Questions for Respondents

Visual Lease Response

VL agrees with the objective of the exposure draft.

Visual Lease Response

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

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

Visual Lease Response

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

Visual Lease Response

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

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

Visual Lease Response

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

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

Visual Lease Response

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

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

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

Visual Lease Response

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

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

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

Visual Lease Response

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

Visual Lease Response

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

Visual Lease Response

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

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

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

Visual Lease Response

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

Visual Lease Response

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

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

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

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

Visual Lease Response

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

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

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

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

Visual Lease Response

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

Visual Lease Response

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

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

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

Visual Lease Response

Visual Lease has no further comments.
Respectfully Submitted,

Joseph Fitzgerald
Senior Vice President, Lease Market Strategy

Visual Lease
William Harter
Principal Solutions Advisor
Visual Lease

Visual Lease Response

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

Visual Lease Response

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

Visual Lease Response

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

Visual Lease Response

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

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

Visual Lease Response

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

Visual Lease Response

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

Visual Lease Response

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

Visual Lease Response

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

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

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

Visual Lease Response

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

Visual Lease Response

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

Visual Lease Response

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

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

Visual Lease Response

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

Visual Lease Response

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

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

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

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

Visual Lease Response

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

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

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

Visual Lease Response

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

Visual Lease Response

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

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

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

Visual Lease Response

Visual Lease has no further comments.

Respectfully Submitted,

Joseph Fitzgerald
Senior Vice President, Lease Market Strategy
Visual Lease

William Harter
Principal Solutions Advisor
Visual Lease

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

• What is lease management?
• What are lease management tasks?
• Who is responsible for lease administration?
• How can you optimize your lease management strategy?
• Why is lease management important?
• Lease Management Software

Until recently, many companies were not paying much attention to their property and asset leases beyond paying the bills. Leases were simply considered a cost of doing business, and managing lease terms and obligations was not a priority. 

With the establishment of new lease accounting standards that take effect for private companies in 2021, and took effect for public companies in 2019, that mindset is changing fast. Lease management has now become an essential practice that impacts financial reporting and the bottom line. 

If your organization is working toward FASB/IFRS compliance, you’ll need to establish lease management policies and procedures. Below, we dive into why now is the best time to do it and how to create a streamlined lease management process flow. 

What is lease management?

In a corporate or non-profit organization, lease management means tracking and optimizing every aspect of your portfolio of leased assets. Properly tracking leases (not only real estate but also technology, vehicles, and even assets you control as part of service agreements) can help you significantly reduce the expenses associated with leasing. We’re not talking about small change here, but a chance to add millions to your bottom line. 

What are lease management tasks?

Lease administration requires a coordinated effort between the various teams performing these tasks: 

• Lease negotiation and decision making, including lease structure, lease length, and lease-vs-buy options  
• Lease tracking tasks, such as keeping track of upcoming renewals and exercising options, managing operating expenses, and updating lease data 
• Lease accounting tasks, including payment of lease-related charges, recording journal entries, calculating asset and liability figures, generating reports, and performing remeasurement when leases change 

What is a lease management system?

A lease management system is a software solution designed to streamline and automate the management of lease agreements throughout their lifecycle. It helps organizations efficiently handle the tasks and processes associated with leases, such as tracking lease details, monitoring key dates, generating reports, and ensuring compliance with lease terms and regulations. 

Where does responsibility for lease administration sit within an organization?

Depending upon an organization’s size, lease administration can be cross-functional, spread across various departments such as accounting, real estate, legal and procurement, or handled by a single dedicated resource within any of these departments.  

Companies that have a significant concentration of a specific asset type, like real estate, will most likely have an individual or even an entire department dedicated to the management of those leases. Further, with real estate leases, it is not uncommon for companies to outsource all or some portion of its real estate lease administration to a third-party broker or company. This same concept applies to other lease types, including fleet and IT equipment.

How can you optimize your lease management strategy?

Why has lease management process flow become so important? Under the old lease accounting rules, leases were not included on balance sheets and had little impact on financial reporting. Under the updated lease accounting standards, organizations must record both right-of-use assets and payment liabilities associated with leases on their balance sheets.  

This is a big change: adding the value of the entire leased portfolio can make a huge impact on the outcome of financial reports. It also means the risks associated with poor lease decisions and management are magnified. That’s why financial leaders must now carefully scrutinize and manage leasing decisions, administration practices, and expenses. 

Before you make the move to the newest standards, here’s how to get everyone on the same page and your lease management process flow in order. 

How to establish a cross-functional lease tracking process 

In the past, lease negotiation, administration, and accounting were done in silos with little to no coordination between the teams handling each task. That led to inconsistent lease decisions, scattered data, and often, overpayment of lease expenses due to lack of centralized records and audit capabilities. 

An effective lease management process flow requires cross-functional collaboration as well as centralized access to lease data and lease management tools.  

STEP 1: Centralize lease data and management tools

For teams to work together on lease tracking, the first step is to gather all lease data in a central repository that creates a single source of truth as well as an audit trail for all lease decisions and changes. 

Chances are, you’re in the process of centralizing lease payment data for FASB/IFRS compliance right now. To set your teams up for effective lease management process flow, choose a lease management software platform (like Visual Lease) that allows you to centralize ALL data related to lease contracts and provides tools for automating lease tracking tasks and auditing expenses. 

When everyone managing leased assets is using the same system to update lease data, schedule payments, and create accounting journal entries, everyone is always working with the most current data. And you eliminate data integrity problems that can occur when data is moved between systems. 

STEP 2: Develop leasing policies

With centralized tracking tools and technology in place, you can now analyze your lease data and find out which leases are working well and which are costing you more money than you realized. Use those insights to determine how you want to standardize leasing decisions across the organization. 

Best practice is for financial leaders to work with lease negotiators, administrators, and accountants to understand current practices and to establish cost-effective policies for leasing. 

STEP 3: Create lease requisition and update processes

To ensure your accounting team always has accurate lease information to feed balance sheets and financial reports, it’s essential to establish standard practices for every group that’s involved in acquiring and maintaining leases, including processing new leases, documenting lease changes, and handling lease terminations.

Here’s what you might not know if you’re still in the process of consolidating lease data for FASB ASC 842 implementation: every time leases change, your accounting must be updated. So, it’s smart to minimize the burden on your accounting team by choosing lease accounting software that automates lease modification and re-measurement. 

STEP 4: Set up controls  

Adding leases to the balance sheet has increased the complexity of financial reporting. That means more oversight is needed to ensure accounting accuracy. Also, internal monitoring and process validation are required to ensure your policies and procedures are being followed and are driving better decisions and reduced expenses. 

Your lease management software can aid that process in several important ways: 

• Documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms 
• Providing audit tools to find overpayments, late fees, and payments that shouldn’t have been made at all 
• Allowing you to customize approvals required for lease administration and lease accounting tasks 
• Providing an audit trail for all lease changes  

Why is lease management important?

Lease management is critically important to ensure your business remains confident in sustaining lease accounting compliance.
Tackle lease tracking along with the lease accounting changes

Leases are ever-changing. Terms are constantly modified as businesses renegotiate their lease contracts, take on new spaces or terminate their leases.  

Under the new lease accounting standards (ASC 842, IFRS 16 and GASB 87), each of these modifications must be accounted for.  

Lease management software provides businesses with a single source of truth to easily view and access your leases.

What are the benefits of lease management?

Lease management offers several benefits for organizations that have a portfolio of leased assets. Here are some key advantages:

• Improved efficiency and time savings
• Enhanced visibility and control over lease portfolio
• Cost savings through optimized lease terms and space utilization
• Compliance with lease accounting standards (ASC 842, IFRS 16)
• Streamlined reporting and analytics for informed decision-making
• Better collaboration and communication among stakeholders
• Reduced risks of penalties and non-compliance
• Proactive management of lease renewals and important dates
• Minimized manual effort and administrative tasks
• Data-driven insights for strategic planning and portfolio optimization.

Lease Administration Software

Your lease management software can aid the process in several important ways: 

• Documenting the terms of every lease, calculating every payment, and alerting you if payments don’t match the lease terms 
• Providing audit tools to find overpayments, late fees, and payments that shouldn’t have been made at all 
• Allowing you to customize approvals required for lease administration and lease accounting tasks 
• Providing an audit trail for all lease changes  

FASB recently voted to extend the deadline for private companies to implement the new standards to December 15, 2021, and chances are you are breathing a sigh of relief. However, don’t make the mistake of underestimating the effort and putting off the problem. Instead, take this opportunity to examine and overhaul your lease management policies and process flow while you’re working toward lease accounting compliance.

Marc Betesh is the founder and CEO of Visual Lease, the #1 lease optimization software provider, and KBA Lease Services, the nation’s leading lease audit firm. Betesh helped shape the current lease accounting standards in the industry and is a thought leader on ASC 842, GASB 87, and IFRS 16. Betesh is regarded as “top-rated faculty” at CoreNet Global Learning and has lectured on lease topics at New York University’s Real Estate Institute, American Bar Association, Association of the Bar of the City of New York, Practicing Law Institute, ICSC, Lorman Education Services and the Institute of Internal Auditors. He is also an active member of the New York and New Jersey Bars.

Carrie Summerlin Named FICPA’s New Chief Growth & Innovation Officer

The Florida Institute of Certified Public Accountants (FICPA) recently announced that Carrie Summerlin has been named the Institute’s new Chief Growth and Innovation Officer. She will officially join the FICPA on Monday, May 16.

Company achieves double-digit YoY annual recurring revenue, customer and employee growth

Woodbridge, NJ – April 18, 2022 — Visual Lease, the #1 lease optimization software provider, today announced results from Q1 2022, reporting an increase of nearly 40% in both customer and employee count, year-over-year. The company also announced an increase of nearly 30% in annual recurring revenue year-over-year, continuing its path of sustained double-digit growth. Today, Visual Lease helps more than 1,000 public and private companies, as well as government entities, with lease accounting compliance and the financial, legal and operational performance of their leased assets.

“With the introduction of the new lease accounting standards – IFRS 16, ASC 842 and GASB 87 – the stakes are much higher for organizations that do not have a sustainable way to effectively manage and track their leases,” said founder and CEO, Marc Betesh. “Because we’ve spent more than three decades helping companies manage their lease portfolios, we know exactly what is required to avoid the consequences of misrepresenting lease data during an audit. We provide the software, services and subject matter expertise that make achieving and maintaining lease accounting compliance one less thing that accountants and financial managers have to worry about. With Visual Lease, organizations will also benefit from a friction-free annual audit, in addition to greater visibility across their portfolios as their leases continue to evolve.”

Here are a few of the milestones Visual Lease achieved in Q1 2022:

• Expanded its Alliance Partner network across premium accounting firms and services companies, including F.H. Black & Company and Withum, to offer mutual clients best-in-class software and services.

• Hired across all departments and expanded its commitment to ongoing innovation by scaling the Product & Engineering teams by 35% year-over-year.

• Was named a Momentum Leader and a High Performer in the Lease Administration category in the G2 Spring Grid Report.
• Continued investments to further enhance the Visual Lease user interface (UI), building on its reputation of having an intuitive and easy-to-use platform.
• Held its Q1 Customer Advisory Board (CAB) meeting, gathering select financial management and real estate executives from its network of customers spanning the retail, hospitality, telecommunications, construction, financial services and manufacturing industries, to share insights and solicit input into the company’s solutions, services and strategic investments.
• Established an AWS data center in Frankfurt, Germany, enabling EU-based clients to benefit from stronger performance, newer services and features, as well as automatic compliance with residency and regulatory laws regarding their data.

To keep up with announcements from Visual Lease, visit the Visual Lease Newsroom.

About Visual Lease

Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS platform is embedded with more than three decades of best practices from major corporations and leading industry professionals. Our award-winning solutions are used by 1,000+ organizations to manage 500,000+ real estate, equipment and other leased assets. Committed to ongoing innovation and unparalleled customer service, Visual Lease helps organizations transform their lease compliance requirements into financial opportunities. For more information, visit visuallease.com.

Media Contacts
Erica Bonavitacola
Visual Lease
T+1 732 860 4838
ebonavitacola@visuallease.com

Industry leader continues to host virtual events to help companies master lease accounting compliance

Woodbridge, NJ – April 12, 2022 —Visual Lease, the #1 lease optimization software provider, announced its schedule for complimentary educational webinars for the second quarter of 2022. The company will continue to share industry best practices informed by more than three decades of helping businesses properly track, manage and now report on their leases under the new lease accounting standards, ASC 842, GASB 87 and IFRS 16.

“Companies continue to underestimate what it takes to achieve and maintain lease accounting compliance,” said Visual Lease’s founder and CEO, Marc Betesh. “We know that having the right technology in place and committing to ongoing education can empower organizations to get ahead of common challenges. Our webinar series – much like our software – is designed to help businesses across all industries alleviate any stress that is associated with their lease accounting process.”

Visual Lease’s Q2 webinar schedule covers the following topics:

• Achieving Compliance
  • How to Avoid Lease Accounting Compliance Risks (April 21^st) – Get ahead of common risks associated with misreporting company information, such as increased audit fees, fines and potential legal ramifications.
  • GASB Monthly Planning Sessions (May 18^th and June 16^th) – Learn how to prepare for and execute the transition to GASB 87 and GASB 96 with supporting automated accounting technology.
  • How to Achieve Confident Lease Accounting Compliance (May 24^th) – Receive guidance from lease accounting experts to ensure that your organization is equipped to succeed in its compliance efforts.

• Sustaining Compliance
  • ASC 842 Monthly Planning Sessions (April 13^th, May 11^th and June 14^th) – Benefit from expert tips and industry best practices to accelerate and maintain compliance with ASC 842.
  • GASB 87 Roundtable Discussion: Anticipating Day 2 Lease Accounting Challenges (April 27^th) – Hear directly from experienced technology and accounting experts about different Day 2 lease accounting considerations, including how to keep up with frequent lease modifications and how to ensure long-term compliance and audit readiness.
  • The Cross-Functional Power of Centralized Lease Data (June 23^rd) – Learn about the wide-ranging business benefits of maintaining lease data in one central location.

For additional details, registration information and updates on opportunities to earn CPE credits, please visit Visual Lease’s events page, which will be regularly updated.

About Visual Lease

Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS platform is embedded with more than three decades of best practices from major corporations and leading industry professionals. Our award-winning solutions are used by 1,000+ organizations to manage 500,000+ real estate, equipment and other leased assets. Committed to ongoing innovation and unparalleled customer service, Visual Lease helps organizations transform their lease compliance requirements into financial opportunities. For more information, visit visuallease.com.

Media Contact
Erica Bonavitacola
Visual Lease
T+1 732 860 4838
ebonavitacola@visuallease.com

Now, all of these organizations must adhere to a much more robust and complex reporting process than they had been accustomed to under the prior lease accounting standards. Despite this change, many continue to underestimate just how challenging the lease accounting process truly is.

• What is IFRS 16?
• What changed under IFRS 16?
• What is considered a lease under IFRS 16?
• Exceptions to the IFRS 16 Lease Accounting Standard
• IFRS 16 Impact on Financial Reporting
• IFRS 16 Impact on the Balance Sheet
• IFRS 16 Impact on Profits and Loss Statement
• IFRS 16 Impact on Cashflow Statement
• Who Does IFRS 16 Impact?
• History of IFRS 16

What is IFRS 16?

IFRS 16 Summary: What is IFRS 16?

The International Accounting Standards Board (IASB) published the new IFRS 16 lease accounting standard, which replaces IAS 17. For the global community, IASB is responsible for developing and promoting the International Financial Reporting Standards (IFRS) for accounting.

What changed under IFRS 16?

IFRS 16 changes the way companies account for leases in their financial disclosures, including balance sheets and income statements. Under IFRS 16, a lessee applies a single lease accounting model where leases are considered finance leases.  A lessor classifies a lease as either a finance lease or an operating lease.

Here’s what Ernst & Young (EY) says about the changes: “Whether you report under International Financial Reporting Standards (IFRS) or U.S. GAAP, you are likely to be facing significant changes in reporting requirements as you assess the impact of new standards for revenue recognition, financial instruments, and lease accounting. And these changes are not just impacting organizations reporting under IFRS and US GAAP — many national accounting standard setters are also aligning local standards to IFRS.” Read more here: IFRS Compliance Software & New IFRS Lease Accounting Changes

IFRS Compliance Software

What is considered a lease under IFRS 16?

Under IFRS 16, a lease is defined as a contract that enables international businesses to use another entity’s identified asset for a specified period of time in exchange for consideration. Common leased assets include:

• Real estate property, buildings, offices and warehouses
• Office equipment
• Medical equipment
• IT equipment
• Vehicles (automobiles, trucks, vans)

These contracts must specify a timeline in which the right-of-use of the asset is established (or an identified amount of use). It should also include all the potential economic benefits from using said asset. Simply put, some contracts that may not have been considered a lease with the original IAS 17 compliance standard, may now be a lease under IFRS 16 – and must be added to the balance sheet.

Exceptions to the IFRS 16 Lease Accounting Standard

Under the International Financial Reporting Standards (IFRS) 16, the lease accounting standard, there are a few exceptions or specific scenarios where certain leases may be excluded or treated differently. Here are some exceptions to IFRS 16:

• Short-term leases: Leases with a lease term of 12 months or less and that do not contain a purchase option are considered short-term leases. Entities can choose to exclude short-term leases from recognizing lease assets and liabilities on the balance sheet. Instead, they can expense the lease payments on a straight-line basis over the lease term.
• Low-value leases: Leases of assets with a low value (i.e. under $5,000) when new, such as small office equipment or computer peripherals, can be excluded from the balance sheet. While there is no specific threshold defined in IFRS 16, it suggests that a materiality-based approach can be adopted for such leases.
• Leases of biological assets: Leases of biological assets within the scope of IAS 41, Agriculture, are exempted from the requirements of IFRS 16. These leases are accounted for under the applicable provisions of IAS 41.
• Leases of minerals, oil, natural gas, and similar assets: Exploration and evaluation assets, as defined in IFRS 6, Exploration for and Evaluation of Mineral Resources, are excluded from the scope of IFRS 16. Therefore, leases of minerals, oil, natural gas, and similar assets are not subject to the requirements of IFRS 16.
• It’s important to note that the specific application of these exceptions may vary depending on the circumstances and professional judgment exercised by the reporting entity. It is recommended to consult the full text of IFRS 16 and seek guidance from accounting professionals or standard-setting bodies for specific situations.

IFRS 16 Impact on Financial Reporting

IFRS 16 has a significant impact on financial reporting, affecting the balance sheets, profit and loss statements, and cash flow statements of companies. It’s important to note that the impact of IFRS 16 on financial reporting can vary depending on the specific lease arrangements and the nature of the business. Companies should carefully assess the implications and ensure accurate and transparent reporting in accordance with the standard.

IFRS 16 Impact on the Balance Sheet

Recognition of lease assets: Under IFRS 16, lessees are required to recognize lease assets, representing the right to use the leased asset, on the balance sheet. This increases the total assets of the company.

Recognition of lease liabilities: In addition to lease assets, lessees must recognize lease liabilities, representing their obligation to make lease payments, on the balance sheet. This increases the total liabilities of the company.

Change in presentation: The classification of leases as operating leases or finance leases, which was previously used under IAS 17, is eliminated. Instead, the balance sheet shows a single category of lease assets and lease liabilities.

However, if a lease’s terms happen to be under 12 months or low value under $5,000, they will typically be exempt from this new rule (assuming the asset itself isn’t recognized as high value or has purchase options).

IFRS 16 Impact on Profits and Loss Statement

Changes in expense recognition: Under IFRS 16, lessees are required to recognize both interest expense on the lease liability and depreciation of the right-of-use asset. This replaces the straight-line operating lease expense recognition under IAS 17. As a result, the profit and loss statement shows higher expenses in the earlier years of the lease and lower expenses in the later years.

Impact on EBITDA and operating profit: The changes in lease expense recognition affect EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and operating profit. EBITDA increases as lease expenses previously classified as operating expenses are replaced by depreciation and interest expenses. Operating profit may also be affected due to changes in lease-related costs.

IFRS 16 Impact on Cashflow Statement

Changes in cash flow presentation: Under IFRS 16, lease payments are classified differently in the cash flow statement compared to IAS 17. The operating lease payments, previously presented as operating cash outflows, are now divided into a principal portion classified as financing activities and an interest portion classified as operating or financing activities.

Impact on operating cash flow: The classification of lease payments and the inclusion of interest and principal portions affect the operating cash flow. In the earlier years of the lease, operating cash outflows decrease as a portion of lease payments is classified as financing activities. Conversely, financing cash flows increase as the principal portion is classified as such.

Who Does IFRS 16 Impact?

Lessees who follow the International Financial Reporting Standards are affected by the new lease accounting standard. Over 160 countries all over the world will need to adhere to IFRS 16, including Spain, Ukraine, United Kingdom, Russia, Norway, Brazil, Japan, France and more.

History of IFRS 16

The International Accounting Standards Board introduced IFRS 16 in 2016. It is one of the most significant changes to their lease accounting policies in over 25 years. The goal of the new standard was to create transparency in representing leases on the balance sheet for all international businesses. IFRS 16 replaces IAS 17 as the new standard that all companies who operate under IFRS must adhere by and went into effect on January 1st, 2019.

Transition with IFRS 16 Software

Visual Lease provides international businesses with the tools to achieve and maintain IFRS 16 compliance while unlocking financial opportunities within their lease portfolios. Visual Lease’s powerful and easy-to-use cloud-based solution automates lease accounting, all in one centralized location.

Looking for a reliable lease accounting software? Click here to schedule a demo and see how Visual Lease can help you with IFRS 16.

Company achieves double-digit YoY annual recurring revenue and customer growth  
for fourth consecutive year 

Woodbridge, NJ – January 20, 2022 — Visual Lease, the #1 lease optimization software provider, today announced results from 2021, reporting an increase of nearly 30% in customer count and annual recurring revenue year-over-year, making it the fourth consecutive year that the company has experienced double-digit growth. Visual Lease now assists nearly 1,000 organizations with lease accounting compliance and the financial, legal and operational performance of their leased assets.  

“Our continued success is grounded in our commitment to our customers,” said founder and CEO, Marc Betesh. “Our software is designed to help companies not only master lease accounting compliance, but also effectively manage their leased assets for maximum return on investment. Our platform supports cross-functional collaboration across all teams who handle lease data, a critical part of the lease accounting and management process that will drive business impact today and well into the future. As we move further into 2022, we’re building on a very strong foundation, and will continue to make strategic investments in our product, services, people and infrastructure.”    

Some of the company’s other achievements in 2021 included: 

Solution Advancements 

Lease Accounting 

• Expanded its GASB support, launching technical accounting features to streamline the handling of lessor termination calculations, schedule modifications and reports. 
• Introduced GASB 87 Complete and ASC 842 Proven Path, which are end-to-end lease accounting solutions and services packages for public sector entities and private companies with fewer than 100 leases.  
• Introduced a GASB RFP Template, a free, comprehensive RFP template to assist organizations in the evaluation of lease accounting technology providers. 
• Enhanced its most frequently used reports (Ad Hoc, Roll-Forward, Disclosure and Lease Accounting reports), which resulted in greater visibility into calculations, supporting audit-readiness. 
• Launched short-term calculations, empowering its users to easily create short-term calculations irrespective of lease terms. 
• Improved the process around financial entries when importing calculations and transaction values. 
• Expanded support of foreign currency disclosure and reporting, increasing visibility into calculations to assist with audits. 

Lease Administration 

• Released a new Lease Options Report, providing an easy-to-read summary of critical options information and empowering its users to act based on key details within their portfolio. 
• Announced a new Schedule Upload feature, enabling its users to quickly generate abandonment schedules with itemized interest and amortization entries. 
• Expanded the VL Integrations Hub with a broader set of APIs, export and integrations options that allow users to streamline their processes and improve productivity by automating repetitive tasks. 
• Increased support with lease abandonment, a critical capability for many organizations dealing with the ongoing impacts of COVID-19 and the many resulting changes within their lease portfolio.  

Infrastructure & Community 

• Celebrated its 25th anniversary and as part of it donated $25,000 to three non-profit organizations addressing affordable housing needs: Habitat for Humanity International, The Affordable Housing Alliance and New Jersey Veterans Home at Menlo Park. 
• Introduced its Customer Advisory Board (CAB), assembling a select group of senior financial management and real estate executives from its customer base to share insights and solicit feedback on its solutions and services. 
• Doubled its Partner Alliance network, joining forces with a number of industry-leading organizations such as SolomonEdwards and CGFI, providing increasingly valuable service and offerings to mutual customers.  
• Hired across all departments, increasing its employee base by 38% year over year. 
• Launched its Corporate Strategy Department to gather information and harness market insights to determine a greater, forward-looking solution for its customers.  

Brand & Thought Leadership 

• Unveiled new branding, elevating its look and feel to mirror its ingenuity, passion and commitment to helping companies achieve confident, ongoing lease accounting compliance.  
• Announced its Consult an Expert program, providing companies with direct access to its deep bench of accounting professionals and lease specialists. 
• Launched The Visual Lease Data Institute, publishing two reports, “The Road to Readiness for ASC 842” and “Commercial Real Estate in 2022.”  
• Introduced its Lease Accounting Monthly Planning Workshops webinar series, providing companies with unique insight and resources to help successfully take the steps needed to transition to ASC 842 and GASB 87. 
• Launched its Lease Accounting Solution Transition (LAST) PlannerTM, an interactive and easy-to-use tool that provides organizations with a custom plan to facilitate their move from one lease accounting platform to another. 

Industry Recognitions 

• Ranked in the Top 20% on the Inc. 5000 List and included in the Deloitte Fast 500 for the second consecutive year. 
• Honored with a Bronze Stevie® Award in the Fastest Growing Company of the Year category in The 19th Annual American Business Awards®. 
• Named a winner of a Gold Stevie® Award in the Employer of the Year category in the sixth annual Stevie Awards for Great Employers. 
• Identified as a Top Software Company of 2021 by The Software Report. 
• Included in the Capterra Shortlist for Lease Management, identified as a top lease management tool of 2021. 
• Recognized by G2 as the only leasing solution that is a Leader in both Lease Accounting and Lease Administration. 
• Placed in a new Gartner Digital Markets report for FrontRunners Online Property Management Software. 
• Named a Best Place to Work in New Jersey by NJBIZ. 
• Recognized as a Top Workplace in 2021 by NJ.com. 

To keep up with announcements from Visual Lease, visit the Visual Lease Newsroom. 

About Visual Lease  

Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS platform is embedded with more than three decades of best practices from major corporations and leading industry professionals. Our award-winning solutions are used by nearly 1,000 organizations to manage 500,000+ real estate, equipment and other leased assets. Committed to ongoing innovation and unparalleled customer service, Visual Lease helps organizations transform their lease compliance requirements into financial opportunities. For more information, visit visuallease.com.   

Media Contacts 

Erica Bonavitacola
Visual Lease
T+1 732 860 4838
ebonavitacola@visuallease.com     

Katie Vroom
Gregory FCA
T+1 212 398 9680
kvroom@gregoryfca.com  

Industry leader to host a series of virtual events, sharing valuable insights to help companies master lease accounting compliance 

Woodbridge, NJ – January 11, 2022 —Visual Lease, the #1 lease optimization software provider, announced its schedule for complimentary educational webinars for the first quarter of 2022. The organization will continue to leverage its three decades of lease management and accounting expertise to provide organizations with the information they require to achieve and maintain compliance with lease accounting standards ASC 842, GASB 87 and IFRS 16.  

 “These educational sessions not only provide attendees with lease accounting best practices, but also, with insight into the risks and opportunities associated with their leases.” said Marc Betesh, founder and CEO of Visual Lease. “With looming deadlines and changing requirements, there’s never been a better time for organizations to learn directly from industry experts who have helped inform the very lease accounting standards by which they’re impacted.” 

 Visual Lease’s Q1 webinar schedule covers the following topics: 

• Achieving Confident Compliance

• • ASC 842 Monthly Planning Sessions (January 19th, February 15th and March 15th) – Receive expert tips and industry best practices to accelerate and maintain compliance with ASC 842.  
  • GASB 87 Monthly Planning Sessions (January 19th, February 17th, March 17th) – Learn how to prepare for and execute the transition to GASB 87 with supporting lease accounting technology.   
  • Best Practices for Properly Gathering Lease Data (March 22nd) – Gain an understanding of how to successfully navigate and gather your company’s lease data to ensure lease accounting compliance and audit readiness.  

• Sustaining Compliance 

• • How to Prepare for Common Day 2 Lease Accounting Challenges (February 10th) – Hear directly from experienced technical accountants about different Day 2 lease accounting challenges, including remeasurements, modifications and terminations. 

• Lease Optimization

• • Maximize the Value of your Commercial Real Estate in 2022 (January 20th) – Discover new commercial real estate trends from a recent study by The Visual Lease Data Institute. Learn how to leverage these insights to maximize the value of future leases.    

For additional details, registration information and updates on opportunities to earn CPE credits please visit Visual Lease’s events page, which will be regularly updated.

About Visual Lease  

Visual Lease is the #1 lease optimization software provider. We help organizations become compliant with FASB, IFRS and GASB lease accounting standards, while simultaneously improving the financial, legal and operational performance of their leases. Our easy-to-use SaaS platform is embedded with more than three decades of best practices from major corporations and leading industry professionals. Our award-winning solutions are used by 900+ organizations to manage 500,000+ real estate, equipment and other leased assets. Committed to ongoing innovation and unparalleled customer service, Visual Lease helps organizations transform their lease compliance requirements into financial opportunities. For more information, visit visuallease.com.   

  
Media Contacts 

Erica Bonavitacola 
Visual Lease 
T+1 732 860 4838 
ebonavitacola@visuallease.com     
 
Katie Vroom 
Gregory FCA 
T+1 212 398 9680 
kvroom@gregoryfca.com  
 

Lease accounting compliance is not just a one-and-done disclosure. It is a new approach to accounting that includes an ongoing, cross-departmental effort – and a much higher level of scrutiny.

Lease accounting is interdependent on lease administration. The lease accounting standards (ASC 842, IFRS 16, GASB 87) require collecting leases from across your organization and staying on top of them as they change throughout the year. It is a collaborative effort that requires dedicated people (often cross-departmentally in IT, procurement, legal, etc.) with strict attention to detail.

To do so effectively, you need to implement strong lease controls and reliable technology. And though the lease accounting market offers a wide selection of software solutions to streamline compliance efforts, most lack essential lease administration capabilities. Many of the products on the market fail to address the importance of long-term lease administration throughout the financial process.

It is not possible to maintain lease accounting compliance without accompanying technology that supports both lease accounting and lease administration. Here’s why.

Software that includes both lease administration and lease accounting functionality is important to:

#1 Ensure centralized lease data

Having both lease administration and accounting together in one robust solution provides reliable, consistent lease information to support continued compliance and confident financial reporting. This significantly reduces errors, increases efficiencies and helps establish cross-functional collaboration across your business.

Consider this: When you get a new lease, it must be reviewed and abstracted into a system. You’ll need to implement controls that track both the legal and financial elements of that lease, which can control start dates, options, dollar amounts, etc. A platform that has both lease accounting and lease administration ensures that, from day one, your lease information is reliable and up to date.

With lease administrators owning the role of maintaining a single source of truth, accountants can be confident that all data and calculations will be consistent and accurate. In addition, software that supports both functions boosts efficiency by cutting down on time-consuming, tedious tasks outside of the accounting scope, such as searching for pertinent documents, tracking monthly rent increases and handling lease amendments.

#2 Track lease changes throughout the year

Leases are dynamic – and maintaining lease accounting compliance is not a one-and-done disclosure. It is an entirely new approach to accounting and an ongoing process. This can be tricky because leases are complex legal documents that sometimes do not have a clear owner. There are leases (real estate, equipment, embedded leases in maintenance agreements, etc.) that are often handled by different departments within a business.

Lease terms change as your business takes on new spaces, scales back or renegotiates. Implementing lease controls within lease accounting and administration software is the only way to ensure reliable data, repeatable processes, trustworthy guardrails and ongoing monitoring throughout the lease lifecycle. While some organizations selected lease accounting solutions lack this capability, they will run into major issues sustaining compliance as their leases change.

#3 Maintain a comprehensive audit trail

It is important to remember that compliance is not just about meeting accounting standard requirements, but also implementing proper policies and procedures to reduce risk.

Using lease accounting and lease administration software that has comprehensive user rights, integrated approval workflows and audit trail capabilities provides additional peace of mind knowing that any changes – including ones made to critical dates, financial impacts of modifications and more – are fully auditable.

Leases are often managed and modified by a variety of entities both inside and outside an organization. Due to the number of people involved in altering important calculations, the accuracy of the lease data can be difficult to control and may be prone to error without a solution built to handle multiple users. Taking this precaution in the beginning of your compliance journey will save you a lot of time long-term.

Lease accounting and lease administration go hand-in-hand

Lease accounting solutions that do not integrate lease administration into the software are unreliable, incomplete and more complex. Having both within one location is essential to ensure a well-rounded compliance strategy that covers everything you need for complete and accurate data management.

There is power within your lease portfolio. Over the last year, public and private businesses have taken a closer look at their leases – and experienced the downstream benefits of lease optimization. Businesses who must comply with the new lease accounting standards (e.g., FASB ASC 842) are now examining their leases with a higher level of scrutiny than ever before. Additionally, over the last year, companies looked to their leases to reduce the financial impact of COVID-19. In return, these businesses have experienced operational benefits associated with lease optimization.

What is lease optimization?

Optimizing your lease portfolio means:

1. Having a controlled inventory of all lease documentation that is updated to account for all changes and modifications.
2. The ability to capture, monitor and act on all critical lease dates, including end of-term options.
3. Ensuring changes in lease terms are reflected in payment schedules and lease accounting disclosure reports.
4. Conducting regular audits of your leases and the underlying assets by taking stock of your portfolio and identifying gaps and opportunities.

Lease optimization allows your business to uncover savings, streamline lease accounting compliance and accommodate pivotal business needs with agility.

Identify cost-saving opportunities

Over the last year, businesses looking to cut excess business expenses were increasingly mindful of their leases, given leases are the second largest business expense besides payroll. Lease optimization helps organizations identify areas of their leases where they are overspending – and save money through visibility into that data.

Real customer lease optimization examples

Here are some examples of how Visual Lease has helped hundreds of customers save money through lease optimization. Before partnering with us:

• A large manufacturing company lost $105k because they did not realize that their lessor was continuing to bill expenses for surrendered property.
• One of the largest insurance companies in the US lost $185k because they didn’t realize their landlord needed to offset operating expense increases against tax decreases.
• A national bank lost $500k because the tenant forgot to request reimbursement for tenant improvements from the landlord.
• A large tech company lost $210k because the tenant was not aware that tax abatements were not being added back to the base tax amount.

These are examples that with the right information, perspective and tools in hand, lease optimization can be leveraged to materially improve business processes and generate savings in a previously undermanaged area of an organization.

Capture modifications and adjustments that impact lease accounting compliance

Leases change – and adjustments need to be tracked and evaluated under the new lease accounting standards (ASC 842, IFRS 16, GASB 87).

Determining whether a modification has taken place can be operationally challenging, particularly for companies with large lease portfolios or for organizations that do not have the systems and processes in place to properly handle and account for these events. This analysis is complicated and will most likely require a dedicated team and technology to ensure attention to detail.

That said, this is THE perfect time for you to take the extra steps towards optimizing your lease portfolio.

You need to feel confident throughout every stage of the lease accounting compliance journey:

• Day 1 – Compliance (centralizing leases and producing accurate reports)
• Day 2 – Sustainable Auditability (implementing processes and controls)
• Day 3 – Optimization (revisiting and bridging gaps)

Accommodate business needs with agility

Another positive of lease optimization is that it enables your business to pivot and identify emerging lease needs as your organization grows – or vice versa. Having the ability to access your leases in one centralized location – and report on your portfolio in any way helps you to identify the most effective way to scale your lease portfolio to meet your needs.

This article originally appeared here in Forbes.

As a result of Covid-19 and the changing landscape related to leases, private companies have received more time to prepare for and adopt the new lease accounting standards in their financial reporting. Last year, the Financial Accounting Standards Board (FASB) further delayed the deadline for private companies to comply with the lease accounting standard ASC 842, which brings most of a company’s operating leases onto its balance sheet. This delay has given private companies nearly two additional years to comply with the new lease accounting standard. Because public companies have already gone through this process, there are many lessons that can be derived from their journey to help private companies as they move through their own adoption.

Perhaps the biggest lesson learned from public companies, which we’ve seen through our clients’ experiences, is that adopting the new lease accounting standard takes time, can be quite complex and results in a resource-consuming process, particularly if there is a lack of cross-departmental collaboration. With the ASC 842 deadline for private companies looming, there are several things private organizations can do to set themselves up for success.

Know What Lease Data To Gather And Where To Get It

Public companies learned that gathering and validating data was the most challenging part of the lease accounting compliance journey. Companies with large, diverse lease portfolios found lease contracts — and thus the data within those documents — can be scattered across any number of separate sources. Not only is it tedious to gather contracts and relevant data, but it’s also easy to overlook required information if the individuals abstracting the data don’t have an informed sense of what is required for compliance. Failure to properly capture all the relevant data elements can ultimately diminish the value of a company’s financial reporting. Due to this important — and heavy — lift, and despite the deadline delay, getting an early start is key to a private company’s successful adoption.

It’s worth noting that not all required data elements for effective lease accounting compliance will be found within an organization’s lease agreements. In some cases, only about half of the data will be found within contracts, while the remainder will be contained in other sources and require some level of judgment to establish.

When private companies begin down the road to lease accounting compliance, they should first reflect on what the required data is and where it can be found within their organization. These answers can be overwhelming, but in this case, knowledge is power. This is because there can be as many as 70 distinct data elements, such as lease terms, payment schedules, end-of-term options and incentives, that need to be identified and captured to be compliant with the lease accounting standards. To properly collect, organize and analyze all the required data, private companies should get ahead of the process and start to prepare now.

Use A Centralized Data Repository

Another lesson learned from public companies is the importance of a central lease document and data repository. A 2016 survey by PwC found that 39% of companies manage their lease agreements and related accounting in a decentralized manner. While this approach can work for some, it’s time-consuming and can increase the chance of human error during the data collection process. Public companies that had an organized centralized lease portfolio learned that it saved them time on gathering and analyzing required information, which ultimately saved them money in the long run.

When setting up a centralized lease portfolio, public companies were able to streamline and optimize global reporting processes and track lease data in real time, which has proven benefits for lease accounting compliance. By having all of the necessary lease data at their fingertips, these organizations experienced a faster, more efficient lease compliance process while also uncovering cost savings including overpayments, unreceived lease incentives and reduced full-time equivalent costs, among others. Not to mention, centralizing leases can be instrumental in supporting a company’s audit process.

Put Dedicated Teams In Place

Public companies have also seen the value of having the right people in place:

• Cross-departmental collaboration: Working with other internal teams on data collection creates visibility across an organization, streamlining the process and positioning the accounting team as a stronger partner to their business.
• IT assistance: When opting to leverage a centralized data repository or any other dedicated technology, it is critical to enlist one’s IT department from the outset of the project to ensure a smooth implementation, particularly as it relates to the eventual integration with other systems such as an ERP.
• Dedicated players: Bringing in experienced lease accounting, project management and other expert professionals — whether they’re in-house or outside service providers — can minimize the impact on a company’s other resources.

While every organization’s lease accounting compliance journey is different, many public companies discovered that some of the most daunting tasks with the new leasing standards were only tangentially related to accounting. Rather, the most significant challenges were in the preparation process. Once private companies get their leases in order and dedicate the time and resources required, they are positioned to better achieve compliance and drive a positive impact on their business’s financial reporting and compliance.

This article originally appeared here in Forbes.

In 2020, many companies were forced to make tough decisions regarding their leased commercial spaces. From office closures to consolidations and deferrals, many of these decisions will have long-term impacts beyond the pandemic. To survive and thrive in today’s new norm, these same companies now need to evaluate how these decisions will continue to affect the leasing landscape, and what that means for their future finances and operations.  

Lease Market Considerations for 2021 

Covid-19 had a devastating effect on the real estate market in 2020. As organizations continue to adapt to remote work environments, the trickle-down effects will likely play out over the next few years. Unlike the economic downturn in 2008, the commercial real estate market was in a strong position at the start of 2020 — in fact, it was predicted to grow. However, as tenants struggled to meet their rent obligations, and tenant-landlord tensions and lawsuits ensued, the market quickly took a downward spiral. 

Despite this negative trend, several bright spots signal recovery within commercial real estate. We surveyed several hundred companies across retail, manufacturing, health care, financial services and more to gain critical insight into how the leasing market has changed since the start of the pandemic and to help organizations to make better-informed business decisions for the year ahead.  

Revenue Impact of the Pandemic 

By the end of 2020, nearly three in five respondents to our survey reported a 59% loss of revenue in their business since the start of the Covid-19 outbreak in March 2020. Of those that saw a negative impact on revenue, 80%, fortunately, expect that impact to be short-term. As a result, many organizations are more likely to seek and prioritize opportunities to save money — and leases provide a way for companies to do just that. 

Over the past year, many organizations made changes to space and equipment leases. However, most still need to get creative and find other ways for monetary gain. PPP loans, insurance policies and lawsuits were some ways that businesses across all sectors chose to subsidize their company’s overhead in the short-term, but these options are now carrying over into 2021. 

The Future of Office Space 

To cut additional costs, many have turned to their commercial office leases to identify savings. With the pandemic, there has been a monumental shift in the traditional office space, but most companies are not resolved on what that looks like for their businesses in the future. This year, the industry will need to consider several changes to the office market as they make broader business plans: 

• Remote work: The acceleration of remote work has shifted the office environment, resulting in widespread downsizing and a decreased demand in the market. Despite this change in behavior, there are now new opportunities for organizations looking to retain office space in major cities, such as opting for smaller regional offices or expanding office space to allow for social distancing.
• Coworking: Coworking spaces and other short-term rental options may see a rise in popularity as companies continue to explore ways to stay out of the traditional long-term lease options but still provide a home base to employees.
• Subleasing: In addition to coworking, the sublease market has become larger than it was during the dot-com bubble, providing another flexible lease situation for companies to consider.

Important Lease Clauses In 2021 

Lease clauses offer necessary legal protections for both tenants and landlords. However, the onset of the coronavirus pandemic presented unique challenges, which left attorneys scrambling to identify protections for their clients. Many explored force majeure clauses to save costs, only to find that these clauses do not typically extend to pandemics or other public health crises. 

To date, the biggest impact that Covid-19 has had in the market is that it’s suspended progress on new transactions, and by the end of 2020, global CRE deal volume declined 36% YoY. Tenants have been reluctant to sign new leases and because of this, landlords do not have visibility into the future of their buildings. To add to the lack of certainty, where leases are expiring, others could potentially not be renewed until there is more clarity on their business needs, leading to reduction through attrition in the short-term. As such, new leases should include updated clauses to make new and existing tenants feel comfortable with signing their agreements. Our survey identified the most important lease clauses to consider in today’s environment as flexible termination (34%), specific pandemic force majeure clauses (32%) and shorter lease windows (16%). 

To effectively navigate today’s commercial real estate landscape, it’s important to recognize that some changes brought on by the pandemic — such as remote work environments and reimagined workspaces — are likely here to stay. Companies will need full visibility into lease terms and options for negotiation and payment to better manage their businesses in this new climate. Flexibility ultimately creates a win-win scenario for tenants and landlords alike in 2021 and beyond. 

Lease accounting is a massive, cross-functional effort. It involves various stakeholders and systems that impact (and are impacted by) leases. It is not just an accounting problem – and goes further beyond producing a disclosure report.

The dynamic nature of leases prompts constant adaptation, and organizations need an easy way to manage those changes. The bigger the portfolio, the more complicated it becomes, which is why it is important to determine how you will handle accurate lease information and financials.

There needs to be a reliable way to manage leases throughout the year, given lease changes can result in hundreds, potentially thousands of calculations and permutations. While the market offers a wide selection of solutions, not every tool is one-size fits all. Each lease accounting solution offers its own experience – from implementation to daily usage and beyond.

In this blog, we’ll break down the top differentiating areas and questions you should consider (beyond producing accurate calculations and reports) when evaluating lease accounting software.

Configurability vs. customization

Every business is unique with their own processes and leases that contain specific information. Your lease accounting solution should be flexible to match the way you run your business. Weighing the differences between a custom and configurable solution can save you significant time and money.

• Does the solution require customization for unique business requirements? If so, what are the costs and what is the maintenance associated with customization?
• Does the solution support configurable data fields, groupings and financial categories to match your industry and organization?
• Can the solution generate ad-hoc reports on the fly?

Customer experience

At the end of the day, your lease accounting solution relies on the people using it. Make sure you are properly set up and running with thorough, dedicated customer support from implementation and beyond.

• Does the vendor provide in-house, dedicated implementation support?
• Does the vendor offer ongoing customer support at no additional cost? What are their estimated response time SLAs?
• Does the vendor provide ongoing trainings and helpful tools dedicated to various users?
• Is the vendor committed to continuous product enhancements based on customer needs?

Integrations

Your lease accounting software should be able to handle even the most complex lease administration and accounting scenarios, including data imports and exports to various third-party solutions for a true return on investment.

• Does the software integrate with your existing technology infrastructure, such as your ERP and financial systems?
• Does the software offer flexible options to schedule, monitor, manage and automate data imports and exports between third-party applications?

Ease of use

Lease accounting is complex and requires constant adaptation from a variety of stakeholders. You need an easy way to view, track and manage all updates for full auditability.

• Is the user interface intuitive and easy to use?
• Does the solution support the ability to view changes made by various users?

Security

There is a lot of money – and risk – in most lease portfolios. Make sure you feel confident in your solution’s ability to keep your information safe and generate accurate calculations.

• Are there tools for administering individual and group users for system access, roles and permissions?
• Is the solution and calculations backed by a SOC I Type II audit?

Selecting the right lease accounting solution for your business is critical to your success. Evaluating various tools is a necessary part of the process to ensure you are equipped with what is needed to meet ASC 842, GASB 87 or IFRS 16 compliance.

If you’re in search of an all-encompassing lease accounting management software that ensures you’re achieving and maintaining compliance, Visual Lease is the solution you’ve been looking for. Schedule a demo with our team to see if we’re a match.

Table of Contents

• What is a lease term?
• Lease lengths defined under ASC 842
  • Long-term leases under ASC 842
  • Short-term leases under ASC 842
  • Month-to-month leases under ASC 842
• ASC 842 Long-term Lease Accounting
  • Best practices for long-term lease renewals
• ASC 842 Short-term Lease Accounting
  • Short-term lease renewal challenges
• ASC 842 Month-to-Month Lease Accounting

Organizations are increasingly seeking flexible lease options, with short-term leases becoming more popular. Lease accounting standards treat different lease lengths differently. This blog explains the ASC 842 requirements for accounting for long-term, short-term, and month-to-month leases.

What is a lease term?

A lease term refers to the specific duration for which a lease agreement is in effect. It is the period of time during which a tenant has the legal right to occupy and use the leased property, as outlined in the terms and conditions of the lease contract. Lease terms can vary widely depending on the type of property, the landlord’s preferences, and the negotiation between the parties involved. Lease terms are typically stated in months or years, and they establish the start date and the end date of the lease agreement. At the end of the lease term, the parties may choose to renew the lease, negotiate new terms, or vacate the property, as specified in the lease agreement.

Lease lengths defined under ASC 842

For organizations that must comply with ASC 842, long-term, short-term and month-to-month leases are defined as follows.

Long-term leases under ASC 842

Long-term leases are at least one year and one day in duration or longer. Note: Long-term leases are defined the same way across all three major accounting standards (ASC, IFRS and GASB).

Short-term leases under ASC 842

Short-term leases are a duration of one year or less. Note: Under ASC 842, the short-term lease classification is a practical expedient you can choose to apply to an entire asset class. (Read more about the practical expedient for short-term leases below.)

Month-to-month leases under ASC 842

Month-to-month leases are a legal status that varies across different leases and different states. For accounting purposes, the key criteria of these leases are there is no set expiration date and they can be canceled by either party.

ASC 842 Long-term Lease Accounting

Long-term leases have a greater impact on financials, given they remain on the balance sheet for an extended period of time. When making contract renewal decisions for long-term leases, you may find yourself examining their impact on your balance sheet.

Generally, lease renewals involve exercising an option in a current contract or negotiating a new contract. When a contract includes a renewal option, you do not have to exercise it; instead, you can seek to renew the lease with new terms.

For example, you might choose to not exercise an upcoming renewal option on an existing long-term lease with a new five-year term and higher rent than the current market rate. Instead, you could try to negotiate a lower price or a shorter lease term that will limit your commitment to the higher rent.

Lately, more organizations have been negotiating their existing contracts to take advantage of lower market rates and/or shorten their lease term.

Best practices for long-term lease renewals

By starting the lease renewal process early — ideally 9 to 12 months prior to lease expiration — you have enough time to explore alternative leases, see what is happening in the market and know what the best rates are. This puts you in a good position to possibly negotiate a new lease.

This is especially true for real estate leases, which are often long-term. Finding a new location and planning a move takes a lot of time and money. If you wait too long, or too close to the lease expiration, you could end up exercising an option you don’t want or changing to a month-to-month lease because there is too little time to move or to negotiate a new contract.

To avoid this, lease management software like Visual Lease can alert you about upcoming renewal deadlines and other critical dates. This is incredibly useful when planning next steps and making timely decisions.

ASC 842 Short-term Lease Accounting

Under ASC 842, the “short-term” lease designation can be applied to an entire class of leases rather than on a lease-by-lease basis. By electing this practical expedient, short-term leases do not need to be reported on the balance sheet. This and other practical expedients simplify the lease classification process and help organizations more easily adhere to the new lease standard.

That means when you are first classifying and entering your leases into a lease management system, you should decide up front whether all leases of a particular asset class will be designated as short-term leases. For example, you might decide to treat all real estate leases or all equipment leases (or a particular type of equipment, such as copiers) of one year or less as short-term leases.

If you elect to apply the short-term designation, all leases that are one year or less in duration will be handled as short-term leases, with no exceptions. If you choose not to elect the practical expedient, then all leases will be considered long-term regardless of their duration.

Lease management software such as Visual Lease makes it easy to set up fields for different asset classes (such as real estate and equipment) and select which (if any) should be treated as short-term leases. With all your lease information in the system, the Visual Lease platform can then automatically determine which leases meet the short-term lease criteria based on the designated asset classes and contract dates and properly report the expense.

Short-term lease renewal challenges

Just like long-term leases, short-term leases can be renewed by exercising an option or negotiating a new contract. However, exercising an option or extending the length of a short-term lease is tricky because it can affect the “short-term” classification.

As an example: Suppose you have a one-year short-term lease with a renewal option, and you decide 3 months before the end of the current term that you’re going to exercise the option and extend the lease for one more year. With the remaining 3 months of the existing lease term plus the 12 months of the renewal term, you now have extended the contract to 15 months — exceeding the short-term lease criteria of one year (12 months) or less in duration.

In this case, the contract would now be considered a long-term lease, and you would need to identify the lease asset and determine the liability for accounting purposes.

But suppose instead you wait until the very end of a lease term before deciding to renew a short-term lease for another year. In this case, is adding a year to the existing term considered a lease extension, requiring the lease to be reclassified as long term?

Although ASC 842 does not provide explicit guidance for this situation, the feedback from the major auditing firms indicates that the one-year renewal could be treated as a distinct short-term lease. So, theoretically, you could be in a space for multiple years but only commit to one year at a time at the very end of each year, resulting in successive short-term leases.

ASC 842 Month-to-Month Lease Accounting

Sometimes organizations allow existing leases to become month-to-month to delay decisions about long-term commitments. Ideally, an organization would have a minimum number of these leases and manage them strategically — making a conscious decision to go month-to-month for a limited time only.

However, organizations may have month-to-month leases because renewals were not completed on time. Or sometimes the organization does not have a good strategy for replacing month-to-month leases and ends up continuing them “by default” rather than by choice.

Regardless, to maintain accurate lease accounting financial data, you should have an easy way to manage month-to-month leases. With Visual Lease software, you can change the status of a month-to-month lease at any time. Lease management and accounting software lets you easily modify lease information, change the commencement date and add a forecasted expiration date and other data to create a new schedule and calculations for month-to-month tenancy.

Visual Lease also makes it easy to track the dollars associated with a month-to-month lease, including any rent that applies during a holdover as well as straight-line rent expenses. The system can even identify month-to-month leases and show them as short-term lease expenses in disclosure reports.

Use lease lengths to your advantage

By understanding how the different lease terms are defined, you can more simply manage them in a strategic way.

Using a lease management software platform like Visual Lease allows your organization to strategically manage lease terms by:

● Applying consistent treatment to leases according to classification, asset class and any practical expedients that are elected

● Providing tools for creating, tracking, reporting and analyzing lease terms and costs

● Alerting decision makers about critical lease dates and deadlines for exercising lease options and renewals

Learn more about how to account for different lease terms from one of Visual Lease’s in-house experts. Check out our on-demand webinar Managing Short-Term, Long-Term and Month-to-Month Leases (and Everything in Between).

What are rent concessions?

Rent concessions are discounts, incentives, or other benefits provided by landlords to tenants. Landlords sometimes offer rent concessions to entice tenants to sign a new lease — or concessions may come up as part of lease negotiations. For instance, due to the impact COVID-19 had on businesses, many companies asked for concessions from their landlords in 2020 to ease costs related to real estate leases. 

Under the lease accounting standards, any lease concession must be captured and accounted for on the balance sheet. While FASB and IFRS offer some flexibility in how to account for rent concessions, including abatements and deferrals, their unpredictable nature presents an ongoing challenge to lease accounting and compliance.  

In this blog, we identify some common lease concessions and offer some helpful advice for handling them. 

What are some common rent concessions?

Common types of rent concessions include abatements, deferrals, short pays, impairments and early terminations. 

What is rent abatement?

An abatement is a temporary decrease in the rental rate. When this option is elected, a landlord and tenant often negotiate a short-term abatement so that the payment reduction applies for a defined period, such as three or six months. 

Therefore, a rent abatement typically changes the total amount of rent the tenant will pay over the full lease term. 

What is a lease deferral? 

A deferral is a temporary reduction in rent that requires repayment of the balance later. This does not change the total amount of the payments the tenant will make but defers the timing of the payments. 

Landlords may be more willing to work with tenants on a rent deferral than an abatement. However, they may agree to an abatement in exchange for some trade-off of rights and obligations, such as extending the lease term.

What are short payments? 

A short pay is a partial payment. A landlord might agree to accept a short pay until the tenant can repay the remaining amount of the lease payments.  

A short or partial payment results in a liability. In addition, since a short pay is considered a late payment (even if it is paid on time), it may be subject to late fees unless both parties agree otherwise. 

What is a lease impairment? 

An impairment is when the current value of a leased asset (such as real estate, vehicles, or equipment) is lower than the balance due according to the lease. The result is the impairment of the ROU asset, which may require a different amortization calculation for operating leases. 

From the lease holder’s point of view, assets may be impaired if the demand for those assets decreases or if rental rates drop significantly.

What are early terminations? 

An early termination is when a tenant decides to end a lease before its expiration date. But unless a lease includes an early termination clause, companies face serious repercussions when they terminate a commercial lease early. 

For instance, if a company decides to terminate a lease early, it may still have to pay some or all the rent due through the end of the lease term. In addition, the landlord might sue for monetary damages. 

Even if a lease does include an early termination clause, it generally imposes a termination fee and may include some restrictions or other reimbursements to the landlord. 

(Learn more about the costs of early terminations and other lease obligations.)

What are best practices for handling rent concessions?

Treat similar leases the same way. 

Both FASB and IASB allow you to choose to treat all lease concessions as either variable payments or a lease modification. This means you can treat similar leases the same way. (Read the FASB Q&A on lease concessions here.)  

In other words, you do not have to comb through the terms of every contract to determine whether it meets the guidance for a lease modification or a variable payment treatment. This is a practical expedient that saves time and simplifies decision-making.  

There are two important things to keep in mind:  

• You should disclose that you elected to treat similar leases the same way, as well as the treatment you chose to apply to lease concessions — variable payment vs. lease modification. (See more on disclosures below.) 
• If a deferral, abatement or other concession requires you to exercise a renewal option that results in a significant change, you may have to account for the concession as a modification. 

There is some flexibility in lease abatement accounting. 

Both FASB and IASB allow you to treat rent abatements as either existing lease obligations or as negotiated modifications to the lease terms. However, if the lease concession materially increases the landlord’s rights or the tenant’s obligations, it must be treated as a modification.  

• If an abatement is considered a variable lease payment, no remeasurement is required and the abatement flows through to any disclosure reporting.  
• If an abatement is considered a negotiated modification, a remeasurement should be run when the abatement term is agreed on and continue through the rest of the lease term. 

For example, a large manufacturing company that reports under IFRS 16 handled a three-month rent abatement by reducing its short-term and long-term liabilities for those months while still showing activity from a balancing perspective. From a P&L perspective, the company showed the benefit of no rent expense for those three months.

Accounting for Rent abatement under ASC 840 and ASC 842

ASC 840

Under ASC 840, lease abatement is treated as a reduction in the cost of the lease over the lease term. The following are some examples of how lease abatement is accounted for under ASC 840:

If a company receives a rent abatement for the first 6 months of a 10-year lease, the rent abatement is treated as a reduction in the cost of the lease. The cost of the lease is reduced by $300,000 (6 months * $50,000 per month). The rent expense is reduced by $50,000 per month over the remaining 9 years of the lease.

ASC 842

Under ASC 842, lease abatement is treated as a lease modification. Lease modifications are changes to the terms of a lease that are made after the lease has been entered into. Lease modifications can be either beneficial or onerous to the lessee.

If a lease abatement is beneficial to the lessee, it is recognized as a reduction in the lease liability over the lease term. If a lease abatement is onerous to the lessee, it is recognized as a lease liability over the lease term.

For example: 

If a company receives a rent abatement for the first 6 months of a 10-year lease, the rent abatement is treated as a beneficial lease modification. The lease liability is reduced by $300,000 (6 months * $50,000 per month). The rent expense is reduced by $50,000 per month over the remaining 9 years of the lease.

Financial statement impact of rent abatement and rent-free periods under ASC 840

The financial statement impact of lease abatement under ASC 840 can vary depending on the specific terms of the lease and the amount of the lease abatement. However, in general, lease abatement can have the following financial statement impacts:

• Reduced cost of goods sold: If the lease abatement is treated as a reduction in the cost of the lease, it will reduce the cost of goods sold on the income statement. This can improve the company’s gross profit margin and net income.
• Reduced rent expense: If the lease abatement is treated as a reduction in rent expense, it will reduce the rent expense on the income statement. This can also improve the company’s gross profit margin and net income.
• Increased right-of-use asset: If the lease abatement is treated as a lease modification, it will increase the right-of-use asset on the balance sheet. This can have a negative impact on the company’s debt-to-equity ratio and financial leverage.
• Reduced lease liability: If the lease abatement is treated as a beneficial lease modification, it will reduce the lease liability on the balance sheet. This can have a positive impact on the company’s debt-to-equity ratio and financial leverage.

Financial statement impact of lease abatement under ASC 842

The financial statement impact of lease abatement under ASC 842 can vary depending on the specific terms of the lease and the amount of the lease abatement. However, in general, lease abatement can have the following financial statement impacts:

• Reduced rent expense: If the lease abatement is treated as a reduction in rent expense, it will reduce the rent expense on the income statement. This can improve the company’s gross profit margin and net income.
• Increased right-of-use asset: If the lease abatement is treated as a lease modification, it will increase the right-of-use asset on the balance sheet. This can have a negative impact on the company’s debt-to-equity ratio and financial leverage.
• Reduced lease liability: If the lease abatement is treated as a beneficial lease modification, it will reduce the lease liability on the balance sheet. This can have a positive impact on the company’s debt-to-equity ratio and financial leverage.

Think ahead when planning for deferred lease payments. 

With a lease deferral, your organization needs to consider a number of variables and make decisions based on how it will impact your company’s P&L statement.  

• If you choose to report a deferral as a variable expense, you will book the benefit of the lease concession today and the expense of the repayment at a future point in time.  
• If you choose to treat the deferral as a lease modification, the immediate impact will be less, but the expense will be spread out and extend into future periods. 

For some companies, it might make sense to push the expense of deferred rent off to next year rather than inflate payments for FY2020. For instance, suppose a company that received a 3-month rent deferral in 2020 wants to defer payment as far into 2021 as possible. If the company treated the deferral as a variable payment, it would have to recognize the rent expense in 2020 even if the payments are made in 2021. 

Be sure to provide disclosures. 

As with much of lease accounting under the new standards, there are a lot of decisions to make. Providing lease accounting disclosures will help auditors and understand your financial statements, including:  

•  Any abatements, deferrals or other lease concessions received 
• Whether all leases (or similar leases) are treated the same way 
• Which practical expedients were chosen 

By providing disclosures, you can clarify decisions you’ve made and demonstrate that you have treated lease concessions consistently. 

Look ahead for ongoing compliance 

During a Visual Lease webinar, a quick survey of the attendees showed roughly half received some sort of rent concession. These and any other companies that receive lease concessions must account for and disclose those concessions if they are going to maintain FASB and IFRS compliance.  

As you plan for lease accounting, keep these key takeaways in mind: 

• You can take advantage of a practical expedient that allows you to treat similar lease concessions the same way. 
• Look ahead to plan whether you should book expenses now or later, and choose a lease concession treatment accordingly (variable payment vs. lease modification). 
• Provide disclosures to clarify your accounting decisions and demonstrate that you’ve applied lease treatment options consistently. 

What is an embedded lease?

Simply put, embedded leases are components within contracts that entail the use of a particular asset, where the user has control over that asset. You might be surprised at some of the types of contracts that often contain embedded leases, even though the contract may not contain the word “lease.”

Accounting for Embedded Leases represents one of the trickier aspects of implementing the new FASB and IASB lease accounting standards.

In this article, we’ll review the definition of embedded leases for ASC 842 and IFRS 16. Then we’ll go over guidelines for determining if an embedded lease exists, clarifying with an embedded lease example.

The impact of embedded leases under the new standards

For organizations with hundreds to thousands of leases, the need to be ready to comply with ASC 842 and/or IFRS 16 is keeping accounting teams busy. And private companies that have not yet adopted ASC 842 and must do so by December 15, 2021, still have a big task ahead, including:

• Gathering all the necessary data about property and equipment leases
• Implementing technology to do all the calculations and create journal entries
• Deciding how to amend your policies and procedures

Complicating the problem still further is the requirement to report on embedded leases that may be found in other types of contracts, especially those with service providers.

Although you may have done some embedded leases accounting in the past, it’s now a much bigger issue because the new standards bring operating leases, and even some types of service contracts, onto the balance sheet.

That means embedded leases accounting has a much bigger impact on your income statement under the new rules. Streamline this tedious process by utilizing our lease accounting software to save time and ensure embedded leases meet the new lease accounting standards

Common areas for Embedded Leases

• Service agreements: Contracts for services may include the use of specific assets. For example, a maintenance agreement that includes the use of equipment or a service contract for the use of a photocopier.
• Supply agreements: Contracts for the supply of goods may include the use of assets. For instance, a contract to purchase goods that includes the right to use storage or warehousing facilities.
• Construction contracts: Contracts for construction or infrastructure projects may involve the use of equipment or other assets. The contract may grant the lessee the right to use specific machinery or vehicles during the construction period.
• IT contracts: Contracts for software licenses or IT services may include the use of underlying hardware assets. For example, a software license agreement that also provides the right to use specific servers or computer equipment.
• Franchise agreements: Franchise agreements often involve the use of leased premises, such as a retail store or restaurant, as well as the use of other assets, such as equipment or vehicles.
• Licensing agreements: Agreements for the licensing of intellectual property rights may include the use of assets. For instance, a licensing agreement that grants the right to use specific manufacturing equipment to produce licensed products.
• Marketing or sponsorship agreements: Contracts for marketing or sponsorship activities may involve the use of assets. For example, an agreement that provides the right to use certain advertising displays or event equipment.

Embedded leases accounting: 3 questions for identifying embedded leases

In preparation for the new lease accounting standards, you’ll need to review the content of all your existing contracts to determine if they include embedded leases.

As you review those contracts, ask the following questions to decide if they contain embedded leases and make judgments on a case by case basis with the assistance of your advisory partners.

1. Does the agreement entail the use of one or more specific assets?
If no assets are specified, then no lease can exist within the contract. However, if an asset is explicitly or implicitly identified within an agreement, then a lease may exist.

Keep in mind that a lease may exist even if not specifically labeled as a lease within the contract. For example, power purchase agreements may include the use of a specified plant. Oil and gas drilling contracts may specify the use of equipment and pipelines.

2. Does the supplier have the practical ability to substitute a different asset?
If your agreement does specify the use of an asset, can the supplier easily substitute a different asset? And would the supplier benefit economically by doing so?

On the other hand, if the asset is an office copier, it’s not likely that the supplier can easily swap out one machine for another. And it’s also not likely that the supplier would benefit financially from doing that even if they could. In that case, a lease may be present.

In an example related to real estate, today’s corporate property portfolios often include the use of co-working space. If a co-working agreement doesn’t guarantee the use of a specific space within a building (such as hot desking), then the agreement may not be considered a lease.

3. Do you have control over use of the asset?
If you have physical control and decision making authority over the use of the asset, then a lease may be present.

Real World Examples of Embedded Leases

• Office Space in a Service Contract: A company enters into a service contract with a facility management company for various services, such as cleaning, maintenance, and security. The contract also includes the use of specific office space within the facility. The right to use the office space would be considered an embedded lease.
• Equipment in a Software License Agreement: A company purchases software licenses from a vendor, and the agreement also grants the right to use specific hardware equipment required to run the software. The use of the equipment within the software license agreement would be considered an embedded lease.
• Vehicles in a Franchise Agreement: A franchisor grants a franchisee the right to operate a fast-food restaurant under their brand. The franchise agreement also includes the use of specific vehicles for delivery purposes. The right to use the vehicles within the franchise agreement would be considered an embedded lease.
• Storage Space in a Distribution Agreement: A company enters into a distribution agreement with a logistics provider to store and distribute its products. The agreement also includes the use of specific storage space within the logistics provider’s warehouse. The right to use the storage space would be considered an embedded lease.
• Manufacturing Equipment in a Licensing Agreement: A company licenses a patented manufacturing process from another company. The licensing agreement includes the right to use specific manufacturing equipment required to implement the process. The right to use the equipment within the licensing agreement would be considered an embedded lease.

Embedded leases accounting: next steps

Once you have determined which contracts do contain embedded leases according to the new lease accounting standards, what’s your next step? You’ll need to extract and get that data into a lease accounting software solution.

Learn more:
Data Collection Tips for ASC 842 Transition and IFRS 16 Compliance
Can You Trust AI for Lease Abstraction?

When implementing the new FASB and IFRS lease accounting standards, it’s easy to overlook the ongoing maintenance of your lease data. To avoid an unexpected burden on Day 2, be sure to choose lease accounting software that will make it easy to accommodate changes to existing leases and automatically update your accounting accordingly.

Questions? Let us show you how easy it is to manage your lease data and accounting in Visual Lease.

Hundreds of private organizations have begun their journey towards lease accounting compliance. Although, many of them underestimate the amount of effort involved with preparation. In particular, assembling a team of internal resources – and identifying their responsibilities – is one of the most important steps to a successful implementation.

In this blog, we explore 3 critical ways your lease accounting and management team can help you achieve success – and why you should get started now.

1) Lease inventory demands cross-departmental effort.

Identifying all leases held by an organization is a complex and time-consuming task that the accounting team cannot do alone.

To gather a full scope of all leases, accounting must engage with different areas of the business, including real estate and finance. You may also find it necessary to also include representatives from lease administration, C-level management, legal, procurement and IT.

Real estate or facilities teams are an efficient way to identify a company’s property leases. If a business has multiple locations, this may involve tracking down records from many different sites.

Additionally, departments such as procurement, IT and legal are essential to search through records for equipment leases and other contracts classified as leases under the new standards. For example, procurement might use a spreadsheet or other tool to track assets such as office machines, IT equipment or vehicle fleets.

By involving the necessary personnel early in the lease identification process, companies can feel confident that their lease inventory is thorough and accurate.

Learn more: How to Assemble Your Readiness Team

2) Lease information affects a variety of business decisions.

A company’s chosen lease accounting technology affects more than just the accounting team. Centralizing lease information into one system can transform efficiencies and financial savings beyond lease accounting compliance.

Therefore, when evaluating a lease accounting system, you will want to have a clear understanding of who will need to access lease information. The chosen solution should make it easy for them to make updates, run reports and export any data they may need. Thus, it may be necessary to include those representatives during the evaluation of the solution.

For instance, any employees responsible for ongoing tracking and management of leased assets — including making changes and adding any new leases — should be identified to verify the system is intuitive and easy to use, and therefore will help them keep lease data accurate and up to date.

You may want to also include various departments, including IT, to evaluate how lease technology can support your organization beyond just accounting compliance, including accounts payable, accounts receivable and other data-driven decisions. IT is integral to this process, to ensure the solution can properly meet your requirements for integration with various third-party systems.

Furthermore, involving executives, real estate/facilities staff, and others in the preparation process can make sure the chosen solution meets their needs beyond accounting and compliance requirements.

3) Teamwork is essential to lease accounting compliance.

It clearly takes more than the accounting team to transition to the new lease accounting standards and achieve compliance.

By identifying the roles and responsibilities of internal stakeholders early in the process, the compliance team can create a plan of action that ensures accountability throughout lease accounting implementation.

A team approach improves the efficiency, thoroughness and accuracy of data abstraction, which ultimately helps to ensure the company will meet compliance requirements on time and on budget.

Together, the transition team can make informed decisions that will make long-term impacts on the company’s lease investments.

Long-term benefits for lease accounting and for the business

Once a company successfully transitions to the new lease accounting standards, the identified team can continue to use lease technology to share information and make decisions that impact both financial reporting and business performance — empowering the company to both maintain ongoing compliance and maximize the return on leased asset investments.

To create a plan for assembling your stakeholder team and other steps of lease accounting  implementation and compliance, use the Lease Accounting Milestone Planner.

Lease Accounting Compliance: Lessons from Public Companies

Although private companies still have some time to adopt the new lease accounting standards, public companies have already had to meet their compliance deadlines. In doing so, these companies have learned valuable lessons that can be applied to:

• Private companies that are in the planning stages of lease accounting compliance
• Public companies that rushed to select a tool and now see they need a better, long-term solution for their lease accounting needs

What are some of the things that helped public companies be successful in implementing the new lease accounting standards? What areas could have been improved?

Below, we share some helpful advice based on the experience of public companies that have already adopted new lease accounting standards.

Challenges in Achieving Lease Accounting Compliance

What lease accounting capabilities do you need for long-term reporting and compliance?

Some public companies found out the hard way that the accounting solution they chose was missing key capabilities that they need to ensure accurate, ongoing lease financials. 

For example, while some companies used a lease calculator tool to meet their initial compliance needs, they now realize it will not help them maintain compliance and do their reporting for the long term. 

That’s because every time a lease changes (which is often), the pertinent information needs to be updated in the lease accounting system so that subsequent reporting will be accurate. However, a lease calculator simply does not provide the tools for updating and maintaining lease data.

Public companies that chose a software-based solution with the following capabilities are better positioned for long-term compliance and accuracy:

• A single source of truth for lease data
• Automated calculations and financial reporting, including disclosure reports
• Tools for backup and verification of calculations and lease data

What is the best way to manage a large and/or complex lease portfolio?

Any public company with multiple locations or a large lease portfolio — including equipment and real estate — quickly learned that manually searching for and reporting on those leases would be a time-consuming and inefficient process.

To save hundreds of hours in time finding and verifying lease information, select a solution that provides a central repository for recording and tracking lease data. Once your leases are entered in the system, you can easily generate the reports needed for compliance — plus use the solution for ongoing updates and to view lease details on demand.

Advice for Successful Lease Accounting Audits

How long does it take to implement lease accounting?

Time and again, public companies learned that lease accounting implementation is a complex and time-consuming project, with high stakes and stakeholders across the business. 

While a lease accounting software solution can be implemented in weeks, the work required before solution implementation can take many, many months. So, it is mission-critical to invest  time up front in both auditing your lease portfolio and evaluating the technology you will use for lease accounting.

For help in planning your lease accounting compliance project, use our Lease Accounting Milestone Planner. 

What are some best practices to satisfy auditors? 

Leases can change fast and it can be hard to stay on top of them. To provide auditors with accurate and thorough lease financials, it is recommended to have checks and balances in place. To do so, you can use a lease accounting system to provide a full audit trail of updates to your changing leases. This helps provide auditors with a clear and complete picture of your business’s finances.

Strategies for Maintaining Compliance

How do you maintain accurate lease financials beyond compliance?

Look at the new lease accounting requirements as an opportunity to get the best solution for the long term — one that will continue to meet your business needs and satisfy auditors year after year.

For example, a technology solution that provides both lease accounting and lease administration capabilities helps public companies:

• Achieve compliance and meet ongoing lease accounting requirements
• Ensure that lease data is always accurate and up to date
• Save time by making lease information searchable and available at a glance
• Control costs by staying on top of all payments and transactions
• Meet important dates for renewals, renegotiations and options

How can you account for a growing or changing lease portfolio?

With the time and cost required to implement lease accounting, it makes sense to choose a solution that does more than just help you achieve compliance. Successful public companies opted for technology that will scale to accommodate any changes that might occur in their lease portfolio and provide ongoing lease management capabilities.

A cloud-based software solution can not only automate and streamline lease accounting and reporting, but also provide tools for making changes to financials, adding documents and clauses, searching for lease clauses and editing existing leases.

The Simple But Important Lessons Learned

As the experience of public companies are shown, there are some fundamental lessons that can help you to achieve lease accounting success:

• Get started now — start planning for your lease inventory and your lease accounting technology ASAP
• Do your research — get input from across the business, and perhaps consult an accounting firm, to identify leases and reporting requirements
• Think ahead to your lease management needs beyond compliance — to get maximum ROI from your lease accounting technology
• Set yourself up for success — choose a comprehensive lease accounting and lease management technology solution, such as Visual Lease

Want to hear directly from a public company about their experience preparing for and managing ongoing lease accounting compliance? View our on-demand panel discussion.

Recently, we have talked a lot about ways that companies can understand their lease obligations and reduce costs  in light of COVID-19. What many businesses have discovered during this time is that a lack of insight into these responsibilities and costs has huge implications — not just for lease accounting, but also for day-to-day business decisions and ongoing cost management.

As companies look ahead to recovery from the economic impacts of COVID-19, it is more important than ever to have a technology solution in place to help avoid financial issues and better manage the obligations associated with leases.

That is where a robust lease administration solution can help businesses avoid risk and realize benefits beyond lease accounting in three crucial ways.

1. Gain Greater Visibility into Leases with Lease Administration Software

As many companies have recently learned, the ability to find leases and uncover the important details buried within them — including clauses, due dates, and options that have an effect on lease obligations and costs — can be a complex and time-consuming task. This is especially true for organizations with multiple locations and, potentially, hundreds of leases to manage.

A lease management solution such as Visual Lease, which combines lease administration and lease accounting capabilities, makes it easy to manage lease data and determine your rights and responsibilities. The software provides the ability to search for specific lease parameters and gather the information you need to:

• Track payments and analyze costs
• Identify overpayments or opportunities to cut costs
• Get a complete picture of leases as part of the company’s bigger financial picture
• Make informed business decisions related to lease obligations and overall costs

2. Keep Track of and Manage Changes Related to COVID-19

With the closures, disruptions, and cut-backs to businesses related to the COVID-19 pandemic, many companies are coping with another new challenge — the need to keep track of any changes made to their leases during this time, such as:

• Lease modifications
• Lease terminations
• Lease impairments
• Variable payments
• Operating expense pass-throughs

Finding every affected lease and manually updating each one is cumbersome and time-consuming. Plus, it opens your business up to the risk of manual errors.

Lease administration software makes it easy to change lease information when you need to — providing the tools to find the pertinent leases and quickly update them with changes to payments, terms, options, and other information you will need later for lease accounting.

3. Stay Current on All Leases with Lease Administration Tools

A lease administration system also helps you stay current on critical dates and upcoming events within your leases — including opportunities to make changes and save money.

Lease administration software provides tools for tracking changes, alerting you to important  dates and events, and keeping your critical lease data up to date at all times. For instance, you can have the solution automatically alert you to deadlines for exercising lease options.

Find More ROI in Your Leased Assets

A combination lease accounting–lease administration software solution not only helps you organize, track, and report on lease data in accordance with the latest lease accounting standards. It also provides ready access to accurate, up-to-date information that can help you get the most value from your leased assets.

So, while some lease accounting deadlines have been pushed back, it makes sense to implement and use a lease management solution now. It will empower you to not only handle lease issues related to COVID-19 lease, but also manage lease financials in a way that can help you maximize lease ROI, improve liquidity, and plan for the future

Ready to get started ASAP? Request a demo of Visual Lease today!

Across industries, sectors and organizations of different sizes, the COVID-19 outbreak has touched virtually every business in some way. Between stay-at-home orders, emergency closures, and supply chain disruptions, companies are coping with a lot of operational and financial challenges posed by the crisis. 

In the middle of all this uncertainty, the deadlines for compliance with the latest lease accounting standards have once again been extended. That means: 

• Private companies have an additional year to adopt new lease accounting standards in their financial statements. 
• Public not-for-profit companies that have not yet issued financial statements also get an extension. 
• Government entities that comply with GASB 87 postponed the effective date and subsequent reporting deadlines for 18 months.  

That’s good news for businesses that have yet to fully implement the new lease accounting standards or are still in the process of updating their accounting practices. But just because there has been a reprieve does not mean you should delay implementing a lease accounting software. Furthermore, implementing a tool to track your leases can be incredibly helpful.  

Stay Ahead of Compliance with Lease Accounting Software 

Like we’ve been saying, getting ready for compliance with the new lease accounting standards is a time-consuming and intensive process. That’s because the reliability of your financial reporting depends on doing a thorough lease inventory and accurately consolidating all your lease data. 

Our advice is to continue moving forward as quickly and efficiently as possible on these compliance efforts. That includes implementing lease accounting software to help you organize and report on your lease data in support of the new standards. 

Having access to accurate lease data is also crucial to business and accounting decisions related to the pandemic. 

That means lease accounting software will not only help you meet the compliance deadline down the road. It will also enable you to search for and manage critical lease information right now — and even find ways to save money in circumstances related to COVID-19. 

Leverage the System to Save Time and Money  

Now more than ever, companies need to understand their lease obligations and rights so they can manage costs and find areas where they might have some flexibility. (Read more in our blog COVID-19 and Lease Accounting: Understanding Your Lease Obligations and Costs.) 

A lease accounting and management solution such as Visual Lease can help your company save time and money by providing greater control over your leases. It provides the tools to search for and view important information needed to stay on top of your lease requirements in three crucial areas: 

Better Manage Your Financial Responsibilities 

Visual Lease tracks the relevant language of all your leases, to help you determine what rights and options you have regarding rent and other payments. For example: 

• What are your monthly payments obligations across all your leases? 
• Are you paying for assets that the business no longer uses or needs? 
• Do the leases include a grace period before any late fees apply? 
• Do any leases allow you to defer payment and if so, for how long? 

• Is the company overpaying for services that it is not receiving during a business closure? 

Having this and other lease information readily available can help you better manage costs and cash flow. It can also save valuable time when you are looking for lease clauses and other helpful information you need to effectively negotiate with landlords (or with tenants, if you are a landlord). 

Understand Your Legal Responsibilities 

Are there any lease clauses that protect your business from potential casualty, force majeure, or even bankruptcy? 

Without a lease accounting and management solution, you would have to look for that type of information by manually reviewing all of your leases. But with a solution such as Visual Lease, you can easily search for pertinent clauses to help determine what the business’s legal rights and responsibilities are. 

Keep Track of Lease Options and Notices 

You can also use Visual Lease to find options that will help you improve liquidity and reduce expenses during a business closure or slowdown. For example, you can search leases to find out what options you may have for downsizing or relocating a space — or for rent abatements or lease renewals, impairments, or terminations. 

You can even set up the lease management solution to automatically alert you to important events, such as: 

• Options that must be exercised by a certain date 
• Notifications that must be sent about upcoming lease options 

The alerts will continue to be important as companies reassess how they do business, the resources they need, and the options they will exercise moving forward in what may be a very different, post-COVID environment. 

Lease Accounting Software: Beyond Compliance 

How leases address defaults, terminations, options, rent abatements, and other issues can have a big impact on the decisions that a business must make, under all sorts of circumstances. 

Having lease accounting technology that puts these and other lease details at your fingertips will not only prepare you for lease accounting compliance — it will also empower the business to make more informed and timely decisions, both during the COVID-19 pandemic and in the days, weeks, and months to follow. 

In addition, lease accounting software provides the tools a business will need to calculate and report on lease modifications, deferrals, and other changes post-COVID. 

With all the business closures and cutbacks due to the COVID-19 pandemic, a lot of companies are worried about not only managing their lease expenses now, but also accounting for changes to payments and other lease obligations later. 

As the COVID-19 emergency continues, more companies are faced with making critical decisions on lease issues, which in turn have an impact on lease accounting.  

How will lease concessions and other changes that occur in the wake of the COVID-19 crisis affect your lease accounting? 

How to Handle Lease Changes Related to COVID-19 

While there are not any additional lease accounting processes or rules to learn for handling concessions due to circumstances surrounding COVID-19, you may elect the method of selecting practical expedients, instead of performing a lease–by–lease analysis of the legal language. This change currently applies to both FASB guidelines (whether 842 or 840) and IASB, but only for lessee schedules. Other lease accounting issues will continue to be guided by the specific terms of your lease contracts and your lease accounting standards (i.e. ASC 842, IFRS 16, GASB 87). 

While you should always consult with your accounting advisory partner regarding your specific situation, the following guidelines can help as you consider the different concessions that may apply to your lease accounting during and after COVID-19: 

• Rent Abatement  

The COVID-19 pandemic is causing companies to ask how to account for rent abatements. The FASB and IASB have provided the ability to elect to treat rent abatements as either existing lease obligations, or as negotiated amendments to the terms. However, there are limitations on this ability to choose. For example, modifications which materially increase the lessor’s rights or the lessee’s obligations must be treated as modifications.  

If a company elects to not take the expedient of not determining if the lessor is obligated to provide a rent concession, or if the lease is not eligible for such election, the treatment will be dictated by the terms of the lease: 

• If the landlord is obligated, the concession is considered a variable lease payment. No remeasurement is required, and the abatement will flow through to any disclosure reporting. 

• If the landlord is not obligated, the concession is considered a negotiated modification. A remeasurement should be run when the abatement term is agreed on and continue through the lease term. 

• In the event there is not an agreement to abate rent, this is considered a short payment. The payment is recorded in Visual Lease as if made, but as in the normal course of events, the cash transaction books to Accounts Payable. Therefore, while the Ending Liability is reduced on schedule, it is replaced by an Accounts Payable liability until the payment is made. 

COVID-19 presents such an unforeseen and disruptive impact upon operations, therefore, many companies are electing to keep related costs and abatements distinct from normal operating expenses. As a result, we suggest creating distinct financial categories in this situation. 

• Accounting for Changing Discount Rates 

Lower interest rates in response to COVID-19 may affect the Incremental Borrowing Rate (IBR) that lessees typically use as their “discount rate” for lease accounting. The IBR may also be affected if borrowing costs change — for example, because of a declining credit rating. 

A lower interest rate increases the calculated amount of a lessee’s right-of-use (ROU) assets and lease liabilities. This in turn affects balance sheets when lessees enter new leases, remeasure existing leases, or transition to new lease accounting guidance. 

• Partial Termination  

With more people working from home, some businesses may invoke a lease clause or negotiate a lease modification to reduce their square footage and the related costs.  

Referring to your lease accounting guidance can help you identify what options you may have for recording a partial termination or other modification that reduces the scope of a lease. For example, under ASC 842, you have the choice of reducing the ROU asset proportionate to either the reduction in the lease liability or the reduction in the leased space. 

• Impairment  

In an economic downturn, leased assets such as property, plants and equipment may be valued below their current balance. The result is the impairment of ROU assets, which may require a different amortization calculation for operating leases. 

From the lease holder’s/lessor’s point of view, some assets held for lease may be impaired if demand for those assets decreases or if rental rates drop significantly. 

For either party, a lease accounting software solution with automated impairment processing helps to simplify the complex process of recording these types of lease impairments. 

Handle It All with Good Communication, and Intuitive Software 

In any still-evolving situation like the COVID-19 pandemic, it is always a good idea to consult with your legal counsel and accounting advisory partner as needed to make sure you understand all your rights, obligations and expenses regarding your leases. 

Maintaining good communication among all parties in a lease is extremely important to help you from avoiding potential high-risk misunderstandings and mitigate conflict. For example, a landlord may misinterpret a tenant’s need to shutter the doors for the short term as abandonment. Or, a tenant could have difficulty getting a concession for unused office space if the business closure is not documented and the landlord is not notified according to the lease terms. 

Additionally, taking advantage of tracking your leases clauses and financials within a reliable lease accounting and administration software, such as Visual Lease, is incredibly helpful to save your organization significant time and money during and after COVID-19. For more information to see how Visual Lease can help your business evaluate your leases as it relates to COVID-19, visit here or reach out to us today to learn more about our COVID-19 lease impact service. 

Deciphering financial and contractual obligations of a lease can be a challenge. And that is especially true during an unprecedented event, such as the COVID-19 pandemic. All you really want to know is, what are you responsible for?

Below, we answer questions about some of the common lease provisions that may pertain to COVID-19 and how they could affect your lease obligations — and ultimately, your lease accounting.

Provisions That May Pertain to COVID-19 and Lease Accounting

Since every lease has different language, obligations and consequences, we always recommend talking to your legal counsel to get help interpreting lease provisions and determining if and how they pertain to your business.

Regardless, the common lease clauses below may include language that will have an impact on tenant/lessee or landlord/lessor responsibilities during unusual situations such as the COVID-19 crisis.

What is a Force Majeure provision?

Force Majeure is a clause excusing nonperformance by the landlord/lessor or tenant/lessee, with specific lease language that defines what events trigger an exclusion. This lease provision typically also defines whether or not specific types of performances are covered — for example, a landlord’s obligation to perform certain maintenance and repairs.

The lease language might provide different definitions of “Force Majeure” events, but they may include acts of God, terrorism, natural disaster, governmental action, riots, or more generally, events out of the party’s reasonable control. The more specific the language is, the less likely you can rely on the clause to postpone or cancel obligations under the lease.

What does Force Majeure excuse or not excuse?

The Force Majeure clause may excuse things such as a landlord’s requirement to make repairs or a tenant’s requirement to maintain janitorial services within the premises. Note that the payment of rent is often not excused.

What is an example of a Force Majeure clause under which rent payment is not excused under COVID-19? 

“This Lease and the obligation of Tenant to pay the due rent hereunder and perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease . . . if Landlord is prevented or delayed from so doing by reason of strikes or labor troubles or by accident, or by any cause whatsoever beyond Landlord’s control, including, but not limited to, laws, governmental preemption in connection with a national emergency or by reason of any Requirements of any Governmental Authority.”

What is a casualty provision?

Most leases have a provision regarding what happens when the building, premises, or property is damaged by a casualty such as a fire, flood, hurricane, earthquake, and similar events.

What does a casualty provision mean in a pandemic like COVID-19?

Casualty provisions rarely cover government shutdowns or pandemics. Usually the only events covered are those that would physically damage or destroy a building or asset in some way.

What kind of obligations are included in leases regarding landlord vs. tenant responsibilities?

Generally, leases may include obligations such as maintenance and repairs, how common areas are handled, building hours, base-building cleaning, and extra cleaning. Specific lease language will differentiate what responsibilities fall on the landlord/lessor versus on the tenant/lessee for tasks such as:

• Maintaining the building
• Maintaining the specific tenant space
• Emergency repairs/maintenance
• Common area maintenance (CAM) and use

Are there specific lease obligations that may be more relevant during the COVID-19 pandemic?

Due to the nature of the virus, any lease clause concerning maintenance and cleaning of the building and tenant’s premises is relevant. Additionally, clauses concerning any “above and beyond” maintenance and cleaning are relevant.

For instance, specific lease language may include expenses that the landlord can choose to undertake but then pass on to the tenant — such as extra deep-cleaning that might be required during the pandemic (or at other times).

Are there any third-party agreements that should be reviewed?

Depending on the specific lease language requiring tenants to maintain and clean their own premises, any third-party agreements concerning the “Supplemental Cleaning of Tenant’s Premises” would be relevant. Other obligations with third-party contracts may include construction or renovations and other premises maintenance.

Most supplemental cleaning contracts can be terminated with 30 days’ notice, which means a tenant can potentially renegotiate scope and pricing changes depending on how the current situation develops.

What insurance provisions are included in leases?

Most leases contain requirements for both the landlord/lessor and the tenant/lessee to obtain and maintain certain insurance policies. While not all are applicable during the COVID-19 pandemic, some may be, depending on the exact policy and what coverage it includes.

Some policies — such as business interruption insurance — may help with rent, operational costs, lost profits, and similar issues. However, the policies must have been put in place prior to the current COVID-19 pandemic.

What is a business interruption insurance policy?

This is usually an add-on to a business’s property/casualty insurance policy to cover loss of business income in a disaster that is covered by the main property/casualty policy. However, since it is usually applicable to a natural disaster or fire, the policy would have to be reviewed and interpreted to determine if the current COVID-19 situation is covered.

Do government orders, regulations, or laws concerning COVID-19 take precedence over lease provisions?

Any government order, regulation, or law issued concerning the pandemic may take precedence over any lease provision. This could include anything from the payment of rent and the status of evictions to the physical use of buildings.

For example, the governor of New Jersey issued a lockdown order for nonessential businesses, requiring them to close to the public. But whether this action cancels lease performance or obligations would depend on the specific Force Majeure language contained in the lease.

As time goes on, there may be additional government actions that supersede any lease language to allow for delayed performance and even delayed evictions. New York, for instance, delayed all commercial lease evictions until at least June 20, 2020, and there are proposals to consider delaying rental payment obligations for 90 days.

What is a Continuous Operations clause?

A Continuous Operations clause is lease language that requires a retail tenant to be open and operational for a certain number of hours per day and/or days per week. This provision generally applies to retail tenants, although it does not necessarily appear in all retail tenant leases. The provision is rarely found in other commercial tenant leases.

Are there exceptions to a Continuous Operations clause?

Specific lease language may give exceptions, such as Force Majeure events, that allow for not continuously operating. But again, this depends on the specific language in the lease. In most cases, Continuous Operation provisions still require payment of rent.

What are some other lease provisions that may be relevant during COVID-19?

• Notice provisions provide guidance for ensuring that notices between tenant and landlord are legal and binding — for example, regarding lease renewal, lease termination, lease options, and general requirements for providing official notice of any action to the other party.
• Gross-up provisions state that if a building is shut down for an extended period, landlords must credit back the costs of any unprovided services when issuing their year-end reconciliations. Tenants should keep an eye on this issue when reviewing their year-end statements.
• Percentage or profit-sharing rent provisions specify a rent charge based on the gross income of the tenant rather than a fixed monthly or annual value.

Get Help from the Experts

Your legal advisor and accounting advisory partner can both help you understand how lease provisions may pertain to COVID-19 and result in lease concessions and other changes that will affect your lease accounting.

In addition, a lease accounting and administration software solution such as Visual Lease can help during this process — providing abstracted clauses and tools for organizing your lease data.

Visual Lease is providing the information above for informational purposes only and should not be construed as legal or accounting advice.

The COVID-19 pandemic has impacted every company in some way. With “social distancing” and all the emergency regulations that are in place, many offices and nonessential businesses are shut down entirely — or at the very least, their brick and mortar locations are closed while employees work from home.

One of the business effects of COVID-19 that does not get a lot of attention is its impact on leases and the related financial obligations. Whatever leases a company holds — not just for office, warehouse, manufacturing, or retail spaces, but also for equipment, vehicles, and other assets — the pandemic-related shutdowns complicate lease obligations and the associated lease accounting and administration.

What should you look for in your leases to understand your obligations and manage costs?

1. Review Your Leases to Know What You Owe, and When

Although many companies are not using their leased assets while business is “on hold”, they may still be required to pay rent through the end of their lease terms, as well as any other costs spelled out in their lease agreements.

That is why now more than ever, it is critical to understand exactly what is in each of your leases and make sure you don’t miss payments and important events during closures or cutbacks due to COVID-19. Otherwise, you could be subject to late fees or nonpayment penalties — or worse, face eviction and still have to pay the rent.

What to Look for in Leases

The table below shows some examples of categories, events, and obligations to look for and review in your leases — given there may be changes to how and if your business is using leased assets.

Every lease will have different language, obligations, and consequences for the lessee/tenant and for the lessor/lease holder — and few, if any, probably anticipated anything quite like COVID-19.

2. Evaluate Your Lease Financials and Options Under COVID-19

With the timetable to get “back to normal” still to be determined and so much that remains unsure, it is also important to conserve business spending wherever possible.

For instance, now is a good time to print out a general ledger to date and review all of the recorded transactions to get an overview of your current expenses. You might even find some unnecessary or optional recurring charges you can cancel or put on hold.

In addition, by understanding your leases and being clear about your rights and obligations, you may be able to find areas where your company can avoid overpaying or incurring additional fees during this time.

Where You Might Save

For example, part of your monthly rent may go toward front-desk/lobby security or other services you are no longer receiving because the building is closed. If so, you may be able to negotiate with the lease holder for a lower monthly payment.

Or, your building may be reopening with some restrictions and now requires more intensive cleaning and sanitation in all public areas. Are you obligated to pay that additional cost under the term of your current lease? You’ll want to check before you agree to pay anything extra.

Does your lease include any language around rent abatements or what happens if the space cannot be used due to circumstances beyond anyone’s control (Force Majeure)? Ideally, your leases are clear and thorough — though, of course, even the best lease cannot include every “what if” scenario.

When an area of cost concern is not covered in a lease, having a good relationship with the lease holder will improve your chances of being able to negotiate a term that will satisfy both parties.

Reflecting Changes in Your Lease Accounting

If you cannot get out of a lease and must abandon an asset, you will need to write down its value over a short period of time while still retaining the liability and making the payments. If the landlord will let you out of the lease, you will need to account for any termination fee you pay, as well as write down the asset and the liability in your lease accounting.

In these and other circumstances,you can account for changes in lease payments, such as the remeasurement requirements for abandoned or terminated leases.

Next Up: How These Changes Will Affect Your Lease Accounting

In this series of blogs, we will talk about the impact of COVID-19 on lease obligations and your lease accounting practices moving forward.

In the meantime, if you have a lease accounting system already in place — or better yet, a lease management solution that combines lease accounting and administration functions in one system — you have tools that will make it easier to identify your current lease obligations and understand their financial implications.

In an act of relief for companies during the coronavirus pandemic, the Financial Accounting Standards Board (FASB) recently voted to propose a one-year deferral of major accounting standards, including ASC 842 (Leases). This proposal would allow private companies an additional year, on top of the initial delay that went into effect October 2019, to adopt the lease accounting standard in their financial statements. Public not-for-profit companies who have not yet issued financial statements would also be granted an extension.

In light of the coronavirus outbreak and its impact on the global financial market, we support FASB’s decision to defer compliance for this additional year.  Organizations are reeling from the impact of COVID-19, and this deferral would relieve pressure regarding ASC 842 compliance and give them time to focus on the operational and financial challenges posed by the crisis.

COVID-19 Has Exposed Inadequate Lease Controls

Delaying the compliance deadline will also give organizations needed time to pull together the information needed to meet ASC 842 as well as provide them with much-needed control over their lease obligations. COVID-19 has brought to light significant inadequacies of existing controls surrounding lease agreements. In an effort to find liquidity and reduce expenses, companies have been examining their leases to understand their options. What they are finding is that they cannot get clear-cut answers about their rights and obligations. How their leases address defaults, terminations, options, rent abatements and other issues can make a huge difference in how companies pivot in this environment.

Extra Time Is Needed to Gather Information

If the ASC 842 deadline is pushed out, companies should take advantage of the extra time to collect, organize and summarize their lease information as well as schedule out their rental obligations.  Figuring out lease rights and obligations across a real estate or equipment portfolio is incredibly time-consuming, and is best done when resources are available. Public companies had a difficult time gathering needed lease information as their ASC 842 deadline approached at the end of 2018, and had to rely on expensive consulting firms to get it done. In fact, the difficulty public companies experienced was the primary reason FASB decided to push the deadline last October. Private companies, who have fewer resources and smaller budgets, should take heed and avoid that trouble.

Tighter Lease Controls Provide Liquidity and a Strong ROI

Furthermore, organizing leases now will give them earlier control and reduce costs along the way. Especially for companies utilizing lease management software solutions like Visual Lease, adopting tighter lease controls has an exceptional ROI. Through tight management of leases, customers are able to avoid costly penalties, act in time to exercise options, prevent rent overpayments, aggregate and refinance leases and optimize their portfolios. As we have seen over the years, given the expensive nature of real estate and equipment leases, any one of these benefits can save thousands to millions of dollars.

Compliance with ASC 842 is no small undertaking, and continued action and momentum towards compliance is best practice. Our recommendation is to not look at a deadline deferral as another reason to push the work further down the road. Instead, companies should work diligently, taking advantage of the additional time to gather their lease information, better manage their portfolio and reduce costs.

With all the new lease accounting rules you have to contend with — whether you follow ASC 842, IFRS 16, or GASB 87 — the prospect of generating lease accounting disclosure reports can be intimidating. In this blog, we look at three simple but vital things to keep in mind as you gather lease data and think about how you will comply with the latest lease disclosure reporting requirements.

1. Lease accounting disclosure reports now require more detailed data.

The Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), and Governmental Accounting Standards Board (GASB) created ASC 842, IFRS 16, and GASB 87 respectively with the same goal: to provide insight into an organization’s leasing activities and greater visibility into its assets and liabilities.

Where leases previously were mostly on the income statement or just a footnote, today’s lease accounting standards require those assets and liabilities to be brought onto the balance sheet — creating a far more thorough picture of an organization’s finances. Under ASC 842, IFRS 16, and GASB 87, an organization’s lease accounting disclosure reports must now provide:

• More detailed qualitative and quantitative information about leases, such as cash outflows and values of right-of-use assets
• Significant judgments made in measuring leases
• The amounts recognized in the financial statements 

These new standards require you to gather a large amount of data to generate quantitative lease accounting disclosure reports related to real estate, equipment, vehicles, land, and any other leases your organization might hold.

Among other things, you will need the various inputs that are created by your amortization schedules and right-of-use (ROU) or leased asset and liability balances. You will also need access to the data points in those schedules, as well as the ability to pull out relevant values on liability and cash flows.

Lease accounting disclosure reports may also require qualitative information such as the terms and conditions of leases, assumptions used in applying the lease standards, and certain elements outside of the lease liability.

Trying to input all the pertinent lease information and track it using a spreadsheet or other manual method is no match for the kind of reporting requirements these new standards require. Thankfully, that is where lease accounting technology plays a vital role in disclosure reporting.

2. Accurate lease accounting disclosure reporting depends on software.

Lease accounting software streamlines the disclosure reporting process by providing a secure and efficient system for organizing lease data, to make sure that key information is properly compiled and disclosed. 

The right lease accounting software solution helps you capture all the necessary data, track changes, and report lease costs in accordance with both your accounting policies and procedures and the latest accounting standards.

In addition, a lease accounting solution further streamlines this very complex process by providing automated calculations and workflows that improve lease accounting disclosure reporting in several crucial ways:

• Ensuring the accuracy of disclosure reports by providing a single-source, centralized system for inputting, storing, tracking, and managing all lease data
• Properly accounting for nuances within leases through configurable reporting and calculations, ensuring that assets are consistently accounted for
• Eliminating human error and reliance on formulas to further ensure accuracy by having all your data points and calculations already in the system
• Integrating to the balance sheet, allowing each type of lease and related information, including ROU assets, interest expenses, and liabilities, to be brought into the balance sheet
• Providing visibility into important qualitative lease details such as terms, changes and dates

Beyond achieving compliance with lease accounting disclosure reporting requirements, you can also opt for an all-in-one lease management system that combines lease accounting and administration. Such a system provides full lease accounting capabilities along with administration functions for day-to-day, ongoing lease management.

To learn more about what to look for in a lease accounting solution, read A Complete Guide to Lease Accounting.

3. Disclosure reporting requirements depend on which standards you must follow.

While ASC 842, IFRS 16, and GASB 87 differ in the types of organizations they apply to, there are some similarities in their disclosure requirements. For example, GASB 87 was created for use by state and local governments in the United States, while ASC 842 is for public and private organizations in the United States and IFRS is for international organizations.

However, across all three standards — ASC 842 disclosure reporting, IFRS 16 disclosure reporting, and GASB 87 disclosure reporting — the key requirements include the following:

• Information about the nature of an organization’s leases (including subleases)
• Leases that have not yet commenced
• Significant assumptions and judgments
• Amounts recognized in the financial statements
• Maturity analysis of liabilities
• Lease transactions with related parties

While ASC 842 makes U.S. financial reporting more consistent with the international requirements, and ASC 842 and IFRS 16 disclosure reports are very similar in format and content, there are also some important differences to keep in mind.

For example, where ASC 842 classifies leases as either operating or finance, all leases must be accounted for as finance lease under IFRS 16. In addition, ASC 842 and IFRS differ in how a short-term lease — one with a term of 12 months or less — is defined when transitioning an existing lease to the new standards.

Under ASC 842, the lease’s term is determined by the original commencement date. So, for example, a 10-year lease that has only 6 months left on it at the time of transition would still be considered a long-term lease.

However, under IFRS, an existing lease’s term is based on how much time remains when the transition occurs. Therefore, a 10-year lease with only 6 months remaining at the time of transition could be categorized as a short-term lease for purposes of disclosure reporting. Additionally, IFRS 16 provides guidance for so-called low value leases, allowing them to be grouped and treated similarly on the disclosure report.

Unlike GASB 87, where practical expedients are not optional, both ASC 842 and IFRS 16 require disclosure reporting to include which practical expedients an organization has elected to apply to its lease accounting, including:

• Practical expedients related to short-term leases
• Those related to separating lease components
• Election of transition-related practical expedients
• Election not to restate comparative periods upon adoption

With more comprehensive and complex requirements for lease accounting disclosure reporting, ASC 842, IFRS 16, and GASB 87 certainly present new challenges to accounting teams. However, with the implementation of lease accounting software and more efficient accounting practices, these new disclosure standards promise to deliver clearer, more accurate, and more useful financial statements.

How often do you have this experience when evaluating enterprise software? The vendor gives a demonstration of an amazing solution, walking you through complex tools that do exactly what you need. You say, “This is perfect! Can you give me a price?”

First, they give you pricing for the bare bones model. Then, you find out that what they showed you involves a lot of add-ons to the platform. None of it is standard and every extra thing – from fields that you need, to reports – is going to cost you. 

That’s a common frustration to come across when evaluating software vendors. Systems that lack configurability are expensive, time-consuming to implement, and cumbersome to update when you need a small change.

Wouldn’t you rather get everything you need right out of the box? When it comes to lease accounting and management software, you can, if you know what to look for. In this article, we’ve laid out desired configurable enterprise lease accounting software you need.

What you see should be what you get

Software customers shouldn’t have to jump through hoops to get a system to work how they need. A good lease accounting system should make your life easier – and be configurable to meet your needs. 

When looking at different lease software providers, they all claim to be customizable. However, when you dig deeper, you’ll find out their system contains only surface-level customizations at best.

At Visual Lease, our solution is designed to be flexible and scalable for all customers. Every customer coming to us from any industry can have a system that meets their unique needs without paying extra to get it.

If you want a truly flexible system that works how you need it to, and will serve your business for many years to come, here are the specific features to look for:

1. Look for a truly configurable database

Every organization has different lease information that they need to track. Manufacturing companies with leased warehouses will need to track the number and height of bay doors. Retail franchise groups need to track the brand associated with each retail location. They may also have leased vehicles that need to be associated with a location and a manager. Hospital groups may want to track the originating parent company for each facility.

These are just a few examples, but I’m sure your organization has similar necessities that are not part of the typical lease data tracked by “canned” lease software. When you think through everything you’re currently tracking (or would like to track all in one place), you’re going to need more than just a few uniquely tailored fields specifically to your business.  

What you need is a software product that has been designed from the database level to be completely configurable. With that capability, there’s no need to give up what you are looking to track and try to force your business into a one-size-fits-all model.

With Visual Lease, you not only get a flexible system, but you get one that is entirely configurable for no additional cost. Our implementation team helps you through the initial setup, but also teaches you how to tweak the system yourself when the inevitable changes happen in your business, so you can always have the data you need at your fingertips.

2. The importance of ad-hoc reporting

With any lease software, you’ll get what looks like an impressive collection of standard reports. But as you begin to use them, you’ll realize you need to make changes. You’ll want the reports to reflect your own terminology, your organizational structure, and your leasing policies and practices – not to mention the look and feel of your brand.

The last thing you want is to have to go back to the vendor (or a consultant) and spend a lot of money on report customizations. Oftentimes, software companies will provide you custom reports – for a cost. Why would you want to pay for exporting your own data in a way that makes sense to your business? 

Instead, look for lease software with an ad-hoc reporting tool that makes it quick and easy to create your own data visualizations and reports. 

With Visual Lease, you can query ANY lease information that you’re tracking in the system and group, subgroup, and filter the data any way you choose. Even better, you can do it with a tool you already know: Excel. You can save reports, add to a dashboard, or export and format with templates to create a branded look. 

3. Flexible user access & security 

For comprehensive lease software that manages the entire lifecycle of your leases (including administration and accounting), you’ll likely need to provide different levels of access and control for people with different responsibilities.Some examples of user roles and access include:

• Multiple levels of administrative access, rather than a single administrator
• A separation of roles and associated access rights within the various parts of the lease system
• The ability to create groups based on roles with pre-assigned permissions
• The ability to control certain rights at an individual level

You’ll also want to control login credentials and create passwords that match your corporate password policy. You might want the extra security of using multi-factor authentication, or you might want to tie into your organization’s existing Single Sign On (SSO) to authenticate users.

4. Adaptable implementation services

When you work with a vendor to implement software, how does the process begin? In most cases, you’ll hear about cloned steps they take with every customer.

When you’re getting a more customizable product, the process will start with a conversation about your goals and how you want to use the system.

For example, the implementation team should ask about the systems you’re using now. Obviously that conversation will include your AP/GL, but should go beyond that to discuss other systems that you need to integrate with, or tools that you’re replacing. What’s working well that you would like to replicate in your new comprehensive lease management system? 

The team should work with you to create what we like to call your “blue sky vision” of your ideal solution.

Accounting strings are a great example of an essential customization that your implementation team should set up for you. Every large organization has a unique coding system for invoices that allow the financial team to identify who owns that invoice, who is responsible for paying it, and where it belongs in the budget. That code should follow every lease-related expense and journal entry. 

Your implementation team can work with you to concatenate information from various lease data fields (often including custom fields) to create custom accounting strings that match your coding system. 

5. An all-inclusive price

Let’s be realistic: even the easiest to use lease software requires implementation services to help you get your data into the system. You’ll need training for administrators. And you’ll need ongoing support when questions come up.

Many (if not most) solution providers nickel and dime you for every service they provide on top of the product itself.

Here at Visual Lease, we feel that “software as a service” means you should get the services you need included with the software. That means implementation services, training, and help desk support are all included in the price you pay for our product.

People are always surprised when they ask about extra charges and we say, no, this is all included as part of the system.

Want to see for yourself? You can be confident that what you see will be what you get, all at a reasonable and predictable price. Schedule a demo now!

With the big push to achieve compliance, a lot of businesses have been laser-focused on making the transition to the new FASB/IFRS lease accounting requirements.

While that is understandable, it’s important to also think beyond the transition and look to what is next — namely, keeping up with the required lease accounting remeasurements.

In this blog, we’ll take a look at the common types of lease accounting remeasurements and offer some tips on how to make sure your data stays up to date.

1. What are lease accounting remeasurements?

The work doesn’t stop once you’ve done your initial lease accounting based on your knowledge of all your existing leases. That’s because, while you might think of contracts as being inflexible, the truth is that leases often require changes.

And according to FASB and IFRS codification and guidance, whenever there is a material change to a lease, the way in which you do your accounting must also be adjusted to reflect that change.

So, when circumstances cause changes in either the payments or the value of the lease assets themselves, it triggers the need for these lease accounting remeasurements.

2. Why is doing remeasurements important?

According to FASB/IFRS, if you don’t do lease accounting remeasurements as required when material changes occur, you are no longer in compliance, and your financial statements will be materially misstated.

It’s that simple — and that critically important.

3. What types of changes require lease accounting remeasurements?

Material changes are major events that can commonly occur during the life of a lease and require you to change the accounting pattern that you set up initially.

Both FASB and IFRS require lease accounting remeasurements when the following changes happen. Additionally, IFRS has some unique and somewhat more subtle requirements, which we will discuss a bit later.

Amendments

When a lease is renegotiated, a remeasurement must be done to reflect the changed terms of the lease. For example:

• At the 2-year mark in a 5-year contract, you’re confident you will want to remain in the same space beyond the current lease term. So, you decide to renegotiate to extend the lease term for an additional 5 years.
• Just 2 years into a 5-year contract, your mall loses a key anchor store — and potentially, a lot of foot traffic. So, you decide to renegotiate with the owner for better terms.
• Halfway through a 10-year lease, a neighboring office on your floor becomes available. Your needs are growing, so you and your landlord amend the lease to add the extra space for the remaining 5 years of the lease.

In each case, your accounting was set up based on the previous lease pattern, so you now need to adjust the numbers in accordance with the renegotiated lease terms.

Impairments

Changes to the leased assets themselves can also require lease accounting remeasurements. For example:

• Your building is damaged in a flood, making part or all of the office space unusable.
• A leased truck is damaged in an accident. While your driver was not at fault and the truck is still drivable, it is no longer as described in the contract.

In circumstances like these, you have the opportunity to write down some portion of the asset value because the asset is no longer worth what it was before.

Events Related to Unused Space

Here, there are two common scenarios that trigger the need for remeasurements:

• Abandonments — When you are not using a space but cannot get out of the lease, you must continue to pay and account for the space. Here, remeasurement requires you to write down the asset value over a short period of time while still retaining the liability and making the payments. 
• Terminations — When you are not using a space and the landlord is letting you out of the lease, remeasurement requires you to include any one-time termination fee you might pay, along with writing down the asset and the liability.

4. What are the unique remeasurement triggers under IFRS?

As we mentioned above, the new IFRS standard requires lease accounting remeasurements based on some additional, and more subtle, lease changes.

Index-based Change of Payments

Under FASB ASC 842, indexed-based changes to payments are considered variable rate payments and do not materially change a lease; therefore, those changes don’t require remeasurements.

However, IFRS requires lease accounting remeasurements whenever you have changes to lease payments based on indexes. For example, if the amount of your payment changes every 6 months or yearly based on inflation according to the CPI, you must do a remeasurement to reflect that change.

Interest Rate Changes

Under IFRS, if the interest rate under which your lease payments are made is changed — due to changes in the market rate, your credit rating, or some other factor — you must do a remeasurement.

That’s true even if the interest rate change is small, because the appreciation schedule you had before was based on an interest rate to which you no longer have access.

An interesting difference: Under FASB, most lease accounting remeasurements must be updated to reflect the current interest rate. However, a change in the interest rate in itself does not trigger a remeasurement requirement.

5. How can you spot the need for lease accounting remeasurements?

Lease accounting is not a one-and-done process, and keeping track of remeasurement requirements is an important part of the ongoing task.

Here are some tips to help you stay spot events that might signal the need for lease accounting remeasurements:

• Stay on top of the data and monitor lease information for changes in key areas. For example, changes in key dates usually happen when there has been a material change to a lease. So, new commencement and expiration dates might indicate an event such as signing a new or renegotiated lease, exercising a termination option, or other adjustments to the length of a lease.
• With real estate leases, keep an eye on information related to the rentable area. For instance, look for changes indicating that area has been given up or new space has been added.
• Monitor the payment structure. An unexpected change in payments might suggest there is a new contract or a change in lease terms that requires a remeasurement.
• Partner with your real estate team. With lease remeasurements triggers such as impairments and abandonments, the signs can be hard to spot through data monitoring alone. Keeping the lines of communication open between the accounting team and the real estate team — the people who typically handle the lease administration tasks — helps you stay on top of important yet subtle events.
• Use Visual Lease for lease administration as well as lease accounting. That way, you’ll have all the key fields set up for tracking lease modifications, events, and activities on an ongoing basis. Plus, you’ll have all the tools you need to do the necessary calculations, including remeasurements.

6. How does Visual Lease make lease accounting remeasurements easier?

Visual Lease not only helps you transition to the new standards. We’re here to help you stay compliant, with data tracking, reporting, and notifications for the life of every lease.

The Visual Lease implementation team uses a structured, robust process to set up the system the way you need it, to track the data points that are important to you. As part of the process, the team works with you to set up any system notifications you might need based on key fields.

The Visual Lease system also provides the ability to upload your own accounting schedules as your needs change or as new scenarios arise. This helps to ensure that Visual Lease always contains a complete picture of your portfolio for creation of your consolidated reporting for the SEC or investors.

In addition, Visual Lease continuously enhances the system, adding new scenarios and nuances to your data tracking and reporting capabilities so that you can keep up with changes over time — including events that require remeasurements.

To learn more about lease accounting remeasurements and other capabilities of the Visual Lease platform, contact us today and we’ll be happy to help.

As the standard for lease accounting software, Visual Lease provides the tools you need to achieve compliance. We make it easy to track, report, and manage your lease finances within our system – and we’re extremely passionate about delivering an incredible user experience.

It’s our mission to simplify how companies manage their leases and associated finances, but there’s so much more to gain as a Visual Lease customer – from saving time, to simplifying difficult tasks and jobs, eliminating stress and headaches, and providing answers when they’re needed.

Our newest campaign, Compliance Plus, represents the many extra benefits of using Visual Lease, and demonstrates our promise to give you confidence, efficiency, and flexibility, which are just as important when doing your job.

Confidence

Wouldn’t you want to feel more confident knowing you have all of your leases properly accounted for, organized, and identified within one location?

The strength of consolidating all real estate, equipment, vehicle and other leased assets makes all the financial reporting and compliance requirements much more reliable.

Efficiency

Our lease accounting capabilities consistently classifies leases, runs calculations, and computes right of use (ROU) asset values, along with liability schedules, so you can more easily achieve accurate results, saving you time and frustration of performing tasks manually.

Flexibility

Every field within the platform is configurable, allowing your platform to reflect your unique needs. We recognize the need to capture various data points in different ways, and have made it simple for you to do so, while avoiding costly customizations.

These benefits of our software go beyond compliance, and are all time-savers and cost-savers for your business. With Visual Lease, you will not need to worry about maintaining confident, efficient, and flexible. We take the complexities out of lease accounting, so you can get back to focus on what you need to do to do your job.

The challenges of lease accounting data collection for distributed firms

Getting ready for compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16) is a complex and time-consuming process. But the challenge is greater for companies who have widely distributed lease data, such as firms with many physical locations, and parent companies with many subsidiaries.

If your company is facing this challenge, you’re probably wondering how to accomplish some important pieces of the process:

• Collecting lease accounting data from many different people, systems, and locations.
• Setting up a lease accounting and lease management system that meets everyone’s needs.  

In this article, we’ll share some tips to help you find and collect all your lease data, as well as strategies to make your compliance process faster and smoother.

Lease data collection tips: how to find all your lease data

One of the reasons lease accounting data collection is so complicated is the wide variety of assets that companies lease.

It’s obvious to look for real estate leases, office equipment leases, and vehicle leases. But there are other leases that may not immediately come to mind, such as furniture or construction equipment. And, there are items that are considered leases even if the contract doesn’t say so, such as assets that are included with service agreements.

When those assets are distributed across many locations and regions, it’s even more difficult to find everything.

Here are the lease data collection steps we recommend. Share this process with each stakeholder collecting data for their respective subsidiary company or location.

STEP 1: Start with Accounts Payable

Your Accounts Payable teams can provide a list of all recurring monthly payments. This will identify the lease holders and finance companies you are paying. Depending on your records, you may be able to drill down and find information about the leases covered by these payments.

STEP 2: Reach out to those who negotiate and manage leases

If you need more information than you can get from Accounts Payable, contact those who obtain and manage leases. Real Estate, IT, and Procurement should all have records for the leases they manage. Be sure to ask for all the documents related to each lease. For example, Real Estate should provide commencement letters along with the lease contracts.

STEP 3: Turn to Procurement and Legal to find embedded leases

Embedded leases can be found in service contracts and other types of agreements. Ask your Procurement and Legal teams to check all contract records for assets you use as part of a contract, even if the contract doesn’t specify the word “lease.”

Learn how to identify embedded leases: Embedded Leases Accounting: Do Your Contracts Contain Leases?

STEP 4: Ask lessors and finance companies for lease records

If you don’t have records of all the leases covered by a recurring payment, OR you don’t have all the data you need to track for each lease, it’s time to turn to the lessors. Since they need to do their own accounting for leases, they should be able to provide the details you’re missing.

Now that you know how to tackle lease data collection, here’s what you need to know to implement the project throughout your organization.

Tips for lease accounting project planning

Plan your timeline conservatively

As you work out your timeline to lease accounting compliance, plan for more time than you think you’ll need, especially for lease accounting data collection. Those of us who have been through this process with hundreds of public companies over the past year know that most companies underestimate the effort required for lease data collection. Consider the steps involved in collecting lease data:

• Identifying everyone in your organization who may have lease data somewhere.
• Figuring out what data you need to collect for every lease.
• Devising a method for collecting the data in a central location.
• Reaching out to stakeholders and asking them to find leases (and waiting for them to do so, when they also have other jobs to do).
• Having lease contracts abstracted to collect all relevant data points.
• If necessary, obtaining translation services for contracts in foreign languages.
• Figuring out where you’re missing data points and doing the research to find that information.
• Testing and validating lease data.

The point is, for most accounting teams there is more to do than you realize at the beginning of the project. And many dependencies and stakeholders to manage. So take that into account in your planning process and start early.

Related Article: Lease Accounting Compliance Deadline: Will You Be Ready?

Make decisions at a global level

When you have a distributed organization, you often have different groups operating independently. That means each subsidiary or location is tracking and using lease data in different ways. If you don’t have visibility into what everyone is doing, you may be considering sending out a survey or otherwise collecting input from everybody about how to set up your lease accounting system. Or every getting everyone involved in choosing the tool.

Here’s our advice based on lessons learned over the past couple of years. Going that route can significantly delay your project. The time it takes to wait for the responses, then figure out how to include every field that everyone asks for, is time you’ll wish you had back later on. Instead, make the decision at a global level about what data you need to track for accounting and lease management purposes (ideally with the help of your accounting advisor and key stakeholders), and move forward from there.

Read the last tip for advice on getting buy-in and cooperation from all those who will be using the new lease system.

Set up spreadsheets for lease data collection

The simplest way to do lease data collection in a distributed organization is by using spreadsheets. Once you know the data fields you need to collect, create a spreadsheet for each stakeholder collecting lease data.

As you receive the spreadsheets, you can import the data into your lease accounting system. Once you have data in the system, you can begin to test and validate.

IMPORTANT: Be sure to make accounting decisions that impact data collection (such as practical expedients you plan to take) as early in the process as possible.

Share the benefits of your lease accounting and management system

Once you’ve chosen and configured your lease accounting system, you can show it to all your stakeholders when you ask them to collect their lease information. Demonstrating the lease management capabilities and reporting they stand to gain once their data is in place can encourage them to make data collection a priority.

We know that complying with the lease accounting changes is new to most private companies. However, it’s far from new to us at Visual Lease. We have been through this process hundreds of times over, and we are here to help. Don’t hesitate to reach out to us with your questions.

When ASC 842 and IFRS 16 were first announced, there was quite a bit of uncertainty about how the accounting would work for variable rent leases. Large public companies found themselves in the role of early adopters, and had to work out many complex accounting calculations and processes that had never been done before.

FASB and IASB have since provided revised guidance, and accounting advisors and technology providers (like Visual Lease) have learned valuable lessons from the experience of helping public companies move toward compliance in 2018.

If you are part of the next wave of organizations ramping up your lease accounting compliance efforts for the 2019 deadline, you’re in luck. You can benefit from the best practices developed over the past year, and avoid time-consuming mistakes and delays.

What are variable payments?

Variable payments are payments that can fluctuate or change in amount based on specific factors or events. These factors could include variables such as usage, sales volume, market conditions, or other predefined triggers. Unlike fixed payments, which remain constant over time, variable payments can vary up or down depending on the circumstances they are tied to. These payments can be found in various contexts, including lease agreements, loans, contracts, and other financial transactions where the payment amount is subject to change based on certain conditions being met.

Why are variable rent leases so complex from an accounting standpoint?

In the past, the difficulty with variable rent leases was only about calculating the correct payment, whether that was based on on a variable interest rate, CPI increase, a percentage of sales, or some other variable factor.

Under ASC 842 and IFRS 16, variable leases require much more complicated accounting. You’ll need to understand how to break out all the components of variable rent leases, including non-lease components, so you’ll be able to properly represent them on your balance sheet. Also, you need to consider how the accounting treatment will change over time.

Here’s just one example to illustrate some of the issues that will arise with variable rent leases:

Let’s say you have a lease that starts at $10,000 per month, with straightforward CPI increases over time. That base rent of $10,000 goes into the calculation of your ROU asset and liability, and the CPI increases are treated separately as variable payments.

That process continues the same way (although the amounts of CPI increases may change each year) until something happens that requires a remeasurement of the lease, such as exercising an option. Upon remeasurement, all those CPI payments that were variable before now get treated as fixed payments that go into the calculations for ROU assets. Only the future CPI increases (after the remeasurement) qualify for the variable payment treatment.

That’s just for leases with simple CPI increases. What happens if your increase has a floor? Let’s say each increase can’t be less than 2 percent. In that case, the 2 percent becomes part of the fixed payment, and only increases above 2 percent are treated as a variable payment. To complicate matters further, if you also report under IASB or other non-US GAAP standards, CPI increases are handled differently.  Your accounting standard must be capable of handling multiple methods simultaneously.

Needless to say, there’s a great deal to learn. When it comes to handling all the complicated scenarios for variable rent leases, you will need guidance from your accounting advisors. Here’s what is critical to know now as you begin preparing for compliance with the new lease standards:

How are variable rent leases accounted for under ASC 842 and IFRS 16?

Under both standards, variable rent leases are classified as finance leases. This means that the lessee must recognize a right-of-use asset and a lease liability on the balance sheet. The lease liability is calculated as the present value of the future lease payments, including any variable payments. The right-of-use asset is calculated as the cost of the lease, less any lease incentives received.

The variable payments under a variable rent lease are treated as part of the lease liability. This means that the lease liability will increase or decrease each time the variable payments are adjusted. The lessee must also recognize interest expense on the lease liability over the lease term.

The main difference in the treatment of variable rent leases under ASC 842 and IFRS 16 is how the variable payments are estimated. Under ASC 842, the variable payments are estimated using the most recent information available at the commencement of the lease. Under IFRS 16, the variable payments are estimated using the best available estimate at the commencement of the lease.

The difference in the treatment of variable rent leases under ASC 842 and IFRS 16 can have a significant impact on the lessee’s financial statements. For example, if the variable payments are estimated to be higher under ASC 842 than under IFRS 16, the lease liability will be higher under ASC 842 and the lessee’s interest expense will also be higher.

What are the key considerations for tracking and reporting variable rent lease data?

• Identifying all of the variables that affect the lease payments. This includes the index or rate that the rent is tied to, the amount of usage of the leased asset, and any other factors that are specified in the lease agreement.
• Tracking the values of the variables over time. This will allow you to accurately calculate the lease payments and update your accounting records accordingly.
• Recording the lease payments in your accounting system. This will ensure that the lease payments are properly reflected in your financial statements.
• Reporting the lease payments to your stakeholders. This may be required by law or regulation, or it may be necessary for internal reporting purposes.

What are the challenges of accounting for variable rent leases?

There are several challenges to accounting for variable rent leases, including:

• Complexity: Variable rent leases can be more complex to account for than fixed rent leases because the lease payments can fluctuate over time. This can make it difficult to accurately calculate the lease liability and right-of-use asset.
• Volatility: The value of variable rent leases can be more volatile than the value of fixed rent leases. This is because the lease payments can be affected by changes in the index or rate that the rent is tied to, or by changes in the amount of usage of the leased asset. This volatility can make it difficult to forecast the future cash flows from the lease and to manage the lease risk.
• Data management: Variable rent leases require careful data management to track the variables that affect the lease payments and to calculate the lease liability and right-of-use asset accurately. This can be a challenge if the lease agreement is complex or if the variables that affect the lease payments are not well-defined.
• Compliance: Variable rent leases can be complex to comply with accounting standards and regulations. This is because the accounting treatment of variable rent leases can vary depending on the type of lease, the index or rate that the rent is tied to, and the amount of usage of the leased asset.

Despite the challenges, it is important to properly account for variable rent leases. This is because variable rent leases can have a significant impact on a company’s financial statements. By carefully managing the challenges of accounting for variable rent leases, companies can ensure that their financial statements are accurate and that they are in compliance with accounting standards and regulations.

Best practices for recording and tracking variable rent lease data

1. Identify all the variables in your lease payments

It’s not enough to capture the fact that a lease obligation has a variable component. Different variable payment structures qualify for different accounting treatments. And to further complicate things, under the US standard (ASC 842) variable leases may be treated one way, whereas under the international standard (IFRS 16) variable leases may be treated differently. If you must comply with both, you may need to apply two different accounting treatments to the same lease. That’s why it’s so important to understand and capture every parameter that affects how lease payments change over time.

You’ll need the advice of your accounting partners to decide how you’ll treat different variable payment scenarios as well as what practical expedients you plan to take. Then you can work out what data you’ll need to create the calculations.

2. Isolate every variable in your lease management and accounting system

Create separate line items for every variable; don’t make the mistake of combining them with the overall obligation that’s being increased over time. If everything is lumped together, when a remeasurement occurs you’ll be forced to go back and spend a lot of time making manual accounting adjustments.

3. Creating the data right structure

It’s essential to create the right relationship between your fixed rent components and your variable payment components in your lease system.

On one hand, you need to connect them so that you can combine them for payment purposes. But you must also be able to treat them separately as needed for accounting purposes that change over time.

When a remeasurement event occurs, you’ll be in the best position to make a smooth and easy transition to a different accounting treatment.

Visual Lease accommodates complex lease structures and makes your workflow simple

It’s no secret that accounting for variable rent leases (or any leases that have a variable payment component) is complicated. That was true even before the new lease accounting standards, but under ASC 842 and IFRS 16 the complexity has increased exponentially. Plus, with leases more visible on the balance sheet and making a bigger impact on your financial reporting, the stakes are higher and you need to be sure you get it right.

That’s why Visual Lease has taken what we’ve learned working with the early adopters and built best practices into our tools that adapt to the complexities of variable rent leases. With our smart and flexible data architecture and the ability to change accounting treatments automatically, you not only get to compliance fast, but you do it right so you avoid re-work later. Your Day 2 workflow is simple and efficient

Ready to see how it works? Request a demo now.

FAQs:

What are the different types of variable rent leases?

There are two main types of variable rent leases:

1. Index-based leases: These leases tie the rent payments to an external index, such as the Consumer Price Index (CPI) or the London Interbank Offered Rate (LIBOR). The rent payments will increase or decrease in line with the index.
2. Usage-based leases: These leases tie the rent payments to the amount of usage of the leased asset. The rent payments will increase or decrease depending on how much the asset is used.

How are variable lease payments treated in accounting?

Variable lease payments are handled differently based on lease type. For operating leases, they’re recognized as expenses when incurred. In finance leases, they become part of the lease liability and noted as interest expense over the lease term.

What are variable lease payments under IFRS 16?

In IFRS 16, variable lease payments are payments influenced by events beyond time, like asset usage or market changes. These include percentage-of-sales payments, usage thresholds, or market price adjustments.

Are variable lease payments included in lease liability?

Yes, variable lease payments must be included in the lease liability and asset. They’re added initially if known, or later when event-dependent.

What’s the difference between variable and fixed loans?

Fixed loans maintain a constant interest rate, ensuring steady payments. Variable loans have rates that change due to market shifts, impacting monthly payments.

What is an example of a variable rate?

Examples of variable rates include adjustable rate mortgages (ARMs) and credit cards, where rates change based on indices or market conditions.

Can your lease accounting software find lease payment mistakes?

Were you under the impression that lease accounting software could only perform accounting calculations and add information to your balance sheet?

It’s true that this is the primary focus of many lease accounting products. However, smart organizations are choosing more comprehensive lease software that’s designed to provide lease administration along with the lease accounting calculations you need for FASB and IFRS compliance.

Why? Because by properly managing leases and auditing lease payments (which are now much more visible to your financial officers and external auditors), you can uncover millions of dollars in hidden waste and overpayments.

Having this capability is an important opportunity for organizations that want to save money on operational expenses. And who doesn’t stand to benefit from saving money?

3 common ways organizations pay too much for leases

Organizations spend a great deal of time and money negotiating leases for real estate and other assets, making sure the terms align with their best interests. Then, after an agreement is completed and signed, it goes into a filing cabinet, never to be seen again.

Bills come in from lessors and get paid by your AP staff. Expenses are incurred and paid for. Meanwhile, how do you know those charges are in line with what you agreed to pay? Very few organizations are checking to make sure they are, because it’s just too time consuming to find the lease and check every bill. (Not to mention trying to understand the contents of the lease once you find it.)

The problem is, the charges are inaccurate more often than you might expect. That’s because the lessors are not checking either. Landlords typically bill every tenant using to same method and leave it to lessees to challenge the charges.

There are countless details and nuances in lease contracts, especially for real estate leases. When no one is checking the bills against the lease details, incorrect charges and overpayments happen frequently. Here are just a few common examples.

1. Paying charges specifically excluded from the lease

With the use of many leased assets, things periodically need to be maintained and repaired. In a leased office space, the AC needs to be serviced, broken plumbing must be repaired, and faulty light fixtures replaced. The same is true for vehicle leases: cars, trucks and construction vehicles need oil changes and repairs.

When you order these repairs and maintenance services, chances are you automatically pay for them. But what if the lease specifies that the landlord or lessor pays for these items?

If you’re not checking, you’ve likely paid for many expenses that were not your responsibility.

2. Paying an inflated share of building expenses

In leased buildings, shared operational expenses (such as utility changes, cleaning costs, or landscaping expenses) commonly get divided among all the tenants in the building. Each tenant pays a percentage determined by the amount of usable space they occupy.

So what happens when there’s a change to the amount of usable space? Maybe the landlord added a new wing to the building. Or, maybe you gave up a portion of the space you were renting when a floor was subdivided. In both cases, your percentage of CAM charges should be reduced.

If your landlord doesn’t adjust your bills and your AP staff automatically pays those incorrect bills, you lose money for the remainder of the lease.

3. Paying for things you didn’t get

When a lease is negotiated, sometimes landlords agree to certain terms you request, such as the first month’s rent free, initial cleaning, or changing the carpet.

Many times, those agreed-upon changes to the landlord’s standard lease never make it into the billing, so you never get your free month’s rent. Or worse, you get charged for things you never received, like cleaning or carpeting.

Find and prevent overpayments with lease audit capabilities

The fact is, it doesn’t matter what’s in your leases if you’re not tracking the details and regularly validating your payments to be sure your lease payments align with the contracts.

When your lease accounting software tracks not only lease payment information (needed for accounting calculations) but also documents all the details of your leases, you have a powerful tool for preventing overpayments.

Here’s how you can do that when you choose lease accounting software (like Visual Lease) that offers lease auditing capabilities.

Validate every payment against the lease

Visual Lease users can automatically validate lease payments BEFORE you pay the wrong amount!

Every time you pay a bill, you’ll enter the charge into the system. When the system is tracking all your lease terms, it can automatically analyze the payment against the lease contract. If the amount doesn’t match what’s expected, you’ll be alerted. You can choose to pay only the expected amount and hold back the differential until you can investigate with the lessor.

Audit payments to flag anomalies

Certain lease payment amounts, such as CAM building expenses, change over time and you may not be able to validate simply by checking against the lease contract. For example, utility charges for one location may suddenly go up. While you may expect utility rates to increase, how can you tell if you’re being overcharged? It’s possible that a new tenant is the building is using more than their share and you’re being charged a percentage of that. Or, there may be an charge for electricity on the weekend because you failed to notify the landlord in advance.

If you’re not looking for these mistakes (on your part or the landlord’s), you’ll never find these opportunities to save big money.

To find them, you’ll need to use your lease accounting software to look for payments that increase beyond an expected range. Visual Lease lets you run a report that flags payment amounts that fall outside your specified tolerances. Then you can follow up with landlords and other lessors to verify the charges, and only pay what you really owe.

Streamlining the process of validating payments makes it much easier to catch the mistakes that slip through your payment processes every day.

Not what you expected from lease accounting software, right?

Request a Visual Lease demo to learn more about how you can save money on leases.

“We are thrilled to welcome Clark to the Visual Lease team. Visual Lease will benefit immensely from his experience navigating the rapid growth of a SaaS category leader,” said Marc Betesh, CEO and Founder of Visual Lease.

Convery has over 15 years of strategic and operational SaaS experience across sales, pre-sales engineering, implementation, customer success, consulting, and project management. He spent the last eight years at iCIMS as an integral member of the executive leadership team that navigated the company’s dramatic growth.

“I am thrilled to join Visual Lease as it cements its market leadership position in lease management and accounting SaaS. The combination of a best-in-class product and an outstanding customer-centric culture positions Visual Lease as the market-leading solution in this rapidly growing industry,” said Convery.

———–

VISUAL LEASE, LLC

Visual Lease provides lease accounting and lease administration solutions to help companies manage, analyze, and report on their leased asset portfolios, including real estate, equipment, and more. The company’s SaaS platform combines GAAP & IFRS-compliant lease accounting controls with sophisticated and flexible lease portfolio administration. Over 500 of the largest publicly-traded and privately-owned corporations, retailers, hospitals, and institutions around the globe rely on Visual Lease’s cloud-based SaaS platform to meet operational and compliance requirements. For more information, please visit www.visuallease.com.

Achieve fast compliance and long-term value with Grant Thornton and Visual Lease’s joint lease accounting solution

With the enactment of the new IFRS 16 & ASC 842 (FASB) lease accounting rules, there’s important work to be done, especially for organizations facing a 2019 deadline for compliance with both lease accounting rules (IFRS 16 & ASC 842).

Here’s the to-do list for accounting for leases under the new standards:

• Finding all the records associated with property and asset leases that must be brought onto the balance sheet for compliance with ASC 842 and IFRS 16;
• Classifying leases to understand their treatment;
• Aggregating data in a central repository;
• Selecting a software tool to automate the process of performing calculations, creating journal entries, and producing disclosure reports for IFRS 16 and ASC 842;
• Revising or creating internal processes and controls needed for ongoing accounting and lease management.

Many accounting teams are still shell-shocked from the revenue recognition changes. However, it’s still important to understand that accounting for leases under IFRS 16 and ASC 842 will have a big impact on your balance sheet as well. You need to be sure you’re getting the IFRS 16 and ASC 842 implementation right.

In response, the specialists at Grant Thornton have developed a process and set of integrated tools for end-to-end implementation of the new lease accounting standards. Grant Thornton’s cloud-based data repository, readiness and validation tool – known as LeaseX, helps prepare your data for FASB and IFRS-compliant lease accounting calculations. then, by using the Visual Lease platform, you can
create journal entries and disclosures on your balance sheet and run insightful analytics reports.

What’s more, this joint solution for IFRS 16 and ASC 842 also offers longer term lease management improvements that can have big payoffs for the entire organization.

IFRS 16 and ASC 842 prep: Focus on data collection first

A good lease accounting process starts with data collection, as it takes a great amount of time and effort to gather all of your data for IFRS 16 and ASC 842 compliance.

Learn more: Data Collection Tips for ASC 842 Transition & IFRS 16 Compliance

Once that’s underway, you can work to accomplish the following:

• Talk to stakeholders within your organization to learn more about their lease management needs. Look at the big picture instead of focusing only on accounting requirements for IFRS 16 and ASC 842. Doing that up-front will help you get the most benefit from your lease software solution, potentially making your compliance project a revenue gain instead of a cost.
• Put lease management processes and controls in place to streamline lease accounting compliance going forward, and also to improve decision making and reduce costs. Grant Thornton’s Advisory teams can help you design these processes and controls, while Visual Lease’s flexible management tools can help you implement them.

Learn more: Lease Portfolio Management: Policies & Procedures to Reduce Risk

Streamlining FASB and IFRS data collection and validation with Grant Thornton’s LeaseX

As a leading independent audit, tax and advisory firm, Grant Thornton guides its clients through every step of achieving IFRS 16 and ASC 842 lease accounting compliance. To minimize the data collection burden on organizations, Grant Thornton has created LeaseX.

LeaseX organizes, simplifies and streamlines the process of taking masses of scattered lease data and transforming it into a centralized and complete resource for compliance. The accounting advisory teams at Grant Thornton determine the data fields required to perform the lease accounting calculations under IFRS 16 and ASC 842.

Once that step is complete, the data collected in the LeaseX repository is quick and easy to import into Visual Lease, which performs the lease accounting calculations and creates journal entries and disclosures in your GL/ERP. LeaseX is also compatible with other leasing software.

Here’s what the process of getting your lease data into LeaseX looks like:

1. Grant Thornton works with your organization to set up a LeaseX repository that’s customized according to your organization’s structure and requirements.
2. Next, the specific data needed about each lease to comply with IFRS 16 and ASC 842 is extracted. You can import this data from an existing repository, have your own team review leases and enter data manually, or have Grant Thornton help you with lease abstraction.
3. LeaseX continuously validates the contents of your repository, showing you where data is missing on a lease-by-lease basis.
4. Throughout the process, you can monitor your IFRS 16 and ASC 842 readiness progress by seeing how many leases are complete and how many still outstanding.
5. You can also monitor your total Right of Use (ROU) asset and liability numbers as you populate your data. Financial leaders will appreciate having that information earlier in the process, rather than having to wait until data collection is complete to understand the impact on the balance sheet.

When your LeaseX repository is complete and validated, it’s a simple matter to export the data to Visual Lease. At that point, you’re ready for IFRS 16 and ASC 842 compliance with the ability to generate journal entries and disclosures.

LeaseX and Visual Lease: Long-term lease accounting and management

Grant Thorton, in alignment with Visual Lease, now offers a joint solution that not only streamlines IFRS 16 and ASC 842 lease accounting compliance, but also helps create smarter and more effective lease management. Integrating these operations creates efficiency, reduces leasing expenses, and drives smarter lease decisions across the organization.

Learn more: Lease Accounting Changes: The Silver Lining You’re Overlooking

Visual Lease’s cloud-based platform handles every aspect of lease management and accounting for IFRS 16 and ASC 842 and beyond. With all of your lease data in one unified platform, you have a single source of truth and an end-to-end solution that you can always count on to be accurate and up to date.

Get up and running FAST. LeaseX and Visual Lease integrate seamlessly, meaning there’s next to no implementation time. In one click you can import your prepared LeaseX data into Visual Lease.

Seamless systems integration. Visual Lease provides a deep level of integration not only with LeaseX, but also with a wide variety of systems including SAP, PeopleSoft, Power Plan, Workday, NetSuite, JD Edwards, and more than 50 other platforms — empowering you to automate GL journal entries or create cash transactions in your AP/AR system. You can even integrate with multiple GLs.

Visual Lease works the way you work. No two organizations are alike, so a leasing solution tailored to your company and your specific requirements can be invaluable. Visual Lease’s customization possibilities go beyond simply changing field names, and instead allow you to design the system to work according to your processes and controls – and with Visual Lease, you can quickly make those changes yourself.

With FASB compliance less than a year away, Visual Lease is doing all we can to smooth the transition — including delivering a new lease accounting update designed to make it even easier to meet the requirements of ASC 842 and IFRS 16.

What’s new in our lease accounting update?

Visual Lease FASB 2.0, our enhanced Lease Accounting module, provides a range of new tools for displaying multiple lease views and running a variety of calculations, for the ultimate in accounting flexibility. For example, our lease accounting update enables you to:

• Pick a particular calculation or run parallel entries for ASC 840, ASC 842, IAS 17, and IFRS 16
• Run hypothetical calculations and preview them side by side for comparison, such as different interest rates or lease dates
• Create different calculations and reporting for different dates or different locations
• Automatically compute and reverse journal entries when lease terms change — or even end calculations and remove old assets from your balance sheet entirely

With the new FASB lease accounting rules now requiring all lease assets and expenses to be accounted for, Visual Lease’s enhanced module empowers you to create compliance-related reporting from your accounting data, for a more complete picture of your lease profile and related financial obligations.

For instance, you can look back on 2 years’ worth of journal entries and automatically pull data from your balance sheet for footnotes in Qualitative Disclosure Reports. Forecast what the next 5 years of lease obligations will look like and generate reports on all types of lease expenses — operating, short- and long-term, variable, and sub-lease, as well as finance.

For companies that include different entities, you can create drill-down Disclosure Reports according to different entities, regions, countries, lease terms, or whatever criteria you need. Our lease accounting update also includes enhancements for visualization of short-term versus long-term lease liabilities and for handling IFSR-only portfolios.

What are some enhancements in FASB 2.0?

Our lease accounting update not only sets you up for compliance with new FASB lease accounting rules on Day 1 — it also provides enhancements that help you handle complex lease scenarios on Day 2 and beyond.

Flexible Classifying & Calculating

Added audit trail and override capabilities give an administrator the ability to change the bright lines in Capital Lease Testing, to adjust how a lease is classified and how journal entries are done.

For instance, you can override the default values for the Lease Test Threshold amounts (normally 75% of Useful Life and 90% of Fair Market Value) to tweak those values (e.g., set the threshold to 88%) to be sure leases are properly classified. Our lease accounting update also expands the FASB schedule and calculations with additional criteria, such as Deferred Rent and Prepaid/Accrued Rent balances. The addition of a new Journal Entries section allows FASB schedule data to be viewed in Journal Entry form.

Easier Currency Conversion

A number of enhancements to Visual Lease help you handle complex currency conversions over multiple periods with greater ease and agility. Integration with foreign exchange tables allows third-party data to be used in the system, for tasks such as tracking changing currency rates over time and allowing customer databases to import rates from Visual Lease’s reference tables on demand.

Secure Single Sign-on

Our lease accounting update strengthens our already robust security features with the addition of secure single sign-on. Utilizing user authentication from Federated Security Sources, this capability enables users to log on once for secure access and the ability to work with Visual Lease and accounting, general ledger, and ERP systems simultaneously.

Managing User Workflow, Alerts, & Notifications

The lease accounting update adds tools for managing user approval to tasks, such as allowing specific users to import lease financial entries or hiding project modules from specific users. We’ve also improved lease alerts and notifications by including full contact information for alert recipients — making it easier to identify the alert targets — and adding a quick search capability when selecting targeted organizations.

Enhancements to Financials

Adding a new field for Cost per Rentable Area, our lease accounting update allows this to be included as a recurring, computed cost and adjusted when there are changes in lease terms; Cost per Rentable Area has also been added to ad hoc and abstract reporting capabilities. Enhancements to financials include:

• Forecast calculations on Multiple Lease Update for budgeting/projections
• Ability to filter entries for the financial types used on each lease and for options such as forecasts and GL entries
• Improved searching of the full hierarchy of financial categories
• Mapping to other financial categories for forecasting and straight line rent automation functions

What will the near future bring?

The new FASB lease accounting rules are designed to align U.S. standards with global accounting standards while increasing transparency in financial reporting by 2019. FASB 2.0 from Visual Lease is designed to help you meet those requirements with speed and ease; additionally, it is compliant with IFRS 16, the new international standard.

Are you ready for compliance? Learn more:
FASB Lease Accounting Changes: How to Assemble Your Readiness Team
Get the Best Lease Accounting Software by Comparing Price & Value

Moving forward, we will continue to support these efforts with regular releases — so we encourage you to return to this space frequently to read about the latest lease accounting update from Visual Lease and learn more about how we can help you make the transition.

Want to see for yourself? Request a demo

Why lease accounting may impact corporate real estate strategies

The new lease accounting standards from FASB (U.S.) and IASB (international) essentially require all leases to be brought onto the balance sheet. That’s a big change. According to JLL, currently more than 85% of lease commitments don’t appear on the balance sheet.

After the new rules take effect, balance sheets will show very different debt-to-equity ratios and return on assets. These changes may have far-reaching impacts on the organization, such as loan covenants and greater scrutiny on lease policies and decisions. And it’s happening soon: January 2019 for public companies.

The questions for corporate real estate is, should these lease accounting standards change your corporate real estate strategy? And if so, how?

Corporate real estate strategies you may have to re-think

If you’ve researched the impact of lease accounting on corporate real estate management strategy, you’ve probably seen a wide range of opinions. However, there’s one thing everyone agrees on. The increased financial impact of leasing will mean increasing scrutiny of your corporate real estate strategies and decisions. You may also face new approval requirements from finance leaders for real estate leasing decisions.

Now is the time to think through your current corporate real estate strategies, understand how the new lease accounting rules may impact your organization, and adjust accordingly.

The buy vs. lease decision

Under the new lease accounting rules, you will lose some of the financial benefits of leasing space. Does that mean you should decide to purchase buildings instead of leasing?

Some experts predict that when looking to occupy all or most of a building (like a corporate headquarters), more organizations will now consider the option to buy. According to CBRE, if you’ve got excellent credit you may find that the cost of capital to purchase is lower than the long-term cost to lease.

However, others experts argue that many other factors (besides balance sheet impact) will continue to be the main drivers in the decision to buy or lease space. Some of these include:

• business requirements and forecasts
• availability of capital
• debt and equity covenant restrictions

Remember that the lease accounting changes, in most industries, will impact everyone equally. Your competitors are facing the same challenges you are. However, if you are the lone company in your vertical with a lot of leased space (versus owned) then you may want to rethink your corporate real estate strategies related to leasing.

Lease term length

Under the new rules, longer leases can have a more detrimental effect on the balance sheet due to larger lease liabilities. Does that mean you should consider shorter lease terms as one of your corporate real estate strategies?

There’s already a trend toward shorter lease terms globally. The average lease length for commercial space in the U.S. is 7 years, but in some international markets the average is 2 to 3 years. With the lease accounting changes factored in, some predict that trend will grow.

However, there are practical considerations that may preclude shorter lease terms. For one thing, there’s a lot of risk for landlords with shorter leases. Tenants may also not want to risk having to move every 2 to 3 years. And for certain industries where leasehold improvements are common, having to depreciate that cost over a short lease may not be realistic.

That being said, it’s possible we may see leases for smaller turnkey spaces becoming shorter with more options. But remember, options that you are “reasonably certain” to exercise will be included (for accounting purposes) as part of the lease term anyway.

Lease structure

In many industries, fixed, all-inclusive lease payments are common for the sake of simplicity. However, under the new lease accounting standards, a higher proportion of variable payments (i.e. with payments for taxes and maintenance separated out) may result in smaller lease liabilities. Should you consider modifying lease structures as one of your corporate real estate strategies?

To be sure, structuring leases with separate payments for lease and non-lease components will simplify the workload for your financial reporting team under the new standards. But that can be more work for accounts payable (unless you have lease management software that makes variable payments simple and automatic).

Even with fixed lease payments, you can ask landlords to provide details about breakdowns of your payments for reporting purposes. However, landlords may consider that proprietary information and may not be willing to comply. If you face that situation, outsourced real estate partners can also provide helpful information.

Sale-leaseback is another lease structure that changes significantly with the new standards. Until now, these transactions served as a form of off-balance sheet financing. With this advantage taken away, you may find this lease structure a less attractive option in your playbook of corporate real estate strategies.

More resources for strategic corporate real estate leadership:
Lease Portfolio Management: Policies & Procedures to Reduce Risk
The Uncertain Future of the Corporate Real Estate Profession

The bottom line: how to decide what’s right

Who is right in all these debates? The fact is, there is no one correct answer for everyone. You need to make decisions that are best for your organization. That means considering lease accounting impacts along with other factors that currently affect your corporate real estate strategies and decision making.

Here’s the difficulty: you can’t possibly do that without all your lease data in a central repository. And without software that makes it easy for you to analyze your lease data, find out where your risks and opportunities lie, and make informed decisions about corporate real estate strategies.

Just about every organization is rushing out to get lease accounting software to push out balance sheet calculations. But lease accounting software alone can’t help you with the critical decisions ahead. The lease accounting changes can serve as your opportunity to implement a comprehensive end-to-end lease solution that helps you improve corporate real estate strategies along with lease accounting.

Learn more:
Lease Accounting Changes: The Silver Lining You’re Overlooking