the facilities portfolio? 

  The over-all mission of the business will greatly affect the real estate organization structure. For example, a retail business will require a distinct set of competences in store location, design and build-out. A high tech company will need different skills and functions that will emphasize collaboration, access to skilled labor, and proximity to universities and other knowledge based services and resources. A professional services firm will require yet another set of skills and competencies, so the focus of the business will highly determine how the real estate function is staffed and organized.

  Another key variable in the organization topic is the focus on sourcing. To what degree is outsourcing of various functions such as leasing, design, construction management, and facilities managementa preferred method of achieving the necessary skills to manage the company’s real estate portfolio? For many companies, outsourcing non-core functions to service firms is the preferred approach. In some cases companies will engage a single service firm to manage all aspects of the real estate function and limit the role of internal real estate organization to strategy and service oversight.

  A discussion of organization structure is incomplete without a consideration of business processes. I learned from my days as a consultant that many clients suffered dysfunctional organizations because how they were organized was inconsistent with their work flows and processes.  Once the client went through a rigorous review of processes, the problems with organizational structure became much clearer. The review would typically uncover redundancies, communication problems, and confused roles and responsibilities. I always encouraged the client to undertake a rigorous review of key processes before considering organizational changes.

  Another key consideration in the organization discussion is an honest and frank discussion of company culture. The real estate organization must embrace cultural norms of the corporation to insure a level of trust and compatibility with management, operating unit clients, and other staff groups like finance, human resources, and information technology. Perhaps one of the major sources of conflict is between the real estate organization and the IT group. Here the issue is one of control and responsibility. The real estate group insists on controlling facilities projects while the IT group insists on certain controls governing security, power and air conditioning, and cabling. This organizational conflict is heightened around data center projects, where competing roles and responsibilities are the source oforganizational rivalry. Some companies use matrix management structures to insure collaboration and cross functional communication. The matrix has increased in popularity with the advent of collaborative technologies and mobile communication. But the matrix structure can be complex, and management must insure clear processes and accountabilities to avoid organizational chaos.

  Finally, the organizational topic must lead to a focus on technology. How is the real estate organizationusing the tools such as lease management systems, design and project management applications, and process support tools in the planning and management of the company’s real estate portfolio? Here again processes lead to the appropriate selection of technology tools, whether in the planning, transacting, or on- going management of the portfolio. With the advent of cloud computing, it is now possible to selectbest-in-breed solutions and integrate in the cloud using various APIs. (application program interfaces) This trend will reduce the cost of real estate technologies as well as reduce the time to acquire and configure various solutions.

  The corporate real estate function continues to evolve as companies go through disruptive change such as globalization, outsourcing, and technology innovations.  It’s probably inevitable that how a company is organized today to manage its real estate portfolio will change tomorrow. Staying on top of these changes and adjusting accordingly will be a major challenge for the successful corporate real estate leader.

   

  The post Some Thoughts about the Corporate Real Estate Organization first appeared on Visual Lease.]]> https://visuallease.com/2016112new-years-resolutions-for-the-corporate-real-estate-executive/ Wed, 13 Jan 2016 00:00:36 +0000 http://visuallease.wpengine.com/?p=165 During my tenure as head of real estate I always began the new year with a few resolutions that would become goals for the year ahead. These were typically above and beyond department objectives for the year and represented personal goals for some kind of improvement. Here are a few that I recall..
  The post New Year’s Resolutions for the Corporate Real Estate Executive first appeared on Visual Lease.]]>

  During my tenure as head of real estate I always began the new year with a few resolutions that would become goals for the year ahead. These were typically above and beyond department objectives for the year and represented personal goals for some kind of improvement. Here are a few that I recall:

  • Strive for personal development either by taking a career development course such as those offered by IFMA or Corenet; or catching up on a few popular management books. I’ve always been interested in strategy so I would seek out papers or books by Michael Porter of Harvard who is recognized as the guru of corporate strategy.  His book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” is a classic on strategy. I also read several books by Jim Collins, most notably:” Good to Great: Why Some Companies Make the Leap and Others Don’t”

  • Attend at least one industry conference for both learning and networking experience. I was a member of IDRC for over fifteen years and served as its president in 1996-1997 before it merged with NACORE. Attending IDRC and then Corenet conferences became a yearly habit. When I switched industries and became an analyst at Gartner, I was obliged to attend the Gartner events as a speaker. I absorbed a huge amount of knowledge and insight about information technology which added exponentially to my knowledge base.

  • Update my contact base. I’m a strong proponent of networking both for what you can learn from others but also for the help a network can provide. I would constantly touch base with contacts in the brokerage, design, and engineering fields on all matter of issues.  These contacts become surrogate members of your staff and can help to resolve issues or problems quickly and efficiently. I recall reaching out to contacts in various cities when our group was working a deal for a new lease or construction project. What was the market outlook? What are the issues with local codes or covenants? Who’s a superior contractor in the local market? Your contacts in these cities can be an invaluable source of intelligence.

  • Constantly encourage innovation. I always had a passion for the “next big thing” and strived to inspire my organization to propose ways to improve our processes or technologies. I recall several innovations over the course of my career. At Xerox I led an effort to develop a Lease Management system we called “Lease-Ad.” By today’s standards this was a pretty rudimentary system written in Microsoft’s database management application. At one point we tried to sell the system to outside users but we ended up letting one of our employees take the system out on his own. Another innovation I developed with colleagues was a consulting group we called “The Harbinger Group.” The mission of this group was to pioneer research in the emerging “office of the future” trend. Our greatest accomplishment was helping a scientist from Xerox’s Palo Alto Research Center bring his network technology in front of Xerox senior management. The technology was a fiber optic networking system that allowed huge amounts of data to be transmitted over fiber optic cable. Xerox management had no interest in the technology (“we’re not in the wire business”) so I helped the scientist hook up with a corporate marketing guy who presented the technology to one of Harbinger’s venture capitalist clients.  The upshot of this introduction was venture funding of over $1M,  a license deal with Xerox, and a new company called Synoptics, which later became Bay Networks and ultimately was acquired by Cisco Systems. The technology became a key component of Internet networking. In essence Xerox walked away from a multiple billion dollar opportunity.

  At Gartner I teamed up with MIT and worked for a year developing a research project we called “The Agile Workplace.” This was a multi-client sponsored study and resulted in a landmarkreport on the worker mobility phenomenon. Many of the findings in the report became the basis for all kinds of technologies and practices which now represent the “new normal” in worker mobility.

  So what are your managerial resolutions for 2016?

  The post New Year’s Resolutions for the Corporate Real Estate Executive first appeared on Visual Lease.]]> https://visuallease.com/201615five-challenges-facing-corporate-real-estate-executives-in-2016/ Tue, 05 Jan 2016 21:28:34 +0000 http://visuallease.wpengine.com/?p=164 With the New Year it’s a good time to take stock of the corporate real estate domain and consider the challenges facing the managerial profession responsible for the corporation’s real estate assets and services in the year ahead. Here are five major challenges if dealt with effectively will determine in part the success of corporate real estate in 2016.
  The post Five Challenges Facing Corporate Real Estate Executives in 2016 first appeared on Visual Lease.]]>

  With the New Year it’s a good time to take stock of the corporate real estate domain and consider the challenges facing the managerial profession responsible for the corporation’s real estate assets and services in the year ahead. Here are five major challenges if dealt with effectively will determine in part the success of corporate real estate in 2016.

  New FASB/IASB Lease Standard: We’ve been focusing on this dramatic new lease standard over the last several months in Bell’s Blog. Perhaps the greatest factor for success will be the degree of readiness when the standard is ultimately put into effect, now estimated to be in 2019. We believe companies need to start now to prepare for the commencement of this new standard which essentially requires all leases of more than one year to be placed on the balance sheet as both assets (value in use) and liabilities. Much work is required to achieve readiness including software upgrades, process changes, staff training, and portfolio restructuring. (Please read “The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?”)

  Sustainability:  The environmental imperative has been given added urgency with the United Nation’s commitment to challenging conservation targets. A corporation’s facilities assets represent the largest consumer of energy resources, particularly electrical consumption. “Going green” is no longer a corporate imperative but also represents an excellent source for cost savings. Adopting environmental standards such as the LEED standard (Leadership in Energy and Environmental Design) for construction will insure environmental efficiencies and assure a positive image for the corporate brand.

  Staff Recruitment:  Now that the US economy has reached full employment, the challenge of staff recruitment and retention will become more intense in 2016 as employees seek more challenging and lucrative employment opportunities. This challenge is a double edged sword with work-loads in 2016 increasing with pressures to rebalance portfolios (new lease standard) while demand and competition for talented employee candidates intensifies. Corporate Real Estate executives must work closely with Human Resources to update replacement plans, as well as enhance workplace environments with progressive policies and amenities. Employment focus should shift to training, and personal development, as a way to enhance employee skills.

  Information Technology Refresh:  Corporate Real Estate Executives must insure that their information technology resources are adequate to meet new challenges such as the new lease standard as well as efficiencies gained through broader use of mobile technologies and cloud computing techniques. It is probable that there will be requirements to upgrade data center capacities associated with growth in servers and storage devices. (All related to growth in private cloud computing.)  

  Strategic Alignment: With the continuing improvement in the US economy, corporate real estate executives need to insure that facilities and real estate resources continue to meet the needs of the business units with a top to bottom review of portfolio strategy. Key questions to address: what and where is growth in space needed over the next 6 to 12 months? Are facilities configured to maximize agility and staff flexibility? Are we receiving adequate services at competitive prices from our major service providers? What can we do to reduce occupancy costs through consolidations, space reductions, and alternative workplace strategies such as telecommuting and desk sharing?

  The New Year is a good time to review and refresh strategy and processes. 2016 will bring disruptive change to facilities and real estate management. Those corporate real estate executives who fail to address the challenges ahead (such as those listed above) will risk failure and possibly job security.

  The post Five Challenges Facing Corporate Real Estate Executives in 2016 first appeared on Visual Lease.]]> https://visuallease.com/20151120a-closer-look-at-iot-internet-of-things/ Fri, 20 Nov 2015 23:36:34 +0000 http://visuallease.wpengine.com/?p=161          In my last Blog entry I wrote that IOT would be a megatrend that would revolutionize building operations by imbedding machine addressable technology in every aspect of the built environment. IOT is not new. In fact the technology has been around since the late 1990s. Gartner estimates that there will be nearly 26 billion devices on the Internet of Things by 2020.
  The post A Closer Look at IOT (Internet of Things) first appeared on Visual Lease.]]>

   In my last Blog entry I wrote that IOT would be a megatrend that would revolutionize building operations by imbedding machine addressable technology in every aspect of the built environment. IOT is not new. In fact the technology has been around since the late 1990s. Gartner estimates that there will be nearly 26 billion devices on the Internet of Things by 2020.

  Virtually all aspects of society will be transformed by IOT particularly infrastructure, manufacturing, and energy management systems. Large scale deployments are currently underway globally.  “For example, Songdo, South Korea, the first of its kind fully equipped and wired smart city, is near completion. Nearly everything in this city is planned to be wired, connected and turned into a constant stream of data that would be monitored and analyzed by an array of computers with little, or no human intervention.”

  Because of the enormous number and complexity of devices connected to the internet, technology pundits believe that a new protocol – Protocol Version 6 (IPv6) will be implemented that will allow virtually all human-made objects to communicate over the internet. “The internet of objects would encode 50 to 100 trillion objects and be able to follow the movement of these objects. Human beings living in urban environments will each be surrounded by 1000 to 5000 trackable objects.”

  IOT is not without controversy. The potential for massive surveillance and other invasions of privacy worry critics. Here are a few quotations about these issues: (all quotations from Wikipedia)

  Justin Brookman, of the Center for Democracy and Technology, expressed concern regarding the impact of IOT on consumer privacy, saying that “There are some people in the commercial space who say, ‘Oh, big data — well, let’s collect everything, keep it around forever, we’ll pay for somebody to think about security later.’ The question is whether we want to have some sort of policy framework in place to limit that.”

  Tim O’Reilly, founder of Open Source, who popularized the term “open source”  believes that the way companies sell the IOT devices on consumers are misplaced, disputing the notion that IOT is about gaining efficiency from putting all kinds of devices online and postulating that “IOT is really about human augmentation. The applications are profoundly different when you have sensors and data driving the decision-making.”

  Editorials at WIRED have also expressed concern, one stating ‘what you’re about to lose is your privacy. Actually, it’s worse than that. You aren’t just going to lose your privacy; you’re going to have to watch the very concept of privacy be rewritten under your nose.”

  The American Civil Liberties Union(ACLU) expressed concern regarding the ability of IOT to erode people’s control over their own lives. The ACLU wrote that “There’s simply no way to forecast how these immense powers — disproportionately accumulating in the hands of corporations seeking financial advantage and governments craving ever more control — will be used. Chances are Big Data and the Internet of Things will make it harder for us to control our own lives, as we grow increasingly transparent to powerful corporations and government institutions that are becoming more opaque to us.”

  If you’ve watched the new CBS series “Cyber NCIS,” you get a sense of how IOT could wreak havoc on the populace. Episodes have envisioned how IOT has taken over the control of automobiles, airliners, and drones, with disastrous results. And one episode followed a terrorist plot that used IOT to detonate a bomb.

  The Internet of Things will transform building and real estate management but we should be vigilant to the dark side of this technology. In the wake of the recent Paris attacks, we shudder at the prospects of extremists using this stuff to attack our homeland.

  The post A Closer Look at IOT (Internet of Things) first appeared on Visual Lease.]]> https://visuallease.com/20151111three-scenarios-of-the-future-of-work-and-workplace-implications/ Wed, 11 Nov 2015 22:04:08 +0000 http://visuallease.wpengine.com/?p=160 Price Waterhouse Coopers recently published a report,  “The Future of Work, a Journey to 2022,” in which the consulting firm developed three scenarios of how the future of work may evolve over the next 7 years. Mike reviews them here.
  The post Three Scenarios of the Future of Work and Workplace Implications first appeared on Visual Lease.]]>

  PriceWaterhouseCoopers (PWC) recently published a report,  “The Future of Work, a Journey to 2022,” in which the consulting firm developed three scenarios of how the future of work may evolve over the next 7 years. The project employed  the scenario planning technique invented by Peter Schwartz, and described in his book, “The Art of the Long View” made famous by Shell Oil which anticipated the oil crisis in the 1970s.  The three scenarios in the PWC report emerge from two orthogonal vectors:  1) fragmentation/ integration and 2)  collectivism/ individualism. PWC labels the three scenarios as the “Orange world” where small is beautiful, the “Green world” where companies “care,” and the “Blue world” where corporate is king. In the Orange world, “ companies begin to break down into smaller collaborative networks and specialization dominates the world economy.” In the Green world, “social responsibility dominates the corporate agenda with concerns about demographic changes, climate and sustainability issues.” In the Blue world, “big company capitalism rules as organizations continue to grow bigger and individual preferences trump beliefs about social responsibility.”

  While the report focuses primarily on the human resource implications of the three scenarios, it has little to say about the workplace implications of these three futures. Here are my thoughts on that question:

  The Orange world workplace: This is the world of entrepreneurs and free lancers, who favor highly flexible and IT intensive work environments. Incubator, co-working workplaces will proliferate, particularly in urban, regentrified neighborhoods. (think Silicon Alley in New York, or South of Market in San Francisco) Informality will dominate where millennials are the primary users of the workplace facilities, although boomers, and gen-Xers will also grow as a percentage of the workforce as people live longer and put off retirement.

  The Green world will emphasize environmental and sustainable work environments. LEED (Leadership in Energy & Environmental Design) certified design will predominate and most of the office growth in the green world will occur in suburban and rural markets, because of the lower cost of development. With its emphasis on sustainability, the Green world will prompt continuous innovation in office design, and advances in mechanical and electrical systems that will embrace technology at every level of design, installation and operation. The Green world will spur development of “the internet of things” where all aspects of building operations will be managed by automated control systems, spanning the entire spectrum including electrical, mechanical, security, and other aspects of the building environment.

  The Blue world reflects perhaps the most conservative and traditional office environment. With its emphasis on cost containment and control, the workplace is more formal and more hierarchical with a mix of closed and open workstations. This is the world of high rise offices, and suburban campuses, and even though there will be workplace flexibility, and proliferation of mobile technology, the workforce of the Blue World works primarily from more traditional office environments.

  There are megatrends that will cut across these three futures and influence the CRE management tasks and responsibilities in the years ahead:

  ·      Mobility: the workforce will become ever more mobile as communication technology advances with stunning speed. CRE managers will need to embrace workplace agility concepts both in office design, and operational support

  ·      Internet of Things (IOT): Virtually everything about the office environment will be machine addressable through the internet. This reality will revolutionize building operations and design. Most aspects of the workplace environment will be automated and regulated by digital technology, and this data flow will be captured and analyzed within building management systems of the near future.

  Big Data: The growth of massive data bases and analytical software, mostly based in the cloud, will revolutionize the management of real estate, leases, and the whole spectrum of fixed assets. Forecasting office demand will be like forecasting the weather, and CRE managers will have enormous insight into workplace drivers and costs through the advent of big data and analytics.

  Demographics: The changes in demographics will have a profound impact on workplace design and location criteria. The workforce is aging, retirement will be extended, and racial diversity will be the norm particularly in urban and international markets.

  Outsourcing: Outsourcing will grow more rapidly. Most corporate functions including real estate and workplace management will invariably be outsourced to service firms. Increasingly specialty service firms will take on the responsibility of non-core activities. This will be driven in part by technology enablers, but also as cost containment becomes a management imperative. 

  Some years ago I concluded a research note with a quote from William Jennings Bryant. I think its apropos as we contemplate the future:  “The future is not to be predicted but imagined and acted upon. Destiny is no matter of chance. It is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”

  The post Three Scenarios of the Future of Work and Workplace Implications first appeared on Visual Lease.]]> https://visuallease.com/2015115back-to-the-future-past-predictions-on-cre-and-the-workplace/ Thu, 05 Nov 2015 21:18:21 +0000 http://visuallease.wpengine.com/?p=159 October, 2015 is the month and year when Marty McFly traveled from July 1985 to the future in the famous Delorean time machine. Thus, it’s a good time to review past predictions of the changing workplace, and to rate their accuracy. Predictions of the future almost always miss the mark. Here are a few of my favorite classic misses:*
  The post Back to the Future: Past Predictions on CRE and the Workplace first appeared on Visual Lease.]]>

  October, 2015 is the month and year when Marty McFly traveled from July 1985 to the future in the famous Delorean time machine. Thus, it’s a good time to review past predictions of the changing workplace, and to rate their accuracy. Predictions of the future almost always miss the mark. Here are a few of my favorite classic misses:*

  • “I think there is a world market for maybe five computers.” — Thomas Watson, chairman of IBM, 1943

  • “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” — Western Union internal memo, 1876.

   

  • “While theoretically and technically television may be feasible, commercially and financially it is an impossibility.” — Lee DeForest, inventor.

   

  • “The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?” — David Sarnoff’s associates in response to his urgings for investment in the radio in the 1920s.

   

  • “Radio has no future. Heavier-than-air flying machines are impossible. X-rays will prove to be a hoax.” — William Thomson, Lord Kelvin, British scientist, 1899.

  My entire career has been underscored by a succession of predictions, primarily about the workplace. While a real estate manager at Xerox, I directed a project entitled “Office 88,” which was a forecast of the “new workplace” from a perspective in 1983. The primary purpose of the project was to identify technologies and furnishings that would transform the office environment. This was at a time when office technology was primarily still in the electric typewriter and fax machine era. I think our greatest insight related to the possibility of the paperless office which was way off the mark. Then a few years later, I formed “The Harbinger Group,” which was essentially a research group formed to identify changes in the workplace that would present product opportunities for Xerox. Our greatest achievement was the publishing of a research report, ORBIT II, which was a collaboration with Cornell and a British architectural firm, DEGW. The acronym stood for Organizations, Buildings, and Information Technology, and was a sequel to an earlier ORBIT study. We focused on office design, and services, with the advent of networked computing. Perhaps our greatest contribution was identifying a network technology at Xerox’s Palo Alto Research Center (PARC) that created software that made it possible to send multi-media over fiber optic cable. Xerox opted to license the technology to two Xerox individuals who formed their own company: Synoptics. This fledgling enterprise became Bay Networks and was eventually acquired By Cisco. The Xerox guys made millions (not yours truly) and the birth of client server and multimedia telemetry was born. In essence Xerox invented one of the cornerstones of the Internet, but didn’t know it.

  My latest foray into predicting the future workplace was the collaboration with MIT, Gartner and 22 corporate sponsors in a year- long research project entitled, “The Agile Workplace.” (Gartner, 2001) In reviewing the predictions in this report, I would say if anything we were too conservative. Almost all the predictions emerged as reality but much quicker than we had predicted. For example, we completely underestimated the growth of mobile computing and the impact of the smart phone. We also miss-judged the integration of workplace services, i.e. the merger of CRE, HR and IT. Even this prediction was too aggressive:

  Through 2006, fewer than 25 percent of enterprises will fully integrate support services and processes between human resources, IS and real property management organizations, losing the potential for 15 percent to 35 percent improvement against financial and customer satisfaction benchmarks (0.7probability).

  In the next Blog post I will put forward a few new predictions about CRE and the evolving workplace. Change is accelerating at blinding speed, so making predictions that will stand the test of time is always a risky business.

  The post Back to the Future: Past Predictions on CRE and the Workplace first appeared on Visual Lease.]]> https://visuallease.com/20151029a-correction-to-the-white-paper-the-lease-accounting-tsunami-are-you-prepared-to-weather-the-storm/ Thu, 29 Oct 2015 17:22:36 +0000 http://visuallease.wpengine.com/?p=158 In a earlier white paper, The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?, I wrote that users should evaluate the effects of the new FASB/IASB on a company’sdebt structure, debt to equity, and other factors that would be affected by the new standard, assuming lease liabilities would be considered as debt. In point of fact, the FASB explicitly decided that Type B lease liabilities should not be considered as “debt.” However, the IASB which treats all leases as Type A leases or capital leases, does consider these liabilities as “debt-like liabilities.” (Their exact words) As one of my accounting friends advised “The accounting for Type A leases requires IASB companies to record interest expense, and segregates payments on the lease liability into operations and financing outflows per the cashflow statement, which is consistent with debt.”

  Thus, US companies will experience less impact from the new standard, particularly as it relates to debt covenants, debt to equity metrics, and capital structures. But US companies with significant international lease portfolios subject to the IASB standard, will see their debt levels increase.

  The post A Correction to the White Paper: “The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?” first appeared on Visual Lease.]]>

  In a earlier white paper, The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?, I wrote that users should evaluate the effects of the new FASB/IASB on a company’sdebt structure, debt to equity, and other factors that would be affected by the new standard, assuming lease liabilities would be considered as debt. In point of fact, the FASB explicitly decided that Type B lease liabilities should not be considered as “debt.” However, the IASB which treats all leases as Type A leases or capital leases, does consider these liabilities as “debt-like liabilities.” (Their exact words) As one of my accounting friends advised “The accounting for Type A leases requires IASB companies to record interest expense, and segregates payments on the lease liability into operations and financing outflows per the cashflow statement, which is consistent with debt.”

  Thus, US companies will experience less impact from the new standard, particularly as it relates to debt covenants, debt to equity metrics, and capital structures. But US companies with significant international lease portfolios subject to the IASB standard, will see their debt levels increase.

  The post A Correction to the White Paper: “The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?” first appeared on Visual Lease.]]> https://visuallease.com/20151022it-and-facilities-management-rivals-or-partners/ Thu, 22 Oct 2015 22:17:41 +0000 http://visuallease.wpengine.com/?p=157 Having split my career between facilities management and IT management,  I gained an appreciation of how these two professional disciplines have many similarities, but distinct differences which createpolitical difficulties in many organizations.
  The post IT and Facilities Management : Rivals or Partners? first appeared on Visual Lease.]]>

  Having split my career between facilities management and IT management,  I gained an appreciation of how these two professional disciplines have many similarities, but distinct differences which createpolitical difficulties in many organizations. Both facilities management and IT management have large portfolios of assets, manage significant capital budgets, and complete projects with large financial commitments. Both functions have mission critical responsibilities; and require professional knowledge and expertise, that depends on both experience, management skill, and unique technical knowledge and skill.

  IT and Facilities management have traditionally operated in separate worlds with distinct business cultures, differing professional orientations, different vocabularies, and conflicting operating objectives. The CIO lives or dies on the issue of reliability and uptime and business functionality. The facilities manager focuses on cost reduction, stable and predictable capacities and tolerances, and maintainability. The IT organization uses acronyms and other technical terms like MIPs, bandwidth, uptime, and throughput that seem like Greek to the facilities team. Conversely, the facilities staff talks in terms of square feet and cost per square foot. With the advent of technology convergence, virtualization, cloud computing, and high density processing these two worlds now collide, particularly in the context of data center planning and design, and new office projects. With the advent of mobile technology and cloud based applications, information technology has transformed the nature of work and the workplace. Thus, it’s critical that the CIO and facilities and real estate executive work closely in both the planning and implementation of modern office facilities. In fact, many organizations have created cross functional teams to encourage collaboration between the IT and facilities organization. Once scorned as inefficient and politically conflicted, the matrix organizational structure, has grown in popularity as a way to bridge the gap between IT and facilities. Another organizational technique to bridge the gap is to use virtual teams composed of IT, facilities, project engineers, and other disciplines needed for a major office project. The virtual teams work primarily through web based applications that coordinate work flow and control project accountability.

  In addition some organizations actually have both facilities, real estate, and IT report to a single executive, to insure close coordination. By cross fertilizing the various functions, team members gain appreciation for the other’s priorities and challenges. When we worked on the “Agile Workplace” project, we discovered several major companies who experimented with various organizational models with some degree of success. The key to success with any model was a focus on leadership,  communication and creating joint accountabilities for project success.

  IT and facilities managementoversee large operating and capital budgets. By working together, they have a much greater chance for success than working in isolation.  Now that the data center is the critical entity for cloud computing, it is becoming urgent that facilities and IT workmore closely together, or risk dysfunctional projects with budget overruns, and broken schedules.

  The post IT and Facilities Management : Rivals or Partners? first appeared on Visual Lease.]]> https://visuallease.com/2015109clicks-and-bricks/ Fri, 09 Oct 2015 15:04:02 +0000 http://visuallease.wpengine.com/?p=156 Virtually the entire infrastructure of the enterprise combines traditional facilities assets: buildings, land, furnishings, and lease contracts and IT assets: servers, storage, networks, mainframes, and applications. In the last half century these distinct asset classes have become ever more intertwined, interdependent, and fused to create work platforms.
  The post Clicks and Bricks first appeared on Visual Lease.]]>

  A comment on the next few blog entries:

  One of my interests as both a former real estate executive and then an analyst at Gartner has been the relationship of real estate management and IT management. I predicted over twenty-five years ago while at Xerox, that IT would transform the workplace and the nature of work. This was before the advent of the internet and mobile technology. We were still working with client server architectures, LANs, and desktop computing. At Xerox, I founded a subsidiary, the Harbinger Group which focused on the office of the future. We did a multi-client study called ORBIT-II in conjunction with Cornell University and a British Architect.  In that study we were convinced that emerging technologies would revolutionize the workplace. Later at Gartner I led a multi-client study we called, “The Agile Workplace,” in which we examined how IT was driving workplace flexibility, to include telecommuting, desk sharing, and co-working arrangements.

  These blog entries reflect on this IT-real estate convergence. I hope you find them of interest:

  Clicks and Bricks

  Virtually the entire infrastructure of the enterprise combines traditional facilities assets: buildings, land, furnishings, and lease contracts and IT assets: servers, storage, networks, mainframes, and applications. In the last half century these distinct asset classes have become ever more intertwined, interdependent, and fused to create work platforms. With the advent of distributed processing in the 1980s, and then net centric computing in the last 10-15 years, the boundaries between space (physical) and cyberspace (virtual) continue to blur. Consider the retail industry. Internet shopping has transformed the nature of retail, where retailers combine traditional store based offerings in combination with web based shopping. Blockbuster competes with Netflix by combining store based rentals with web based services. You can order a DVD on line, receive it in the mail, and return to a local Blockbuster store. This combination of “clicks and bricks” typifies many retail business models whether its electronics, automobiles, or fashion. Shop on the web or the store, or both. Clicks and bricks, the combination of physical infrastructure and web based applications and connectivity continues to transform virtually all industries including medicine (virtual diagnostics); education (virtual classrooms); financial services (virtual banking and trading) and government (self service via web based applications).

  This fusion of the physical with digital infrastructure mandates a fusion of management disciplines, processes, software tools, and performance metrics. But IT management and facilities management still remain primarily siloed in their own functional domains with different vocabularies, cultures, and time scales. Beyond the obvious differences, IT and facilities bring vastly different perspectives to their respective functional disciplines. IT focuses on availability, uptime, fault tolerance, and reliability. Facilities focuses on stability, efficiency, capital conservation, and risk minimization. Not that these factors aren’t important to the CIO; but uptime always wins above efficiency. One of the biggest differences between IT and facilities is the time scale dimension. IT assets typically involve a 2-3 year asset life; where facilities assets span decades. IT changes rapidly; hardware and software assets become obsolete quickly sometimes in less than a year; whereas buildings endure for years. IT operations work in real time; responding or reacting to instantaneous changes in the network; whereas facilities operations work in much longer time scales; a typical building project can span 24 to 36 months; whereas software applications can be acquired almost immediately via a web services offering.

  No where has the critical need for IT and facilities management collaboration been more urgent than in the modern data center. There is a virtual crisis in the modern data center. With the advent of high density equipment like blade servers; the power demand and corresponding heat gain in the data center has quadrupled in the last few years. Historically, data centers were designed to provide 40 to 50 watts per square foot; or the equivalent of 2-3 Kilowatts per rack. Today, power demands of 10KW – 15 KW per rack overwhelm traditional power supply and underfloor cooling. The energy costs of the data center have commensurately escalated to 4 to 5 times historical rates. It’s now common to see data centers incurring $50 to $60 per square foot in annual electrical costs. George Gilder, at a recent conference in Boston, reported that the combined energy consumption of the four major internet companies (Google, Yahoo, AOL, and MSN) equal the power consumption of the city of Las Vegas. Goggle is reportedly spending in excess of $1 Billion a year alone in electrical costs. The data center energy crisis has emerged as a federal imperative. The US Congress has passed legislation for the EPA to study data center energy consumption and return later this summer for legislative recommendations that may involve penalties or restrictions similar to recent legislative initiatives in building more energy efficient automobiles. The broader “green” trend globally will become more intense, necessitating a more collaborative and unified approach between IT and facilities management within the enterprise.

   

  The post Clicks and Bricks first appeared on Visual Lease.]]> https://visuallease.com/201591forming-the-strategic-planning-team/ Tue, 01 Sep 2015 15:46:19 +0000 http://visuallease.wpengine.com/?p=153 How do you build your CRE team?
  The post Forming the Strategic Planning Team first appeared on Visual Lease.]]>

   For purposes of the discussion on CRE strategic planning, let’s assume the following:

  ·      The portfolio of leased and owned property is both long established and diverse. The corporate properties are primarily leased facilities with lease terms averaging five years with several renewal and expansion options. Most of the major headquarters offices and manufacturing sites are owned properties. The portfolio is split between domestic and international locations.

  ·      The head of corporate real estate is new to the job and is not encumbered with past biases and cultural imperatives. The new director has extensive experience both as a CRE manager and real estate broker/consultant. The real estate team is fairly small consisting of leasing specialists, project managers, and a few specialists like designers and engineers.

  ·      The new CRE director has been recruited to update and transform the real estate function. Reporting to the corporate treasurer, the CRE director has been given a year to demonstrate progress with the corporate portfolio.

  ·      Corporate management has set three main goals for the CRE function. 1.) Improve the cost of occupancy 2.) Provide a contemporary and agile environment for the office workforce. 3.) Make the company portfolio more flexible and environmentally sustainable.

  The Planning Team:

  The CRE director forms a planning team with representatives from his staff as well as representatives from corporate finance, human resources, IT, and lawyers from the office of general council. He also tags representatives from corporate accounting to cover the requirements of the new FASB lease standard. (See earlier blog entries on this subject)

  The planning team sets forth the following priority actions:

  ·      Develop a master listing of all leased properties, with termination dates in descending order.

  ·      Identify performance indicators of the leased portfolio, to include: cost/sq ft., space per person, net present value of annual rental, expansion options, renewal options, building age and condition, space availability or shortages, location status (security, access to public transportation, convenience to employees, convenience to customers if relevant)

  ·      Run a parallel listing of leased locations using the new FASB/IASB leasing standard. Identify high impact leases, i.e. high asset value, candidate for purchase? Disposition?

  ·      Identify performance indicators of owned buildings and properties to include age, condition, energy costs, expandability, highest and best use, current market value, net book value, land value, easements.

  ·      Identify the technological status of all company properties i.e. telecommunication infrastructure, LANS, WiFi, printers, fax, HDTV, video conferencing, digital security.

  Benchmarking:

  The next step in the strategic planning process is to benchmark the key performance indicators of the portfolio against market benchmarks and competitive benchmarks.

  Key questions:

  ·      How do company lease rates compare to local market rates, competitor’s rates?

  ·      What is the average space per person as compared to industry benchmarks? (IFMA, Corenet, etc.)

  ·      How do owned facility values (NBV) compare to current market values?

  ·      What are the most valuable, least valuable properties in the portfolio?

  ·      Identify high cost, or facilities with constrained occupancy in need of expansion or relocation

  ·      Identify energy efficient/ inefficient locations.

  ·      Identify locations with significant maintenance / repair issues

  ·      Identify feasibility of converting to alternative workplace strategy in select locations. (use of desk sharing, telecommuting, co-working sites like executive suites)

  ·      Is there a need to update company office standards?

  In the next Blog entry we’ll look at what a strategic real estate plan looks like and how it would be implemented.

   

  The post Forming the Strategic Planning Team first appeared on Visual Lease.]]> https://visuallease.com/2015826some-thoughts-on-corporate-real-estate-strategy/ Wed, 26 Aug 2015 22:48:49 +0000 http://visuallease.wpengine.com/?p=152 So what are the major components of the corporate real estate strategic plan?
  The post Some Thoughts on Corporate Real Estate Strategy first appeared on Visual Lease.]]>

              Much has been written about corporate real estate strategy. A Google search on the topic will yield hundreds of papers and presentations on the subject. Almost every real estate software vendor has posted articles on the subject and related the topic to their software and service offering. But from my experience very few corporate real estate organizations maintain a detailed real estate strategic plan, and worst very few fail to execute the plan that they’ve developed. Why is this the case?

              I suspect that the real estate organizations are caught up in the day to day priorities and flash points and thus have little time to devote to strategy. It requires rare leadership on the part of the corporate real estate executive and senior management to set a high priority on strategic planning and execution. But for those corporate real estate organizations that adopt a strategic focus, the payoff in higher value, cost reduction, and enhanced efficiencies is profound.

              So what are the major components of the corporate real estate strategic plan?

  ·      Financial: What are the profit goals and what role will the real estate portfolio play in contributing to these goals?

  ·      Customer support: How do the enterprise facilities support customer care? To what degree will the location and physical layout support the customer? (This is critical for retail facilities.)

  ·      Company Culture: To what degree will the facilities and interior design reinforce company culture? Is the space formal or informal? Will the facilities support collaboration and innovation? What is the level of privacy required?

  ·      Employee access: To what degree are the company facilities accessible to the employee base? Are the locations near public transportation? Is there adequate parking? Are the facilities safe, comfortable, and ADA compliant?

  ·      Security: To what degree do the facilities provide sufficient perimeter and internal security?

  ·      Information technology: To what degree are company locations adequately provisioned for advanced office technology infrastructure (WIFI, CATV, Broadband cabling, Laser Printing, Video Conferencing, Etc)

  ·      Flexibility: To what degree do the company leases provide options for expansion or termination? What is the capacity of the locations for space growth over the next five to ten years? What leases can be terminated without penalty?

  ·      Consolidations: What opportunities are there to consolidate locations for efficiency purposes? How much space and cost can be reduced through strategic consolidations? What investments are needed to implement these consolidations? What is the schedule for implementation?

  ·      Environmental Considerations: What is the status of the company buildings from an environmental standpoint? What upgrades are needed to make the buildings compliant with local and national standards regarding air quality and energy efficiency? Are there issues relating to hazardous conditions such as asbestos or chemical spills?

              In the next several Blog entries I’ll drill down into the strategic planning process. And discuss how the CRE executive can form a planning team and devise a process to step through a systematic strategic planning process. Future Blog entries will also explore how the real estate system can support the planning and implementation process.

   

  The post Some Thoughts on Corporate Real Estate Strategy first appeared on Visual Lease.]]> https://visuallease.com/2015826a-leasing-strategy-to-end-all-leasing-strategies/ Mon, 17 Aug 2015 22:46:00 +0000 http://visuallease.wpengine.com/?p=151 At the time I was the Corporate Real Estate Director of a major multinational corporation with a headquarters in New York City. It was the mid 1990s, and the real estate market in midtown Manhattan was a bit soft. Senior management wanted to move out of New York to an owned (and relatively vacant) office building in suburban Connecticut.
  The post A Leasing Strategy to End All Leasing Strategies first appeared on Visual Lease.]]>

              At the time I was the Corporate Real Estate Director of a major multinational corporation with a headquarters in New York City. It was the mid 1990s, and the real estate market in midtown Manhattan was a bit soft. Senior management wanted to move out of New York to an owned (and relatively vacant) office building in suburban Connecticut. Most of the senior staff lived in Fairfield County, Connecticut and wanted to reduce their daily commute. I was faced with a serious dilemma: the lease on the 200,000 square foot headquarters office had at least ten more years and its rental rate was at least $10 over the current market rate. Thus, the possibility of a sublease was remote since accounting rules required that the difference between the sublease rate and the face rate of the lease would mean roughly $2 million per year for 10 years or $20 Million in rental that we would have to write off as a lump sum payment. Obviously management was loathe to take that kind of hit to their bottom line. What to do?

              Our real estate team studied the leasing data for the corporation’s divisions in Manhattan, Long Island, and neighboring New Jersey. As it turned out, there were 3 different leases in mid town Manhattan that expired over a 2-3 year time frame. Would it be possible to move the headquarters staff to the owned facility in Fairfield County and then move the divisions into the Headquarters space? This would theoretically work, but we would have to subsidize the rental as an incentive for the business units to make the move. The other challenge is that we needed to renovate the Connecticut building for corporate headquarters staff, a project that would take at least two years. Thus, we had to lease a temporary facility in Connecticut, to make room for the midtown location to be re-configured for the operating divisions.

              When I explained the strategy to the CEO, he rolled his eyes. “Bell,” he said, “This is not a ‘No Brainer’, this is a “Brainer!” But he told me to go back and develop detailed plans and financials for the over-all strategy. A month later, we presented the plan to the senior management team, and they gave us the “go ahead.”

              We worked closely with the operating divisions and eventually got their reluctant agreement to make the move. Needless to say, they were getting a good deal: prime midtown Manhattan offices on Park Avenue, only blocks from Grand Central, and a rental rate substantially below what they were paying in their current locations.  The task ahead was daunting. We needed to renovate the Connecticut building, and the good news was that it would require 70,000 sq feet less, thus reducing the headquarters footprint from 200,000 sq. ft. of expensive occupancy to 130,000 square feet of low cost owned space. We would have to take a short term rental for two years, while we renovated the permanent building as well as reconfigure the Park Avenue headquarters for the operating division offices. Finally, we had to negotiate with the State of Connecticut incentives to move the headquarters from New York to Connecticut. The payroll was substantial and I had no trouble exacting a meaningful grant from the state.

              All in all, we completed all the pieces of the strategy on time and on budget. The key to success was thinking outside the box. Rather than figure out ways to offset the huge accounting write-off, we allowed other leases to expire as scheduled and moved those operating unit tenants into the vacated corporate headquarters space. This strategy underscores the opportunities that reside in your lease portfolio. By aligning lease termination dates and other factors like market rental rates and space consolidations, there are opportunities to reduce space and costs while streamlining operations. Obviously having up to date and detailed lease data is crucial to any strategic planning exercise.

  The post A Leasing Strategy to End All Leasing Strategies first appeared on Visual Lease.]]> https://visuallease.com/2015811why-do-we-need-a-new-lease-standard/ Tue, 11 Aug 2015 20:34:07 +0000 http://visuallease.wpengine.com/?p=149 We are frequently asked why we need a new FASB lease standard.. here are our thoughts...
  The post Why Do We Need a New Lease Standard? first appeared on Visual Lease.]]>

  We are frequently asked why we need a new FASB lease standard. Critics of the new proposed standard complain that the benefits are offset by the costs to implement, maintain, and adjust company balance sheets to reflect the added debt. Let’s recall that the new FASB (and IASB) proposed standard requires placing all leases on the balance sheet as assets, and corresponding liabilities. There are slight differences between the International Standard, and the US FASB version primarily dealing with a distinction in capital leases (Type A) and operating leases (Type B) The International standard requires that all leases be classified as Type A, whereas the US version classifies all non-capital leases as operating leases (Type B) with straight line amortization of the rent.

              Small businesses as communicated by one of their industry groups, takes strong exception to the burdens and costs of adopting the new standards. In 2012, two congressmen sent a letter on behalf of 58 other Congressional members urging FASB to reconsider the proposed standard, as being a heavy burden to small business, and a “job killer.” Congressmen Peter King and Brad Sherman reiterated their concerns in an article published in November, 2014 raising the specter of job loss of 190,000 individuals and an economic hit of $400 million per year indefinitely.

              So do we need these new standards? Before we answer this question let’s review the consequences of less than transparent financial reporting over the last decade. Remember Enron? Enron’s use of fraudulent accounting gimmicks and off balance treatment of debt led to one of the largest bankruptcies in US history. By reporting inflated revenues,  “mark-to-market” valuation of assets, and the use of exotic use of SPEs (special purpose entities) to hide debt, Enron collapsed in 2001, along with their accounting firm, Arthur Anderson.  Their chief operating officer, Jeffrey Skilling, and Chief Financial Officer, Andrew Fastow, were convicted of securities fraud with long jail sentences. The CEO, Kenneth Lay, died during his trial.

              But there’re  more recent examples. How about the financial crisis of 2007-2008? This disaster can be traced to less than transparent reporting of enormous debt as a consequence of using exotic financial tools as Credit Default Swaps, Collaterized Debt Obligations, and the failure of credit rating agencies to accurately analyze and report the effects of these tools on corporate debt and risk. The federal government had to bail out these banks with billions of tax payer money.

              We believe that new proposed FASB and ISAB lease standards will mitigate investment risk by making leasing debt fully visible on the balance sheet. For many companies, particularly retail and other enterprises with vast portfolios of leased properties like fast food outlets, the debt load of their leased properties will be significant. And for entities in the airline industry with large leased fleets, there will be a similar increment to their balance sheets. And even for small companies, who need debt capacity to expand their business, the effects of incremental debt in their financials could negatively impact their ability to secure new debt financing, or even to re-finance current debt.

              The new FASB and IASB lease standards will require diligent management in the transition phase. And yes, the process will incur incremental cost in software, staff resources, and consulting assistance. But the end result will certainly raise the consciousness of senior management about their real estate portfolio, and establish a more detailed understanding of how their real estate practices and portfolio affect the bottom line of their business.

  The post Why Do We Need a New Lease Standard? first appeared on Visual Lease.]]> https://visuallease.com/2015810iwms-priority-applications-whats-important-what-can-wait/ Mon, 10 Aug 2015 18:10:05 +0000 http://visuallease.wpengine.com/?p=148 What are some guiding principles for selecting and investing in software functionality in support of your facilities and real estate operations?
  The post IWMS Priority Applications: What’s Important? What Can Wait? first appeared on Visual Lease.]]>

             In years past, someone asked the infamous bank robber, Willy Sutton, why he robbed banks.  Sutton responded, “Because that’s where the money is!” Sutton’s pragmatic answer could be the guiding principle behind software prioritization for facilities and real estate applications. In other words, what are some guiding principles for selecting and investing in software functionality in support of your facilities and real estate operations? To use Willy Sutton’s logic, CRE managers should follow the money in the prioritization process.

           In corporate real estate, it all begins with the leasing process. Having a well thought out leasing and portfolio strategy, is the first step in developing a software application strategy. Everything in corporate real estate begins with the lease portfolio. Corporate leases define obligations, tenant rights, options, costs, and in terms of new accounting rules, assets and liabilities. We know that company lease obligations represent  the second  largest cost on the P&L statement behind labor, and thus, the systematic and attentive management of these costs is crucial to company profitability. Leasing is a complex and labor intensive activity. Typically a medium to large enterprise must  handle hundreds of distinct transactions per  month  generating thousands in leasing cost and related expenditures for utilities, insurance, amortization, taxes, and other related costs. Beyond the lease negotiation and contracting activities, the enterprise must administer a myriad of tasks, including rent payment, lease renewals and extensions, escalations, CAM charges, and cancellations. Thus, the first priority in selecting a software application, is to start with a lease management tool that becomes the central focus for developing a company wide leasing strategy.

           Following the money trail, the second priority is acquiring a space management tool to support space planning, and to assist in space forecasting including  moves, adds, and changes, and the myriad activities and tasks, in managing the details of facilities demand and capacity. As we wrote in an earlier blog, the space management module can be readily integrated with the lease portfolio application so that a leasing record can be linked to space layouts, furniture plans, and human resource data. The space management tool can be enormously effective in planning consolidations, expansions, reductions and collocations of related staff offices .

           The third priority in the IWMS prioritization process, is the selection of a maintenance management tool to handle the various maintenance tasks, such as predictive and preventive maintenance, repairs, and major refurbishments. There are a host of best in class software products to support the maintenance process, and like the space management tool, it is paramount to integrate these tools with the lease management applications and portfolio data base. Like virtually all the applications related to the CRE process, it is important to insure that the maintenance applications are adapted for mobile use, so that maintenance staff can access and input data from the field.

           Underpinning all these applications will be a best in class project management capability, so that whatever corporate real estate function is being considered has a well conceived operating process supported by the project management application. These tools are typically role based, and have pre-determined approval and calendaring functionality, designed to streamline and control the various processes governing the leasing, construction, and maintenance processes.

           Selecting and configuring software in support of the real estate and facilities management process can be a time consuming and expensive endeavor. For many larger enterprises with vast portfolios, it may be wise to go with a single integrated IWMS system, adding modules over time. This offers a single source, with “one throat to choke” if things go off the rails. But now with cloud computing and powerful middleware, it’s possible to select best-in-breed solutions on a prioritized basis, and integrate over time. No longer are user organizations confronted with the “big bang” possibility of going with a full suite of applications at the outset, costing millions and taking years to implement. So going on a prioritized basis is smart like Willy, because, “that’s where the money is!”

  The post IWMS Priority Applications: What’s Important? What Can Wait? first appeared on Visual Lease.]]> https://visuallease.com/2015810rental-escalations-hidden-land-mines-how-your-leased-management-system-can-help/ Mon, 03 Aug 2015 18:07:00 +0000 http://visuallease.wpengine.com/?p=147 Perhaps one of the most daunting and complex responsibilities of the corporate real estate executive is the management  of lease escalation costs. These costs which represent expense pass- thrus from the landlord to the tenant can represent nearly half or more of the cost of tenant occupancy.
  The post Rental Escalations, Hidden Land Mines? How Your Lease Management System Can Help first appeared on Visual Lease.]]>

              Perhaps one of the most daunting and complex responsibilities of the corporate real estate executive is the management  of lease escalation costs. These costs which represent expense pass- thrus from the landlord to the tenant can represent nearly half or more of the cost of tenant occupancy. The complexity of first negotiating favorable expense escalation clauses, and then managing these costs, can create enormous financial and legal penalties for the commercial tenant, unless managed effectively.

              What are some of the more troublesome challenges in rental escalations, what I liken to leasing land mines? First, is discovering erroneous or fraudulent expense items that fall outside legitimate building owner expenses. These would include labeling capital expenses as maintenance expenses, costs unrelated to the tenant space such as personnel costs unrelated to the building, and fees and other service costs unrelated to the tenant space. Thus, it’s crucial that detailed expense definitions which form the basis of expense escalations are included in the lease, along with a clear statement of the base year. Too often landlords miscalculate escalations because of erroneous base years, or misused expense definitions.

        Another source of erroneous charges relates to miscalculating tenant space as the basis of CAM (common area maintenance) charges. Depending on the specific real estate market, definitions of usable, rentable, and gross space can vary widely and these variances can affect escalation charges by a wide margin.

              How can a lease management system assist in the management of escalations? A product like Visual Lease provides a module which automatically flags escalation charges that deviate from the parameters in the lease. This feature greatly reduces the time and effort required in scrutinizing and analyzing escalation charges, and can assist in pinpointing charges that may require specific audit review. Depending on the number of leases, the complexity of escalation clauses, the necessary documentation that needs to be researched about a specific charge, the number and skill of lease administrative staff, all these factors define the magnitude and difficulty of managing escalation costs. A typical corporate lease portfolio of 500 leases will generate at least 30-40 escalation billings per month. While most of the billings will be generally accurate, they will require analysis to validate their correctness before payment. By having the lease management system automatically scan the billings against lease terms, including expense stops, agreed- to expense categories, rate increases, allocations, and other specific terms in the various leases, will vastly reduce the time required to analyze and validate the escalation charges.

              As we discussed in an earlier blog posting, there is a real benefit in having a lease audit service combined with a lease management system. This combination provides the capability of bringing in the audit service on particularly troublesome escalation charges flagged by the system. This final line of defense ensures that for major problematic variances in an escalation charge from lease terms, will be challenged with detailed and exacting documentation. The savings to the tenant can be substantial and more than justify the audit fees.

  The post Rental Escalations, Hidden Land Mines? How Your Lease Management System Can Help first appeared on Visual Lease.]]> https://visuallease.com/2015721collaborating-with-your-tenant-rep-via-the-lease-management-system/ Tue, 21 Jul 2015 17:53:30 +0000 http://visuallease.wpengine.com/?p=150 Many companies today use tenant representatives to handle various leasing actions such as leasehold relocations, renewals, expansions, and extensions.  Tenant representatives are commercial brokers who typically operate exclusively as tenant advocates, while collecting commissions from building owners. This may seem like a conflict of interest, but the industry has self-regulating practices to avoid most abusive behavior. 
  The post Collaborating with Your Tenant Rep via the Lease Management System first appeared on Visual Lease.]]>

           Many companies today use tenant representatives to handle various leasing actions such as leasehold relocations, renewals, expansions, and extensions.  Tenant representatives are commercial brokers who typically operate exclusively as tenant advocates, while collecting commissions from building owners. This may seem like a conflict of interest, but the industry has self-regulating practices to avoid most abusive behavior. Maintaining a tenant representative relationship builds a degree of trust and efficiency in the leasing process as the tenant rep develops an intimate knowledge of the user client’s culture, policies, and practices.

           The question arises, in the context of the tenant rep and client relationship, of how the user client can use a lease management system as a collaboration tool. There are a number of specific leasing projects where the tenant rep and client can benefit from a broad use of the lease management system, such as Visual Lease:

  Critical lease dates: By having the tenant rep have access to the leasing system, the tenant rep can monitorcritical dates well in advance of taking action, and advise the user client of strategic options: whether to renew, expand, or relocate. Having these extra set of eyes on critical action dates, supplements the activities of lease administrators and leasing specialists.

  Market rates: The tenant rep can supplement leasing information of user leases with current market rates; providing insight to lease renewals at favorable rates, or whether it’s advantageous to relocate at new but lower rates.

  Market conditions: The tenant rep can supplement user lease data with market data such as absorption, supply and demand, competitive offerings, and changes in local tax or other market factors.

  Communication medium: Tenant reps can use the leasing system to update the user client on project status, such as renewals, or new leases. The system becomes an efficient medium for collaboration and communication, easily accessible remotely from the field, or in the office. Updates are real time, keeping both the user client and tenant rep current on leasing activity, project status, and rent payment status.

  Flagging problems: One area where the tenant rep can add significant value is spotting and reporting irregularities in escalation charges. By monitoring escalation payments, the tenant rep is able to flag errors or overages in certain CAM charges. It is here where the user client can benefit from the experience and knowledge of the tenant rep who typically has broad and deep experience with landlord practices.

  Strategic planning: The user client will benefit from involving the tenant rep in the strategic planning of the leasing portfolio, particularly in the context of facility consolidations, or strategic relocations. The leasing system becomes an essential tool in the planning process, by aligning actions with critical lease dates or options. Another important area for strategic planning is the question of lease versus buy, particularly in light of the pending FASB rule change on operating leases. It is usually advisable to gain the input from the tenant rep on lease/ buy questions, and to use the leasing system to flag these questions.

  The evolution of the tenant representation industry has matured considerably over the last ten years. It’s now a common practice for user organizations to enter into one or more exclusive partnerships with commercial realty firms, to execute leasing actions as well as to serve as strategic advisors to the corporate real estate organization. It’s both practical and advantageous to include the tenant rep advisor in the lease management system for the reasons cited above. By doing so the user client leverages the knowledge and experience of the tenant rep, as well as leverage the value of the leasing system itself.

  The post Collaborating with Your Tenant Rep via the Lease Management System first appeared on Visual Lease.]]> https://visuallease.com/2015717iwms-20-chief-characteristics/ Wed, 08 Jul 2015 21:46:00 +0000 http://visuallease.wpengine.com/?p=145 Advances in technology and changes in user behavior are driving significant transformation in Integrated Workplace Management Systems (IWMS) software architecture and delivery..
  The post IWMS 2.0 – Chief Characteristics first appeared on Visual Lease.]]>

  Advances in technology and changes in user behavior are driving significant transformation in Integrated Workplace Management Systems (IWMS) software architecture and delivery.

   IWMS in the Cloud

   Cloud based delivery has the effect of disaggregating the functionality of IWMS solutions from multiple vendors. No longer must users choose one vendor to deliver all the functionality of an IWMS suite. Alternatively, users can choose best- in- breed solutions, and then integrate in the cloud with a common data base, performance metrics, and process engines. The user client can join multiple best –in- breed solutions, realizing higher performance, while reducing the cost of configuring and installing the applications.

  This approach avoids the “big bang” implementation of a major IWMS solution which can take years to implement and millions in cost. Cloud based delivery can significantly reduce costs, by eliminating the need for server and storage hardware, data center staffing and facilities and energy costs. An ancillary benefit of moving to the cloud for IWMS delivery is to avoid the accounting effects of leasing hardware for premises based delivery. In a few years all leases, including IT leases will be capitalized and put on the balance sheet. Cloud based delivery avoids this accounting impact.

  Growth in User Mobility

  IWMS 2.0 is influenced by a rapid growth in user mobility. Most corporate real estate staff, particularly construction, maintenance and real estate project staff will access IWMS functionality via wireless devices. Lease data, maintenance orders, construction schedules, and other portfolio data will be readily inputted and retrieved via mobile technology connected via the internet to cloud based applications.  This trend greatly enhances the productivity of in-field professionals, by minimizing office time and increasing time in the field. It also shortens response time by closing the gap between data input and output. For example, leasing specialists have ready access to lease terms, notices, and other time sensitive data, while on site at a company location.

  Sharing Data Between Systems

  Today, most modern cloud-based software systems (if not all) expose what is called an “API” that allow that system to seamlessly talk with other systems.  An API is, by definition, is something that defines the way in which two entities communicate.  These APIs are completely invisible to Web-based software users; their job is to run silently in the background, providing a way for applications to work with each other to get the user the information or functionality he needs.  The important part of the API in this context is not so much what it is at a technical level, but what it does at a practical level; simply stated they are the glue that allows all of the great software you leverage today share data.  This has become so commonplace in todays world that if you use almost any website today, I am sure you have unknowingly been using APIs.  APIs are the KEY to building seamless IWMS 2.0 solutions.  (More to come on APIs in future discussions.)

   Conclusion:

  IWMS 2.0 represents the natural evolution from large, complex (and expensive) enterprise solutions to small, aggregated solutions that take advantage of cloud based delivery. Many large companies will continue to acquire these large multi-functional applications, and even these are moving to the cloud, but smaller organizations with relatively small to medium sized portfolios will opt for aggregated “best-in-breed” solutions, to achieve lower cost, faster implementation, and more rapid return on investment. 

  The post IWMS 2.0 – Chief Characteristics first appeared on Visual Lease.]]> https://visuallease.com/2015717iwms-historical-perspective/ Mon, 29 Jun 2015 21:39:00 +0000 http://visuallease.wpengine.com/?p=144 As a Gartner analyst some years ago, I focused on the real estate/ facilities management software space. I had spent nearly thirty years in corporate real estate, and was perhaps the only analyst at Gartner who had a broad and varied background in corporate real estate. I wrote one of my first research notes, in April of 2003 on the corporate real estate and facilities management space when I identified the key components of what I later named IWMS.. a lot has changed since then.
  The post IWMS – A Historical Perspective first appeared on Visual Lease.]]>

  As a Gartner analyst some years ago, I focused on the real estate/ facilities management software space. I had spent nearly thirty years in corporate real estate, and was perhaps the only analyst at Gartner who had a broad and varied background in corporate real estate. I wrote one of my first research notes, in April of 2003 on the corporate real estate and facilities management space when I identified the key components of what I later named IWMS (Integrated Workplace Management Systems). These elements included 1.) real estate management 2.) facilities management  (CAFM) 3.) Design and Space Management 4.) and Maintenance Management (CMMS) Subsequently, facilities environmental sustainability was added to the list of core functionality.

  In November of 2004, I published the first Gartner Magic Quadrant on what I defined at the time as Integrated Workplace Management Systems (IWMS) Initially I received “push back” from the corporate real estate community on the acronym. Many felt that the absence of “real estate” in the acronym diluted the prestige of their position and function.  Software vendors were particularly annoyed with the acronym, but several began to use it in their subsequent marketing. Within a year, the acronym became widely adopted.

  I chose these words carefully since I truly believed that the power of these applications lay in the four dimensions, first “Integrated.” Data and processes from the full life cycle of facilities management would benefit from being tied together. Second, I chose the word “workplace” over real estate or facilities, since the nature of how and where people worked was undergoing transformation from places to a multiplicity of settings from home offices, shared work settings, and virtual offices. I viewed IWMS applications as the primary platform for workplace services. Third, I chose “management systems” to emphasize the enterprise nature of the suite of applications. Like ERP, HCM, and other enterprise class of software, IWMS was truly in all its dimensions, an enterpise level of functionality and data management.

  Today, the IWMS market has matured greatly. The fact that major software vendors such as IBM, SAP, and Oracle have committed to IWMS with major acquisitions and product development testifies to its market maturity. Another dimension of its market growth is the global reach of its proliferation. The current Gartner magic quadrant (June, 2014) cited Manhattan and Planon as “Leaders” for their broad global presence, and multi-language, multi-currency functionality.

  In a future Blog we’ll explore the future of IWMS, what we call, “IWMS 2.0” With the advent of cloud computing, combined with the rapid growth of mobile computing has redefined the meaning and nature of integrated systems  No longer do we think that IWMS can only be achieved through a single massive (and expensive) premises based system. Best- in- breed solutions united in the cloud, is now at hand, drastically reducing total cost of ownership, install time and rapid achievement of ROI.

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