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.

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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!

With the new FASB/IFRS lease accounting standards, significantly more assets and liabilities must now appear on the balance sheet. Yet, some businesses still aren’t using lease accounting software to help with the complex task of managing their lease portfolios. 

What are some of the lease accounting auditing risks that arise when you don’t use a software solution?

Exposure of lease accounting auditing risks

The new standards are designed to expose lease accounting auditing risks and reveal if an organization lacks the proper checks and balances in their accounting process.

No one wants to find out through an audit that they’ve been doing their lease accounting all wrong. Yet that is exactly what can happen when you do your accounting manually or with a spreadsheet application.

 The truth is, the risk of failing an audit is greatly increased when you don’t have a software system in place that mirrors your lease accounting policies and procedures.

Underestimating lease complexity

People often underestimate the difficulty of accounting for all their lease assets and liabilities. Even for businesses with a relatively small lease portfolio, facilities and equipment are the second biggest cost (behind the #1 cost, people).

 Once you start breaking down a portfolio and digging into the details, you may be surprised at the complexity of the leases and the costs associated with them. Not only are there different classes of assets (such as real estate and equipment) and different types of leases (operating and finance), but all are calculated differently.

 For example, real estate lease are very complex transactions, with common area charges and other details that must be reported accurately. Leasing office space might require complex calculations for how the building’s tenants divide costs such as:

• Cleaning the lobby and other shared areas
• Trash removal
• Parking lot maintenance
• Lawn/Landscape care

 There are many other important lease details that are easy to overlook. For example, you may have some embedded leases that are part of a larger contract, such as an IT support services agreement included in an equipment leasing contract.

 Unlike manual accounting, Visual Lease puts a proven process in place for capturing all these pertinent data points.

No audit trail for tracking change management

When you use a spreadsheet or calculators, there is no audit trail to help you track your change management process. That means you have no proof you’ve followed the policies and procedures you’ve put in place for change management, approval flows, and other lease accounting requirements.

 For example, lease data changes need to be recorded and tracked as they happen, so that if an audit takes place — for a credit evaluation, a bank loan, shareholder reporting, or other purposes — you can prove that everything is in order and up to date.

 Visual Lease reduces lease accounting auditing risks by providing an audit trail that thoroughly documents your change management process, including:

•  Who made a change
• The date and time the change was made
• Whether approval was needed for the change and, if so, who approved it
• If the change was required due to a data error or to show a change in lease management

 (Read more about changes to leases in our blog on lease accounting remeasurements.) 

Lack of controls

In lease accounting, everything is about controls and making sure you are consistent across your accounting process.

But with a spreadsheet or manual accounting process, there is not much you can do to control who can see the data or make changes to your lease records, which exposes your business to lease accounting auditing risks.

Visual Lease software helps to keep your data secure with password protection and a wide range of authentication features you can use to manage access, user roles, and permissions for your lease accounting system.

(Read more about lease accounting data security features.) 

No one place for your data

If you’re using a spreadsheet or calculators and manually entering the information in your balance sheet, you lack an important resource: a single data repository that includes all the supporting evidence behind it.

 With Visual Lease, you get a single-source repository that brings all your lease data together for easier tracking, change management, reporting, and verification should an audit need to be done.

Lack of notifications for important events

When you’re doing your lease accounting manually, you don’t have the ability to flag events and set notifications for important dates and events, such as:

•  Lease renewals
• End dates
• Payment increases
• Opt in/out deadlines

 With Visual Lease software, you can have the system alert you to important dates so you can stay on top of lease changes that have an impact on your liabilities.

Lack of visibility into location-level costs

Without software for administering and maintaining your lease portfolio, you may not be fully aware of the cost of leases at the location level.

For example, one customer had a warehouse that was paying $1,600 a month to lease a forklift — and had been doing so for eight years! For that amount of money, the company could have purchased the equipment several times over or leased a newer forklift with all the latest features.

Visual Lease provides visibility into these types of expenses so you can identify business risks as well as leasing accounting auditing risks. You can also set up the system to alert you to lease renewals and remind you to review the costs, to see if they still make good business sense.

Human error and incomplete data

Recording all your lease data and doing calculations by hand is not only difficult and time consuming — the chance of human error increases your lease accounting auditing risks.

A single typo or a misplaced decimal point can throw everything off. If you do business in other countries and must deal with multiple currencies, having to figure out the calculations on your own is an added challenge, with added risk of human error.

In addition, with the new lease accounting standards, more than 40 different types of data must be tracked to do the required calculations. Unless you have a very simple lease portfolio, how do you know which fields you need?

Visual Lease software guides you through the process using tried and true calculations that have been validated by more than 700 customers and our industry-leading accounting partners.

Plus, having already helped public companies successfully transition to the new FASB/IFRS standards, Visual Lease has best practices built into the solution.

 To learn more about how the Visual Lease platform can help you avoid common lease accounting auditing risks, give us a call. 

You did it! You made the smart decision to purchase a lease accounting solution to help you ensure compliance with the latest accounting guidelines and reporting requirements.

Now comes the exciting — and somewhat intimidating — part: the process of lease accounting implementation.

You’re probably wondering where to begin. So, let’s start by taking a look at the basic steps that are vital to implementing a lease accounting platform.

What are the basic steps in platform implementation?

Visual Lease has created best practices for platform implementation. The steps in this process will guide you through your own implementation project, for lease accounting or virtually any software solution.

• Analysis: evaluating the requirements of the business
• Configuration: setting up the platform to meet the identified requirements
• Conversion: compiling lease data and populating the information into the platform
• Validation: ensuring that the platform as set up meets the business requirements
• Production: going live — this is where you actually start using the platform

Wrapped around all of these activities is training, the step in which users are educated on how to work with the platform. Unlike the steps above, which follow a progression, training should begin on day 1 and continue throughout the implementation process, alongside the other steps.

What tasks will help you prepare for lease accounting implementation?

Having helped more than 700 organizations implement their lease accounting platforms, Visual Lease knows what it takes to make the process run smoothly, so that businesses can start reaping the benefits as quickly as possible.

The following are 7 essential tasks that will help you get a jump on your lease accounting implementation project.

1. Take a lease inventory ASAP.

The first step is to locate and list all the leases that the business holds — checking finance, HR, operational groups, legal, IT, procurement, and other areas.

• Reconcile lists across the business.
• Identify the tools that are holding lease information. Is it in a Microsoft Access database, Excel, or some other spreadsheet application?
• Identify any embedded leases. For example, check your service contracts to see if they give you control of an asset. If so, those contracts are considered leases.
• Identify the impact of any bank covenants.

2. Determine what kind of lease data to track.

You want to identity which data points are important to the business — and which ones are not.

• Select expedients as soon as you can, so you know which data points you need to capture.
• Work with the different departments to identify data points for future operational needs — helping you pinpoint which lease information is important to those stakeholders.
• Assess any overlapping data — identifying which source is the best one, so you can streamline the process of compiling lease data.
• Determine how data points affect other data points — identifying which data points are part of other data sets, to consolidate and simplify data collection.
• Test data integrity and fix errors ASAP. You want to be sure everything is accurate and up to date before you migrate the data.

3. Build a strong team.

The most effective lease accounting implementation team is one that is representative of all the lease stakeholders across the business.

• Identify the individuals who are managing leased assets.
• Define everyone’s role and responsibilities in the implementation project.
• Assign a Project Manager. Doing so helps to promote team accountability and organization.
• Assign various Power Users for the platform — so the Project Manager or other leader has backup.
• Determine if you need an Accounting Advisor to fill project gaps or supplement your internal team.
• Engage everyone when implementing best practices — including the accounting team, advisors, and power users.

4. Educate your team.

Like training, education is an ongoing and vital part of lease accounting (or any) implementation.

• Become familiar with guidance for the new lease accounting standards.
• Determine how guidance will impact your lease portfolio.
• Build test scenarios.
• Ask your Accounting Advisor for help as needed.
• Take platform training ASAP. The earlier you begin training, the more smoothly the implementation project will go.

5. Build a realistic timeline.

The process of identifying leases and compiling lease data can take a lot longer than you think it will. (Just any public company that had to meet the new lease compliance requirements by 2019.) So, it’s smart to create a timeline that takes the following recommendations into account.

• Evaluate potential roadblocks and issues that may cause delays.
• Determine internal meetings that will be needed outside of platform implementation meetings, such as planning meetings for individual teams or departments.
• Estimate the time needed for project segments, such as the time to inventory leases and deg fine data points.
• Set a deadline ahead of your final deadline. This gives you a cushion of some extra time in the event of unexpected delays or setbacks.

6. Sharpen your communication skills.

Sharpening and deploying your best communications skills — and encouraging your team to do the same — will go a long way in helping everyone stay engaged and positive throughout platform implementation.

• Actively listen on implementation calls, to make sure you are getting all the details you need.
• Ask questions. Remember, there is no such thing as a dumb question.
• Be honest about how you feel. Sharing how you feel the implementation is going will help to encourage the team or help them make improvements as needed.
• Provide feedback to strengthen configuration.
• Meet internally to make decisions as needed.
• Stay organized.
• Involve your Accounting Advisor and other partners in calls and meetings.

7. Get started NOW!

We can’t say it enough: preparing for lease accounting implementation is a long and often complex process. So, the sooner you get started, the better!

• Have time on your side. Again, if possible, set a deadline with a cushion (some extra time) built in.
• Don’t be tied to the order of these 7 tasks. They are interrelated and often overlap, so it is fine — in fact, it’s good — to do multiple tasks at the same time.
• Ask your peers about their implementation experiences. You can learn from their good experiences, as well as from their mistakes.
• Make sure you allow enough time to do it right! A failed implementation is far more expensive and disruptive than taking the time up front to get the job done correctly.

Need more help?

Visual Lease is not only happy to help with your lease accounting implementation — it’s an important part of our business.

To learn more about our implementation services and the Visual Lease platform, contact Jenn Orlando, Director of Implementation, at jorlando@visuallease.com.

Until recently, Corporate Real Estate (CRE) and Accounting departments had little reason to talk to each other. 
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CRE is primarily responsible for obtaining space and managing facilities-related issues. The Accounting department’s job (related to real estate) has been to pay the bills and record the expenses in the ERP. Before FASB ASC 842 and IFRS 16, accounting for leased property assets was straightforward. And for most companies, there was little effort to manage the expenses associated with property assets; those were considered necessary costs of doing business. So there was not much for CRE and Accounting to talk about. 

Because of the new lease accounting standards, that situation has changed dramatically in the past year. Companies must now account for leased assets and liabilities on their balance sheets. Real estate lease portfolios often represent many millions of dollars, and that value can have a big impact on financial statements. 

Plus, the new lease accounting standards make leasing costs more visible, and companies are realizing how much money they stand to save by better managing real estate leases.

That’s why, as companies assemble their teams and work toward compliance with the new accounting standards, it’s critically important that Accounting and Real Estate teams work together. 

What Accounting needs from Real Estate for lease accounting compliance

As a lease accounting and lease management technology provider, Visual Lease is often involved in the initial meetings as organizations begin planning for adopting the new standards. Because this process is new to them, many organizations make the mistake of thinking Accounting can manage it on their own. Many times, CRE is not even included in those early meetings.

The first thing that’s important to understand is how much time and effort it will take to gather all your lease data in one place. Few organizations have a central repository for lease information. Lease contracts are filed away in drawers, and lease data lives in spreadsheets on the computers of the people who manage those assets. Especially for a distributed organization, finding it all and centralizing lease data will be a big job. 

To further complicate things, accounting for real estate leases under the new standards requires much more information about leases than was needed in the past: information that Accounting does not have access to. We’re not only talking about the details of lease contracts, but also information about property decisions, such as whether or not leases are likely to be renewed at the end of the term. 

This information can only come from the CRE team. That’s why Accounting will need the help of the keepers of real estate lease data and the decision makers, to achieve compliance with the new standards. 

And there’s more: getting compliant is not a one-and-done exercise. Real estate leases change often: they are revised, renewed, and canceled as the space needs of the business change. Payment amounts for rent and maintenance may also change over time. Every time that happens, Accounting must update journal entries and balance sheets. So organizations need to set up processes for CRE to keep Accounting in sync with lease changes that impact financial reporting.

What CRE gains from working with Accounting on compliance

As Accounting teams begin to understand the magnitude of the effort required to collect and report on lease data (especially for complex real estate leases), they reach out to CRE for help. 

At first, lease accounting data collection may seem like a burden on the CRE team. However, it’s important to realize that this is an opportunity for CRE to “gain a seat at the table,”  become a more valued part of the organization, and demonstrate to the C-suite that their work is directly tied to business performance.

As I mentioned, the new lease accounting standards make real estate leases much more visible financially, and therefore a higher priority for the organization. Real estate lease information will now be needed for business planning and forecasting, and will affect not only the books but also things like debt covenants and borrowing capabilities. Suddenly, CRE has important expertise, control over critical assets and essential data, and their decisions have a much larger financial impact than ever before. 

And, due to the complexity of the new lease accounting standards, almost every organization with more than a few leases will need a central repository for lease data and software to perform calculations. Some software platforms, like Visual Lease, include tools that help manage leases and optimize lease expenses. 

So, that puts CRE in a position to become real heroes: they will have the data, the tools, and the status to drive process and policy changes that save the organization millions of dollars. 

How will organizational relationships evolve after FASB compliance?

At the very least, Accounting and Real Estate teams will communicate and collaborate more effectively during and after implementing the new lease standards. 

For example, we’re seeing two different strategies emerge for sharing the responsibility for lease accounting calculations between Accounting and Real Estate:

• Real Estate is responsible for collecting raw data (including details about options and other decisions) and generating the necessary lease accounting calculations. The Accounting team has the ultimate responsibility for financial reporting, so they must vet the numbers from Real Estate and use them to create the journal entries that feed reports.
• Real Estate collects only the raw data and passes that to Accounting to perform the calculations and create journal entries. In that case, Accounting will need to work closely with Real Estate to make sure the data is complete and broken down into the level of detail needed for calculations.

Changes in responsibility are also leading to changes in the organization’s reporting structure, with more Real Estate teams now reporting into the CFO’s office. That’s happening because Financial leaders want more visibility and involvement in Real Estate decisions. It’s not only lease-or-buy decisions that are important, but also choices about lease length and the availability and structure of lease options. When the two groups work more closely together, Accounting can calculate the financial impact of various alternatives before the decisions are made. 

Instead of moving Real Estate into the Accounting department, some organizations may choose instead to handle decision making related to property leases, including negotiating the leases, through the Finance and Legal departments. In this scenario, Real Estate will keep only the responsibility for facilities management tasks, and in companies where this is an important focus, for culture and employee experience.

Either way, it seems likely that the new lease accounting standards will drive changes in skill sets, responsibilities, and collaboration between the CRE and Accounting teams.

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

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

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

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

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

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

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

Learn more:

Lease Accounting Changes: The Silver Lining You’re Overlooking

2. Putting the entire compliance burden on the Accounting team

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

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

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

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

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

3. Underestimating the task of gathering real estate lease data

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

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

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

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

4. Lacking expertise about the standards

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

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

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

Learn more:

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

5. Failing to plan for post-compliance lease management

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

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

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

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

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

Learn more:

How Lease Accounting Software Can Help You Save Money on Leases

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

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

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.

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.

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.

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 upcoming lease accounting changes mandated by FASB and IASB have dramatically increased the scope and complexity of lease reporting requirements for every organization that has leased assets (which is just about everyone).

That’s why many are looking for lease accounting and lease reporting software to help them prepare their financial reporting for leases.

Most available software tools provide a collection of pre-programmed standard reports. In some cases, the list is extensive: 100 reports or even more. At first glance, it probably looks like those canned reports are more than enough to handle all your lease reporting needs.

Unfortunately, soon after they begin to use the reports, most organizations will realize that they are not enough.

Relying on canned reports costs you time and money

The truth is, every organization is unique. You have you own way of doing things, your own industry and internal lexicon, your own organizational structure, your own leasing policies and practices… and many other factors that make you different from the company next door and your competitors around the world.

Because of these differences, at some point (probably sooner rather than later) you will want to make changes to those canned reports.

Then what? You will have two options:

• Go back to the software vendor (or hire a consultant) and shell out more money for custom reports. Then wait for weeks or months for the result, and hope you get what you wanted.
• Invest a lot of time in trying to learn a complicated report writer (and hope the employee who learns these skills doesn’t take the expertise elsewhere).

What’s the alternative? Get a more flexible lease reporting tool (Visual Lease) that makes it quick and easy to create your own data visualizations and custom reports using something you already know: Excel.

What can you do with unlimited ad hoc lease reporting?

Having the ability to create your own custom reports for any purpose is an incredibly powerful tool. Using Visual Lease, you can do much more than modify a few standard lease reports.

Get immediate answers

Your boss (or a financial auditor) asks you a question that requires you to dig into your lease data. How do you get the answer? It’s very unlikely that a canned report will be able to provide it.

With access to Visual Lease’s flexible lease accounting system and ad hoc lease reporting tool, you can easily query ANY lease information that you’re tracking in the system and group, subgroup, and filter data any way you choose.

With that capability, you can find answers or produce requested information in minutes.

How it works in Visual Lease:

1. Using the ad hoc reporting tool, filter and group your lease portfolio any way you like.

For example, you can filter leases for one division, or one particular type of lease (such as property leases), or leases with certain clauses, such as an option to buy. You can also filter over a time period, such as leases coming up for renewal within 2 years.

These are common examples, but you can filter and group leases according using any field tracked in the system.

2. Choose the data fields that you want to see for each lease on the report.

At this point, you have a custom data visualization that can answer questions or provide guidance for business decisions. You can view within Visual Lease or output to Excel.

Format reports any way you like

Every organization produces a variety of reports for different purposes and audiences. You want the ability to present lease reporting in the right way to meet the needs of those looking at the reports.

For example, your CFO might prefer charts and graphs that provide insights and business intelligence at a glance. Your audit partner, on the other hand, might want to see spreadsheets showing specific details structured in a certain way.

Visual Lease’s flexible ad hoc lease reporting tool lets you easily produce reports the way people want to see them.

How it works in Visual Lease:

1. Once you’ve chosen the leases and lease data to include in the report, click a button to export to Excel.
2. Now you have the data in a format you’re accustomed to working in: an Excel spreadsheet. Using Excel, you can format the data however you choose: rearrange columns, show data in graphical format, include your logo and branding.

Not an Excel wiz? Visual Lease trains our customers to take better advantage of the power of Excel, a tool that does much more than most people realize. Having that valuable skill can take you far in your career as well as improve your lease reporting!

Create templates

What about the next time you want to run your formatted report and update the data? Or you want to change the filter (to report on equipment leases instead of property leases, or look at leases in a different geographic region)?

That’s the real power of Visual Lease’s ad hoc reporting tool: you can take your formatted Excel report and bring it back into Visual Lease to use as a time-saving report template.

How it works in Visual Lease:

1. Import your formatted Excel report back into Visual Lease.
2. Now you can update as often as you like directly in Visual Lease, without having to export and format each time. Simply click a button to update the data.
3. You can also change the filter criteria, the lease groups and subgroups, and/or the included data fields to create a new report with the same formatting.

Report on custom fields

Many organizations want to track specialized lease data or details that are not important to others. For example, companies that rely on leased warehouses to store product or equipment want to track information like ceiling heights and number of loading dock bay doors.

You won’t find those fields in lease accounting and lease reporting software, because most organizations have no need to track that information.

Does that mean you need custom software specifically built for your industry? That’s not the best solution, because even if you could find that you will have different requirements than your competitors.

That’s why we have designed Visual Lease to be completely flexible. You can create fields to track and report on any lease details that are important to you. It’s just as easy to add custom fields as it is to create custom reports.

Want to see how it works in Visual Lease? Schedule a demo to see for yourself.

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

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.

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.

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

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.

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.

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.

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

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.

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

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 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.

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.