The Fusion of Technology and Data Standards

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

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

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

The Pillars of Effective ESG Reporting: Integration and Implementation

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

Leveraging OSCRE’s Work with VL ESG Steward

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

Broadening ESG Reporting Horizons

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

A Comprehensive Approach to ESG Standards

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

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

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

Shaping the Future with Data Standards

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

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

Visual Lease and OSCRE: Collaborating on ESG

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

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

Beyond Compliance: The Vision for ESG Stewardship

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

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

A Unified Front for Data and ESG Standards

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

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

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

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

The Challenges of Pre-Visual Lease Management

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

Visual Lease: A Catalyst for Efficiency and Collaboration

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

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

Navigating Lease Accounting and ESG Reporting with Visual Lease

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

A Future-Ready Approach to Lease Management

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

• Is Excel good for lease accounting?
• 1. Lease terms constantly change, and it’s hard to keep up
• 2. Lease accounting calculations are complex and time consuming
• 3. Excel spreadsheets are prone to human error
• 4. Excel lacks historical data required for audits
• Benefits of lease accounting software
• Ensuring ASC 842 compliance
• Get Started!

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

Is Excel good for lease accounting?

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

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

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

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

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

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

2. Lease accounting calculations are complex and time consuming

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

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

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

3. Excel spreadsheets are prone to human error

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

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

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

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

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

4. Excel lacks historical data required for audits

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

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

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

Benefits of lease accounting software

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

Ensuring ASC 842 compliance

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

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

Get Started!

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

• Using ASC 842 Excel Templates
• How to Create Customized ASC 842 Excel Templates
• Best Practices for Data Entry and Formula Setup
• Best Practices for Document Organization
• Common Challenges with ASC 842 Excel Templates
• ASC 842 Excel Templates vs Lease Accounting Software
• Leaving Cumbersome Spreadsheets for a Purpose-Built Platform

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

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

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

Using ASC 842 Excel Templates

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

How to Create Customized ASC 842 Excel Templates

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

Step 1: Define Your Lease Data Categories

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

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

Step 2: Create a New Excel Spreadsheet

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

Step 3: Set Up Columns and Headers

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

Step 4: Format and Customize the Template

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

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

Step 5: Add Formulas

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

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

Step 6: Set Up Tabs and Document Management

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

Step 7: Testing and Validation

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

Step 8: User Training

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

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

Best Practices for Data Entry and Formula Setup

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

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

Formula Setup Best Practices:

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

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

Best Practices for Document Organization

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

1. Use Separate Tabs or Worksheets: Create separate tabs or worksheets within your Excel workbook to store different types of lease documents. For example:

• One tab for lease agreements
• Another for lease amendments
• A tab for disclosures and correspondence
• A separate tab for audit documentation

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

Common Challenges with ASC 842 Excel Templates

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

1. Data Accuracy

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

2. Security Risks

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

3. Version Control

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

4. Audit Complications

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

Excel Templates vs Lease Accounting Software for ASC 842

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

1. Data Accuracy and Automation

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

2. Enhanced Security

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

3. Version Control and Collaboration

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

4. Audit Readiness

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

Leaving cumbersome spreadsheets for a purpose-built platform

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

Table of Contents

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

How to Calculate the Present Value of Lease Payments in Excel

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

Step 1: Organize Data

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

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

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

Step 2: Use the PV Function

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

=PV(rate, nper, pmt)

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

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

Step 3: Repeat as Needed

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

Cons of Using Excel: Changes in Lease Payment Schedule

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

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

The Importance of Lease Calculations in Maintaining Compliance

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

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

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

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

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

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

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

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

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

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

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

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

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

Improving your Lease Management Process

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

Making the Switch from Excel to Visual Lease Software

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

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

• Efficiency: Visual Lease streamlines lease management, saving you time and reducing manual data entry.
• Accuracy: With automated calculations, you can trust that your lease data is accurate.
• Compliance: Visual Lease ensures compliance with ASC 842 and other accounting standards.
• Advanced Reporting: Access advanced reporting and analytics to gain valuable insights into your lease portfolio.
• Document Management: Store and organize all lease-related documents within the platform.
• Audit Readiness: Visual Lease prepares you for audits with accurate and well-documented lease data.

Switch to Visual Lease today to experience the difference.

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

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

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

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

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

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

Take Preemptive Action on ESG Reporting 

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

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

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

Discover more about the VL ESG Steward here. 

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

1. Ensure clear communication and documentation

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

2. Increase lease agility and flexibility

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

3. Staying ahead of ESG reporting requirements

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

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

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

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

Learn more about the VL ESG Steward here.

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

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

What is the California Climate Accountability Package?

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

What is SB-253? Who does it impact?

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

What’s Included in SB-253:

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

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

The Impact of SB-253:

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

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

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

What is SB-261?

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

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

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

How Can VL ESG Steward Help?

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

What is Common Area Maintenance (CAM)?

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

CAM Fees in Leases

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

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

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

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

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

What Does Common Area Maintenance Include?

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

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

Review Your Lease Agreement Carefully

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

Negotiating CAM Charges

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

CAM vs. Operating Expenses

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

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

CAM Considerations in Lease Accounting:

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

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

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

1. Clearly Defined Lease Term Specify the lease term clearly in your agreement. Whether it’s a year-long lease or a month-to-month arrangement, outlining the duration of the lease provides both parties with a clear understanding of their commitment.
2. Rent Amount and Due Date Clearly state the monthly rent amount and the due date. Make sure to include information about late fees and acceptable methods of payment.
3. Security Deposit Details Outline the amount of the security deposit required, the conditions under which it may be withheld, and the timeline for returning the deposit after the lease ends.
4. Maintenance and Repairs Specify the responsibilities of both the landlord and tenant when it comes to property maintenance and repairs. Define what constitutes normal wear and tear and what falls under the tenant’s responsibility.
5. Property Access and Inspections Detail how and when you, as the landlord, can access the property for inspections, repairs, or other legitimate reasons. Ensure you adhere to local laws regarding notice periods for entry.
6. Subletting and Assignment Determine whether subletting or assigning the lease is allowed. If not, make it clear that the tenant cannot transfer the lease to another party without your written consent.
7. House Rules and Policies Include any specific house rules and policies, such as restrictions on smoking, pet policies, or noise regulations. Be sure to communicate any consequences for violating these rules.
8. Utilities and Services Specify which utilities and services are included in the rent, and which are the tenant’s responsibility. This prevents confusion and disputes over utility payments.
9. Maintenance of Landscaping If your property has a yard or landscaping, define whether the tenant is responsible for its upkeep or if you, as the landlord, will handle it.
10. Notice Period for Lease Termination Clearly state the notice period required for either party to terminate the lease agreement. This helps prevent misunderstandings and ensures a smoother transition.
11. Dispute Resolution Include a section on how disputes will be resolved, whether through mediation, arbitration, or the legal system. A clear dispute-resolution process can save both parties time and money.
12. Renewal Procedures If you offer lease renewal options, outline the process for renewal, including any changes to rent or terms.
13. Insurance Requirements Specify whether the tenant is required to maintain renters’ insurance and provide details on the coverage required.
14. Guest Clauses Define rules regarding guests, such as the maximum length of time guests can stay, and whether overnight guests must be registered with the landlord.
15. Fee Protection Clarify any fees associated with the lease, such as application fees or fees for bounced checks. State the purpose of these fees and the circumstances under which they may apply.
16. Exit Inspection Include a provision for an exit inspection and walk-through when the lease ends. This helps document the condition of the property and any potential deductions from the security deposit.

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

Understanding ASC 842

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

Does ASC 842 Apply to Nonprofit Organizations?

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

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

ASC 842 Effective Date for Nonprofit Organizations

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

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

GAAP Accounting for Nonprofits

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

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

H2: How to Nonprofits Can Prepare for ASC 842

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

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

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

Understanding Non-Lease Components

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

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

What are Non-Lease Components in ASC 842?

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

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

Non-Lease Components Significance and Implications

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

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

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

Understanding Lease Amortization Schedule

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

Creating a Lease Amortization Schedule

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

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

Benefits of Using a Lease Amortization Schedule

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

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

Using Lease Amortization Schedule Calculators and Templates

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

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

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

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

Defining Net Advantage to Leasing

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

The Complexity of Lease vs. Buy Analysis

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

Calculating the Net Advantage to Leasing

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

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

Grasping the Concept Through an Example

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

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

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

Defining Lessee vs. Tenant

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

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

Understanding the Role of Lease Agreements

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

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

Accounting and Business Perspective

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

Interchangeability in Everyday Language

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

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

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

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

What is a Lease Purchase Option?

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

Accounting for Lease Purchase:

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

Lease Classification Test:

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

Lease Purchase Tax Implications:

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

Bargain Purchase Option:

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

Changing Intent and Remeasuring:

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

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

Understanding the Significance of Lease Audits:

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

Lease Audit Checklist:

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

Benefits of Lease Accounting Audit Preparation:

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

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

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

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

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

Accounting for the Complete Picture

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

Why Understanding the Lifecycle Matters

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

Conclusion: Embracing the Full Journey

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

The Evolution of Lease Accounting

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

What Does It Mean to Capitalize an Asset?

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

Capitalized Assets Based on the Lease Classification

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

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

Calculating Asset Capitalization

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

A Clearer Path to Lease Accounting Clarity

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

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

What Is a Restatement?

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

A Deeper Dive into Restatements

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

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

Areas of Common Restatements

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

Responding to Restatements

Responding to restatements requires a methodical approach:

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

Preventing Future Restatements

Preventing future restatements involves building a resilient accounting organization:

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

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

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

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

1. Enhanced Financial Organization:

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

2. Simplified Bookkeeping:

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

3. Efficient Invoicing and Payment Management:

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

4. Financial Analysis and Reporting:

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

5. Compliance with Accounting Standards:

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

6. Time and Cost Savings:

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

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

What Is a Lease Commencement Date? 

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

Lease Commencement Date Definitions

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

How Do You Determine A Lease Commencement Date? 

Attorney’s Perspective on Lease Commencement Date

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

Accountants’ Perspective on Lease Commencement Date

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

Can the lease commencement date vary depending on the circumstances?

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

Importance of Lease Commencement Date for Accounting

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

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

Lease Commencement Date FAQ’s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is Contract Management System?

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

Contract Management Functions:

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

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

Integration of ESG Considerations:

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

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

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

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

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

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

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

When are these standards expected to go into effect?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lease Incentives: Importance and Purpose

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

Accounting Considerations under ASC 842

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

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

Lease Incentive Programs

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

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

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

What is ESG Accounting?

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

Carbon Accounting and Climate Disclosures:

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

Financial Impact of Environmental Events:

ESG accounting goes beyond carbon accounting and encompasses the financial impact of environmental events. As climate-related incidents become more prevalent, businesses must recognize and report on the effects of such events on their financial statements. For instance, if a company experiences a decline in attendance or cancels outdoor events due to poor air quality resulting from natural disasters or wildfires, these climate-related impacts must be isolated and reported as changes to the financial position. This level of reporting ensures that stakeholders have a holistic view of the financial implications associated with environmental events.

ESG Reporting and FASB:

The Financial Accounting Standards Board (FASB), while not directly involved in ESG standard setting, acknowledges the growing relevance of ESG factors in financial reporting. FASB encourages companies to consider the impact of ESG matters on their financial statements, emphasizing the need for transparent and accurate reporting. While the ISSB standards do not have the legal authority of FASB, they serve as a globally applicable framework for ESG reporting, with nations adopting and aligning their reporting practices accordingly.

Non-Financial Reporting Directive (NFRD): 

The Non-Financial Reporting Directive (NFRD) is a European Union (EU) directive that sets out requirements for certain large companies to disclose non-financial information, including environmental, social, and governance (ESG) factors. The directive aims to improve transparency and accountability in corporate reporting, ensuring that companies provide relevant and consistent information about their ESG performance. Under the NFRD, companies that meet specific criteria, such as being listed on EU regulated markets and having more than 500 employees, are required to include non-financial information in their management reports. The information should cover environmental, social, and employee matters, human rights, anti-corruption, and diversity.

ESG accounting represents a paradigm shift in financial reporting, enabling companies to demonstrate their commitment to sustainable practices and long-term value creation. By integrating ESG factors into financial statements, businesses provide stakeholders with a comprehensive view of their environmental impact and the financial implications associated with it. Carbon accounting and reporting on the financial impact of environmental events are crucial elements of ESG accounting, ensuring transparent disclosures and informed decision-making. As ESG reporting gains momentum, businesses must embrace the evolving landscape and seize the opportunity to become catalysts for positive change.

A Closer Look at the ISSB Standards:

The S1 standard, titled “General Requirements for Disclosure of Sustainability-related Financial Information,” encompasses broad-based sustainability reporting. It covers a wide range of aspects related to environmental, social, and governance (ESG) pillars. On the other hand, the S2 standard is specifically focused on climate-related disclosures, highlighting the increasing importance of addressing climate change within financial reporting.

Phased Implementation Approach:

Recognizing the significant undertaking required for companies to comply with these new standards, the ISSB recommends a phased implementation approach. The initial focus will be on reporting climate-related disclosures, given their paramount importance. This allows companies to gradually acclimate themselves to the requirements before incorporating additional ESG topics outlined in the S1 standard. It is worth noting that both standards become active simultaneously, with climate issues taking center stage.

Effective Date and Global Adoption:

The ISSB has set the effective date for the S1 and S2 standards as the beginning of 2024. However, it is crucial to understand that the ISSB, being an arm of the International Accounting Standards Board (IASB), does not possess legal authority in any specific country. Instead, the ISSB develops globally applicable standards, and individual nations have the choice to adopt them. Similar to accounting rules governed by the IASB, which have been largely adopted worldwide, the ISSB standards are expected to follow a similar path of implementation, albeit with some possible fine-tuning.

Several nations have already expressed their intention to adopt the ISSB standards, emphasizing their commitment to transparent and comprehensive sustainability reporting. While the exact details of implementation may vary slightly, the overall goal remains aligned – to foster consistent and reliable reporting of sustainability-related financial information. The first reports adhering to the new standards are expected to surface in 2025, marking a significant milestone in the evolution of sustainability reporting.

The ISSB’s release of the S1 and S2 standards represents a major step forward in enhancing sustainability reporting practices worldwide. These standards provide a structured framework for companies to disclose sustainability-related financial information, with a particular emphasis on climate-related disclosures. As organizations gear up for the phased implementation, it is imperative to embrace these new standards as an opportunity to promote transparency, accountability, and responsible business practices. By adhering to the ISSB standards, companies can proactively contribute to a more sustainable future and gain the trust and confidence of stakeholders across the globe.

What is Carbon Accounting?

Carbon accounting is the process of measuring and quantifying greenhouse gas emissions, particularly carbon dioxide (CO2), produced by an organization, product, or activity. It provides a systematic approach to tracking and reporting these emissions, allowing businesses to understand and manage their carbon footprint. In simple terms, carbon accounting is the practice of calculating and monitoring the amount of CO2 and other greenhouse gases released into the atmosphere because of human activities.

The Importance of Carbon Accounting

Carbon accounting is instrumental in driving environmental stewardship, meeting investor expectations, complying with regulations, and gaining a competitive advantage. It is a vital tool for organizations seeking to address climate change, reduce their environmental impact, and contribute to a sustainable future. Here are 5 key reasons why it holds significant importance:

1. Investor and Stakeholder Expectations: Investors and stakeholders increasingly expect organizations to disclose their carbon emissions and demonstrate a commitment to environmental sustainability. Carbon accounting and ESG reporting have become crucial in building trust, attracting investments, and maintaining positive relationships with stakeholders who prioritize sustainable and responsible practices.
2. Regulatory Compliance: Governments worldwide are introducing carbon-related regulations and reporting requirements. Carbon accounting ensures organizations stay compliant with these regulations, avoiding potential penalties and reputational risks associated with non-compliance.
3. Reputation and Competitive Advantage: Embracing carbon accounting demonstrates an organization’s commitment to environmental responsibility and sustainability. It enhances brand reputation, attracts environmentally conscious customers, and provides a competitive edge in a market increasingly focused on sustainable practices.
4. Environmental Impact: Carbon accounting enables organizations to understand and measure their greenhouse gas emissions, which directly contribute to climate change. By quantifying these emissions, businesses can identify areas of high impact and implement strategies to reduce their carbon footprint, thus mitigating environmental harm.
5. Climate Change Mitigation: Carbon accounting is essential for effective climate change mitigation strategies. It provides a basis for setting emission reduction targets, implementing energy-efficient practices, transitioning to renewable energy sources, and adopting sustainable business practices. It empowers organizations to take proactive measures to combat climate change.

Carbon Accounting Methodology

Carbon accounting methodology encompasses various processes that enable accurate measurement, reporting, and management of carbon emissions. Here’s an overview of the key components:

• Data Collection: The first step involves gathering relevant data on energy consumption, fuel usage, transportation, waste management, and other activities that generate carbon emissions. This data is collected from internal records, utility bills, supplier data, and emission factors specific to each emission source.
• Measurement and Calculation: Once the data is collected, emissions are calculated using established emission factors and conversion formulas. These factors consider the carbon intensity of energy sources, such as electricity grids or specific fuels. The calculated emissions are often measured in metric tons of carbon dioxide equivalents (CO2e).
• Scopes of Carbon Emissions: Carbon emissions are categorized into three scopes:
  • Scope 1: Direct emissions from sources owned or controlled by the organization, such as on-site combustion of fossil fuels or company-owned vehicles.
  • Scope 2: Indirect emissions associated with purchased electricity, heating, or cooling consumed by the organization.
  • Scope 3: Indirect emissions resulting from activities outside the organization’s control, such as supply chain emissions, employee commuting, business travel, or waste disposal.
• Accuracy and Reliability: Accurate data collection is crucial for reliable carbon accounting. Organizations should ensure data integrity, establish quality control processes, and use standardized calculation methods. Independent verification by third parties further enhances the credibility of reported emissions.

VL’s ESG Steward streamlines data collection automates calculations and provides comprehensive sustainability reporting capabilities. With intuitive data entry interfaces and integration capabilities, Visual Lease simplifies the process of capturing emissions data from various sources, ensuring accuracy and consistency.

With ESG Steward, organizations can enhance their environmental reporting, monitor emission trends, set reduction targets, and make informed decisions to drive sustainability initiatives effectively.

Carbon Accounting Challenges

Carbon accounting presents several challenges that organizations need to navigate to ensure accurate reporting and disclosure of greenhouse gas (GHG) emissions. Common challenges include:

• Data Complexity: Gathering comprehensive and reliable data across diverse operational areas can be challenging. Organizations often face difficulties in collecting data from multiple sources, ensuring its accuracy, and managing data consistency over time.
• Scope 3 Emissions: Accounting for scope 3 emissions, which encompass indirect emissions from the value chain, can be particularly complex. This involves collecting data from suppliers, calculating emissions from activities like transportation and waste management, and addressing data gaps and inconsistencies.
• Calculation Methodologies: Choosing appropriate calculation methodologies and emission factors for different emission sources is complex. These methodologies evolve, and organizations must stay updated with the latest guidelines and standards to ensure accuracy in emission calculations.
• Reporting and Disclosure: Reporting GHG emissions requires adherence to various frameworks and standards, such as the Greenhouse Gas Protocol, CDP (formerly Carbon Disclosure Project), and industry-specific guidelines. Ensuring compliance with these frameworks while providing transparent and accurate disclosures can be challenging.

Manual processes and spreadsheets may not be sufficient to handle the complexities of carbon accounting. Specialized software tools are essential for streamlining data collection, calculation, and reporting. These tools provide automated workflows, data validation, and real-time reporting capabilities, enabling organizations to effectively manage the carbon accounting process.

Ensuring the Accuracy and Reliability of Carbon Accounting Data

Accurate and reliable carbon accounting data is essential for organizations to demonstrate their commitment to environmental sustainability. Accurate data instills trust, enhances reputation, and establishes credibility, making it an essential aspect of demonstrating a genuine dedication to sustainability practices.

Investors and stakeholders increasingly prioritize environmental sustainability when making decisions and assessing the long-term viability of organizations. Accurate carbon accounting data serves as evidence of an organization’s commitment to managing its environmental impact. Investors seek reliable data to evaluate the risks and opportunities associated with climate change and to make informed investment decisions aligned with their sustainability goals. Likewise, stakeholders, including customers, employees, and regulatory bodies, expect transparency and credible information to assess an organization’s environmental performance and hold them accountable for their actions.

With VL’s ESG Steward, organizations gain peace of mind with data validation checks, ensuring the accuracy and integrity of the collected data. By leveraging VL’s analytical capabilities, organizations have gained valuable insights; identifying emission hotspots, tracking trends, and making data-driven decisions.

Designed to align with reporting frameworks and standards such as the Greenhouse Gas Protocol, CDP, and industry-specific guidelines, ESG Steward ensures that organizations not only collect accurate data but also report in accordance with established frameworks, further enhancing the credibility of their sustainability reporting.

Carbon Accounting Software

Carbon accounting software offers a range of features and functionalities that streamline the process of collecting, analyzing, and reporting carbon emissions data. Here are key aspects of effective carbon accounting software:

• Calculation and Reporting: The software provides calculation tools based on recognized emission factors and methodologies, enabling accurate measurement of carbon emissions. It generates comprehensive reports, customizable dashboards, and visualizations that facilitate data analysis and disclosure.
• Compliance and Standards: Carbon accounting software aligns with established reporting frameworks and standards, such as the Greenhouse Gas Protocol and CDP. It ensures compliance with regulatory requirements and industry-specific guidelines, providing organizations with confidence in their reporting accuracy and integrity.
• Data Collection and Integration: Carbon accounting software simplifies data collection by integrating with various data sources, such as utility bills, financial systems, and supplier information. It automates the data capture process, reducing manual errors and ensuring data consistency.
• Goal Setting: Advanced carbon accounting software allows organizations to set emission reduction targets. It enables them to assess the impact of different strategies, evaluate the feasibility of targets, and track progress over time.

By utilizing a comprehensive platform for carbon accounting and ESG reporting, organizations can benefit in various ways:

• Enhanced Efficiency: Integrated software streamlines data collection, calculation, and reporting processes, saving time and reducing manual errors associated with manual data entry and spreadsheet-based approaches.
• Improved Accuracy and Reliability: Carbon accounting software incorporates data validation checks and standardized calculation methodologies, ensuring accurate and reliable reporting. It minimizes the risk of data inconsistencies and enhances the credibility of reported emissions.
• Stakeholder Engagement: Utilizing sophisticated software showcases an organization’s commitment to environmental responsibility, attracting environmentally conscious investors, customers, and employees. It improves stakeholder engagement and enhances an organization’s reputation as a sustainability leader.

Visual Lease’s ESG Steward is an example of a comprehensive software solution that streamlines the data collection process, provides accurate calculations, and offers robust reporting tools. By leveraging VL’s ESG Steward, organizations can simplify their carbon accounting and ESG reporting efforts, gain insights into their sustainability performance, and meet the expectations of investors and stakeholders.

The Opportunities of Carbon Accounting

Implementing carbon accounting practices presents organizations with numerous opportunities and benefits that extend beyond environmental responsibility. Here are some key advantages:

• Operational Efficiency: Carbon accounting provides insights into an organization’s energy consumption and emissions profile. By identifying energy-intensive processes or areas with high emissions, businesses can implement efficiency measures and optimize their operations. This can lead to reduced energy usage, streamlined processes, and cost savings.
• Cost Savings: Carbon accounting helps identify inefficiencies and wasteful practices that contribute to higher energy consumption and emissions. By implementing energy-saving measures, organizations can reduce their carbon footprint and realize significant cost savings in energy bills. Energy efficiency measures often pay for themselves over time and contribute to long-term financial sustainability.
• Improved Sustainability Performance: Carbon accounting allows organizations to set measurable sustainability targets and track their progress. By actively managing and reducing their carbon emissions, businesses can demonstrate their commitment to environmental stewardship and sustainability. This, in turn, can enhance their reputation, attract environmentally conscious customers and investors, and create a competitive advantage.
• Regulatory Compliance: As governments worldwide strengthen environmental regulations, carbon accounting helps organizations stay ahead of compliance requirements. By accurately measuring and reporting emissions, businesses can ensure compliance with environmental standards and avoid penalties or reputational risks associated with non-compliance.
• Risk Management: Carbon accounting helps organizations identify and manage climate-related risks. By assessing the potential impact of climate change on their operations and supply chains, businesses can develop strategies to mitigate risks, build resilience, and adapt to a changing business landscape.
• Stakeholder Engagement: Carbon accounting practices demonstrate an organization’s commitment to sustainability and environmental transparency. This can enhance stakeholder engagement and relationships with investors, customers, employees, and communities. Investors increasingly consider environmental factors when making investment decisions, and customers prefer businesses with strong sustainability practices.

Carbon Accounting Standards

When it comes to carbon accounting, adherence to industry standards and frameworks is essential for ensuring consistency, comparability, and credibility of reported data. Here are some prominent standards and frameworks that govern carbon accounting practices:

Greenhouse Gas Protocol (GHG Protocol): Developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), the GHG Protocol is widely recognized as the global standard for measuring and managing greenhouse gas (GHG) emissions. It provides comprehensive guidelines for organizations to quantify and report emissions from various sources, including direct and indirect emissions (Scope 1, 2, and 3).

CDP (formerly Carbon Disclosure Project): CDP is a global disclosure platform that helps companies and cities measure, manage, and disclose environmental data, including carbon emissions. CDP’s climate change questionnaire is widely used by investors and stakeholders to evaluate an organization’s environmental performance and risks associated with climate change.

International Sustainability Standards Board (ISSB): The ISSB is an independent standard-setting body under the International Financial Reporting Standards (IFRS) Foundation. It was established in response to the growing demand for globally recognized sustainability reporting standards. The ISSB’s primary objective is to develop a comprehensive set of sustainability reporting standards that provide consistent, comparable, and reliable information on organizations’ environmental, social, and governance (ESG) performance.

European Financial Reporting Advisory Group (EFRAG): EFRAG is an organization based in Europe that provides technical expertise and advice to the European Commission on financial reporting matters. In recent years, EFRAG has been actively involved in advancing sustainability reporting within the European Union. The European sustainability reporting standards developed by EFRAG will complement existing financial reporting requirements and contribute to the EU’s goal of a sustainable and resilient economy. EFRAG aims to ensure that these standards align with global developments, including the work of the ISSB, to promote international consistency in sustainability reporting.

• With VL’s ESG Steward, customers benefit from transparent calculations, comprehensive controls, and complete audit trails for compliance with GRI, EFRAG, ISSB, TCFD, Greenhouse Gas Protocol, and other disclosures required by regulators and stakeholders.

Carbon Accounting with Visual Lease

In conclusion, carbon accounting and sustainability reporting have become integral components of corporate responsibility and transparency. Adhering to industry standards, such as the GHG Protocol are crucial for accurate and reliable carbon accounting. The emergence of organizations like the ISSB and EFRAG further underscores the global push for standardized sustainability reporting.

VL’s ESG Steward stands out as the ideal choice for businesses navigating the complexities of carbon accounting and ESG reporting. Our carbon accounting software encompasses key features required for efficient data collection, accurate calculations, and comprehensive reporting. By utilizing Visual Lease’s solution, organizations can streamline their carbon accounting practices, meet industry standards, and enhance the credibility of their reporting.

To take advantage of ESG Steward and unlock the benefits of accurate and reliable carbon accounting, schedule a demo, today.

Types of Commercial Leases

In broad terms, commercial leases can be categorized based on what is being paid for and how it is paid. Unlike residential leases, commercial leases typically involve more than just a base rent. Let’s explore the primary lease types:

1. Gross Lease: A gross lease is similar to renting an apartment for personal use. In this type of lease, the lessor includes all expenses, such as snow removal, lawn maintenance, and hallway lighting, in the rent payment. This is the simplest form of a commercial lease, but it is relatively uncommon in the commercial real estate market.
2. Triple Net Lease: Triple net leases (NNN leases) are frequently seen in retail leases. In this type of lease, the lessee assumes responsibility for additional expenses beyond the base rent. These expenses typically include common area maintenance (CAM), property taxes, and property insurance. The lessee pays the base rent “net” of these three expense categories. Hence, it is called a triple net lease.
3. Pass-Through Lease: Pass-through leases, also known as bondable leases, differ slightly from triple net leases. In a pass-through lease, the tenant directly assumes the costs of expenses such as snow removal, landscaping, and property taxes. The tenant reimburses the landlord for these expenses separately from the rent payment. This type of lease is commonly found in freestanding buildings like banks or fast-food restaurants.
4. Modified Gross Lease: A modified gross lease is often seen in office buildings, combining elements of both gross and net leases. Under this type of lease, operating expenses, property taxes, and insurance are typically included in the initial base year rent. However, any increases in these expenses over the base year are charged to the tenant based on their pro-rata share. The exact terms may vary, specifying either the actual expenses or an increase over a base amount.

Implications for Lease Accounting

Understanding the nature of the commercial lease type is essential for proper lease accounting, as it affects how expenses are treated under accounting standards such as FASB, ASC 842, and IFRS 16. While the lease payment represents the amount paid for asset usage, common area maintenance expenses are typically considered variable expenses, separate from the lease component. Taxes are treated similarly, and considered excluded from the lease expense. Lessors should carefully allocate these expenses based on the lease type to accurately report their assets and liabilities.

Navigating the world of commercial leases involves understanding the various lease types available. Triple net leases, pass-through leases, gross leases, and modified gross leases each have distinct characteristics and implications for both lessors and lessees. Familiarity with these lease types is crucial for making informed decisions and ensuring accurate lease accounting. By grasping the meaning of triple net leases and comprehending the differences between commercial lease types, individuals and businesses can navigate lease agreements more effectively and mitigate potential challenges.

Additionally, companies often seek the assurance of accurate financial information through audited financial statements. In this blog post, we will explore the concept of capital budgeting decisions using accounting software and delve into the significance of audited financial statements.

Capital Budgeting Decisions and Accounting Software:

Capital budgeting decisions refer to the process companies undertake to determine where to invest their capital. These decisions involve evaluating the financial implications, both short-term and long-term, of investing in different assets. One common choice is the lease versus buy decision, where companies analyze the total cost of owning or leasing an asset over its life.

To make informed decisions, companies can leverage accounting software to model and analyze capital budgeting examples. By incorporating various variables and comparing the costs of different options, companies can identify the most suitable investment opportunities. Accounting software enables companies to consider factors such as cash expenditures, loan interest, sales tax, and the impact of leases on the balance sheet and profit-loss statements.

Audited Financial Statements:

Financial statements serve as essential tools for communicating a company’s financial performance. While companies can choose to present any form of financial statement, the highest level of confidence comes from audited financial statements. Audited financial statements undergo a thorough review by Certified Public Accountants (CPAs) who assess the accuracy and completeness of the financial information.

Audits involve not only examining the financial numbers but also evaluating the company’s internal processes and controls. CPAs verify that appropriate steps are taken to prevent errors, fraud, and theft. Through testing and analysis, auditors ensure that finances flow accurately within the company and that the financial reports present a true and fair view of the company’s financial position.

The Importance of Audited Financial Statements:

Audited financial statements carry immense significance, particularly for publicly traded companies and larger private enterprises. They provide stakeholders, including investors, creditors, and regulators, with a higher level of assurance regarding the reliability and accuracy of the financial information presented. Audited financial statements include an opinion letter from the CPA firm, which states that, in the opinion of the CPA, the information is properly prepared and presented.

Capital budgeting decisions and audited financial statements play crucial roles in financial management. Accounting software assists companies in making informed capital budgeting decisions by analyzing costs, modeling scenarios, and comparing alternatives. 

On the other hand, audited financial statements instill confidence in the accuracy and reliability of a company’s financial information. By subjecting financial statements to rigorous scrutiny, companies demonstrate their commitment to transparency and sound financial management.

The Mechanics of Lease Purchase Options:

When a company leases an asset, it gains the right to utilize the asset for a specified period. However, there may come a point when the lessee decides to acquire ownership of the asset. While this can be achieved through negotiation with the lessor, many lease agreements incorporate a lease purchase option. This embedded option allows the lessee to purchase the underlying asset under predetermined conditions.

How Does a Lease Purchase Option Work?

The lessee can exercise a lease purchase option by notifying the lessor. Typically, the lease agreement specifies a purchase price and a specific time frame during which the option becomes available. While the details may vary from lease to lease, the fundamental principle remains constant—the decision to exercise the option lies solely with the lessee. This option to purchase introduces specific accounting considerations under ASC 842.

Lease Purchase Options Accounting Implications under ASC 842:

When a lease includes a purchase option, it must be properly recognized and accounted for according to ASC 842 guidelines. The accounting treatment depends on whether the lessee is likely or not likely to exercise the option. The threshold for “likely to exercise” is relatively high, requiring more than just a higher probability. If deemed likely to exercise, the asset is amortized over its useful life instead of the lease term, which is typically a longer period.

Bargain Purchase Options:

A special case of a lease purchase option is a bargain purchase option. This option is structured to give the lessee a strong economic incentive to purchase the asset. Often referred to as a “dollar purchase option,” it allows the lessee to buy the asset for a nominal price at the end of the lease term. However, a bargain purchase option is not limited to a dollar value. If the purchase price is significantly below the asset’s fair value, it is classified as a bargain purchase.

In the case of a bargain purchase option, accounting rules dictate that it must be accounted for as if the lessee will exercise the option. Regardless of the likelihood of exercise, the asset is amortized over its useful life rather than just the lease term. This accounting treatment ensures that failing to exercise a bargain purchase option would be against the lessee’s economic interests.

Purchase Election without a Purchase Option:

In situations where a lease does not have a purchase option, but the lessee elects to purchase the asset at a later stage through an agreement with the lessor, there is a methodology for exercising the purchase price. This includes adjusting the value of the consideration paid and automatically updating the fixed asset register by replacing the intangible right-of-use asset with the value of the asset and accumulated depreciation.

Lease purchase options offer companies the flexibility to convert leases into fixed assets by exercising their right to purchase the leased asset. Understanding the intricacies of lease purchase options and their accounting implications under ASC 842 is crucial for accurate financial reporting. By effectively managing lease agreements and accounting for lease purchase options, businesses can streamline their lease administration and maintain compliance with accounting standards while making informed decisions regarding asset acquisition.

What is Fixed Asset Accounting?

Fixed asset accounting revolves around the systematic recording and monitoring of a company’s tangible assets, such as buildings, machinery, equipment, and vehicles. These assets often represent substantial investments and have long-term value for the organization. To efficiently handle fixed asset accounting, companies employ a fixed asset register—a solution that works in tandem with accounting platforms like Visual Lease.

What are Leasehold Improvements?

One aspect where fixed asset accounting and lease administration intersect is leasehold improvements. When companies lease premises, they may need to undertake custom work to adapt the space to their specific requirements. These leasehold improvements can range from structural modifications to interior design alterations. The costs incurred in making these improvements, both reimbursed and self-funded, must be accounted for accurately.

Accounting for Fixed Assets:

The accurate handling of leasehold improvements becomes crucial when adhering to lease accounting standards such as ASC 842 or IFRS 16. These standards outline the guidelines for recognizing, measuring, and disclosing leases and lease-related expenses. To ensure compliance, the expenses related to leasehold improvements must be appropriately categorized within the lease accounting framework.

The Role of the Fixed Asset Register:

Within the fixed asset register, companies need to account for the materials and labor costs associated with leasehold improvements. This allows them to maintain a comprehensive overview of their fixed assets and their respective values. The fixed asset register serves as a repository for recording the financial impact of leasehold improvements, ensuring accurate reporting and compliance with accounting regulations.

Fixed asset accounting plays a vital role in accurately tracking, managing, and reporting a company’s tangible assets. When combined with lease administration, it becomes even more crucial to accurately account for leasehold improvements and comply with relevant lease accounting standards. By leveraging dedicated fixed asset registers and integrating them with lease accounting platforms, companies can effectively manage their assets, ensure compliance, and streamline financial reporting processes.

Prepaid rent refers to lease payments made in advance for a future period. It represents an asset on the company’s balance sheet, as the prepayment can be utilized to offset rent expenses in the future when it is incurred. By recording prepaid rent, companies ensure accurate accounting of their lease obligations and optimize the allocation of expenses over time.

Is prepaid rent an asset? 

Yes, prepaid rent is considered an asset in accounting. When a company pays rent in advance for a future period, it has a prepaid rent amount that represents the right to use the leased property in the future. This prepaid amount is recorded as an asset on the balance sheet. As time passes and the rent expense is incurred, the prepaid rent is gradually recognized as an expense, resulting in a reduction of the prepaid rent asset over time.

Prepaid Rent under ASC 842

When it comes to accounting for leases under ASC 842, one area that can be confusing is prepaid rent. Under the previous accounting standard, ASC 840, prepaid rent was recognized as an asset on the balance sheet and expensed over time. However, under ASC 842, there are some key differences to keep in mind.

1. Prepaid rent is not recognized as such under ASC 842. While you can prepay rent ahead of time, the only time this will be recognized is prior to the commencement of the lease term. In other words, if you prepay rent for a future period, that amount will not be recognized as a prepaid asset on the balance sheet under ASC 842.
2. Under ASC 842, you will have a right-of-use asset and a lease liability on the balance sheet. The lease liability reflects all of the future payments that you owe under the lease agreement, and the right of use asset represents the right to use the leased asset over the term of the lease. 
3. If you have prepaid rent under ASC 842, the amount of that prepayment will not be included in the lease liability. However, it will be reflected in the right-of-use asset side. This is because the prepayment has already been made and is considered a reduction of the future lease payments owed.

Straight-Line Rent Calculations Under ASC 842

It is important to note that prepaid rent will not impact the straight-line rent calculation. Straight-line rent is an even amount that is applied to every single month, regardless of whether a cash rent payment is made or not. Therefore, when the prepaid rent is applied, there will be no reduction in the lease liability for that month. However, the right-of-use asset will be amortized, which will be recognized as an expense on the income statement.

It is essential to understand the differences related to prepaid rent under ASC 842 for accurate lease accounting. Properly recognizing prepaid rent can help ensure that your financial statements comply with the new standard and provide an accurate depiction of your company’s financial position. 

What are the key considerations for lease purchasing options and fixed assets?

1. Economic Incentives and Intent

When a lessee intends to exercise an optional purchase or there is a bargain purchase price, it creates an economic incentive for acquiring ownership. Referred to as lease-to-own accounting, this approach assumes eventual ownership at the end of the lease term.

2. Finance Lease Treatment

In cases where the lessee intends to exercise an option or there is a bargain purchase price, the lease must be treated as a finance lease. This classification affects the accounting treatment and financial reporting.

3. Amortization and Useful Life

Instead of amortizing the right-of-use assets solely over the lease term, lease-to-own accounting involves amortizing the asset’s value over its useful life. The expectation of ownership at the end of the lease justifies a longer amortization period.

4. Operating Lease Possibility

If there is an option to purchase, but it is deemed unlikely to be exercised, the lease may still qualify as an operating lease based on specific circumstances. This determination depends on various factors and should be carefully assessed.

5. Remeasurement and Finance Lease Conversion

Once the lessee decides to exercise or intends to exercise the purchase option, the lease requires remeasurement. This results in the lease being reclassified as a finance lease, with a longer amortization period.

6. Fixed Asset Accounting

After the lease is purchased, the right-of-use asset and any accumulated amortization are reversed from the books. The asset is then transferred to the fixed asset register and accounted for in accordance with established fixed asset accounting practices.

Make Informed Decisions with Lease-to-Own Accounting

Understanding lease purchasing options and the associated lease-to-own accounting is vital for businesses considering acquiring fixed assets through leasing arrangements. By correctly accounting for these transactions, companies can ensure accurate financial reporting and align their accounting practices with regulatory requirements. 

Update: On June 26, 2023, The International Sustainability Standards Board (ISSB) announced their first two global sustainability-related disclosure standards in response to widespread demand for better transparency, consistency and reliability into sustainability plans and performance. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 establishes the specific requirements for climate-related disclosures.

While the Standards will ensure that organizations are reporting on robust sustainability data that is both verifiable and comparable, many companies are not yet prepared for the required effort. This blog post details three steps organizations can take to establish a baseline for reporting.

ESG reporting requirements are standards for how a company tracks and reports its Environmental, Social and Governance behavior. Although U.S. requirements have not yet been finalized, it is clear that these requirements will have a significant impact on organizations with the potential to mitigate environmental risk and improve sales through positive brand recognition. 

Socially conscious investors are the best-known driving force behind an organization’s adoption of ESG reporting, but the practice has been gaining more momentum among regulators in recent years. Recently, The International Sustainability Standards Board (ISSB), a branch of IFRS, announced that businesses should start prioritizing climate-related disclosures. Further ESG regulations from the ISSB, SASB and SEC are also expected to go into effect. Even though Europe is further along on the ESG journey than the U.S. is, many U.S.-based companies are likely already impacted by EU regulations, and there are widespread efforts to implement global regulations.

However, many organizations are not yet prepared for what’s ahead as it relates to ESG reporting and goal setting. In fact, only 5% of Senior Real Estate executives said their company’s ESG program is fully established. By waiting for regulations to be fully finalized, organizations are placing themselves at a disadvantage. One of the main factors holding companies back is not knowing what their current environmental impact is and how they can make the changes required to get on track. However, finance teams are in a unique position to be able to help their organizations proactively get a handle on their owned and leased assets, providing them with a strong understanding of their environmental impact. 

This blog post will highlight three ways to get ahead of ESG reporting requirements: 

Three Ways Finance Teams Can Prepare for ESG Reporting Requirements 

1. Create an ESG task force

In order to effectively manage owned and leased assets throughout their entire lifecycle, it is essential for organizations to establish a task force dedicated to Environmental, Social, and Governance (ESG) initiatives. This task force will involve multiple stakeholders, such as finance, real estate, procurement, accounts payable, legal, and others. By clearly defining roles and responsibilities within the task force, organizations can streamline decision-making processes and ensure that the right individuals are involved at each stage.

One crucial responsibility of the ESG task force is to stay informed about ESG reporting guidance, emerging regulations, and relevant laws. It is important to designate at least one member of the task force to monitor additional updates from regulatory bodies like the Securities and Exchange Commission (SEC) and the ISSB. This individual should possess a comprehensive understanding of key concepts, such as differentiating between scope 1 and 2 emissions. By staying up to date with evolving requirements, the task force can proactively address any necessary changes and maintain compliance.

Establishing an ESG task force will ensure that your company has a dedicated team focused on tracking, reporting, and fulfilling ESG requirements. This team will play a crucial role in gathering and analyzing data, monitoring progress, and making informed decisions regarding ESG initiatives. By centralizing these efforts, your organization can effectively engage stakeholders and demonstrate its commitment to sustainability and responsible business practices.

2. Decide how to track and report data long-term

Implementing a centralized system of record not only empowers organizations to gain insights into their portfolio of owned and leased assets and optimize financial expenditures but also, enables them to track and assess the environmental impact of these assets. By leveraging such a system, organizations can make informed decisions based on real-time data and begin taking steps to mitigate their carbon footprint related to their real estate and equipment leases, as well as owned properties.

For instance, as a company’s lease approaches its end, they can use the centralized system to compare the carbon emissions of their current leased office space with alternative options. This analysis can help them determine if relocating to a different space could lead to a significant reduction in their carbon footprint. By identifying and selecting environmentally friendly alternatives, organizations can align their operational practices with their sustainability goals and contribute to a more eco-friendly future.

3. Establish a strong lease controls framework 

To empower the cross-departmental collaboration required to effectively manage, track, report and analyze owned and leased asset data, organizations must implement dedicated technology. A solution that provides a strong lease controls framework will mitigate the risk of reporting errors, ensure that the right people have the right access to the right information at the right time, and also, provide access to meaningful insights. 

Virtual Lease recently launched VL ESG Steward to do all this and more. It is the first solution to push real estate, procurement, facilities and finance teams to go beyond portfolio optimization, accounting and compliance to focus on the environmental impact of their assets, projects and processes. 

ESG Steward is built in accordance with GRI, CSRD, and the Greenhouse Gas Protocol – the global gold standard for ESG and Emissions reporting guidance, ensuring accuracy, consistency and compliance with regulations and enabling organizations to tie hard data to their environmental disclosures with supporting evidence to substantiate claims of progress with confidence.

For more information on how Visual Lease can help your business get ahead of ESG regulation requirements, schedule time with our team. 

• What is a finance lease?
• What is an operating lease?
• Key Characteristics of an Operating Lease
• Finance Leases vs. Operating Leases
• Understanding finance leases and operating leases
• How does ASC 842 impact lease classification?
• What is the Expense Profile for Operating vs. Finance Leases?

Finance leases and operating leases are two common types of lease arrangements that businesses encounter. With the introduction of the ASC 842 accounting standard, the classification and treatment of leases have evolved. In this blog post, we will delve into the distinctions between finance leases and operating leases and discuss how ASC 842 impacts the accounting for these lease types.

What is a finance lease?

A finance lease, also known as a capital lease, is a type of lease agreement in which one party, typically a lessor, allows another party, the lessee, to use and control a specific asset for an extended period of time in exchange for lease payments. A finance lease is structured so that the lessee essentially assumes many of the economic benefits and risks associated with owning the leased asset.

Key Characteristics of a Finance Lease

1. Ownership Transfer: Finance leases often include an option for the lessee to purchase the asset at the end of the lease term for a nominal amount, commonly referred to as the “bargain purchase option.”
2. Long-Term Commitment: : Finance leases are generally long-term agreements, often spanning a substantial portion of the asset’s useful life. They are typically structured to match the asset’s economic life.
3. Risk and Rewards: In a finance lease, the lessee usually takes on the risks and rewards associated with the leased asset. This includes responsibilities like maintenance, insurance, and any potential residual value.
4. Accounting Treatment: In financial accounting, finance leases are recorded on the lessee’s balance sheet as both an asset and a liability. This is because the lessee is considered to have acquired a significant portion of the economic ownership of the asset.

Finance Leases vs. Operating Leases

Finance leases and operating leases differ significantly in their characteristics and accounting treatment. In a finance lease, the lessee often has the option to purchase the asset at the end of the lease term through a “bargain purchase option,” and they take on the risks and rewards of ownership. These leases are typically long-term and are recorded on the lessee’s balance sheet as both assets and liabilities. On the other hand, operating leases are short-term, with the lessor retaining ownership of the asset throughout the lease term. Lease payments for operating leases are generally treated as operating expenses and do not appear on the lessee’s balance sheet. The choice between these two lease types can have a significant impact on a company’s financial statements and decision-making processes.

Defining Operating Leases

An operating lease is a type of lease agreement in which one party, known as the lessor (the owner of the asset), allows another party, the lessee, to use and control a specific asset for a defined period of time without transferring ownership of the asset. Operating leases are often used for short-term or non-core assets and typically have more flexibility compared to finance leases.

What is an operating lease?

Short-Term: Operating leases are generally short-term agreements, covering a fraction of the asset’s total economic life. They do not typically extend for the entire useful life of the asset.

Ownership Retained: In an operating lease, the lessor retains ownership of the leased asset throughout the lease term. The lessee does not usually have the option to purchase the asset at the end of the lease period.

Maintenance and Risk: The lessor is typically responsible for maintaining the asset and bearing the risks associated with ownership, such as changes in the asset’s value.

Accounting Treatment: From an accounting perspective, operating leases are generally not recognized as assets and liabilities on the lessee’s balance sheet. Instead, lease payments are typically recorded as operating expenses.

Finance Leases vs. Operating Leases

Finance leases and operating leases differ significantly in their characteristics and accounting treatment. In a finance lease, the lessee often has the option to purchase the asset at the end of the lease term through a “bargain purchase option,” and they take on the risks and rewards of ownership. These leases are typically long-term and are recorded on the lessee’s balance sheet as both assets and liabilities. On the other hand, operating leases are short-term, with the lessor retaining ownership of the asset throughout the lease term. Lease payments for operating leases are generally treated as operating expenses and do not appear on the lessee’s balance sheet. The choice between these two lease types can have a significant impact on a company’s financial statements and decision-making processes.

Understanding finance leases and operating leases.

Under the previous ASC 840 standard, capital leases were categorized as financing arrangements and were recorded on the balance sheet, while operating leases were treated as a right to use the asset and remained off-balance sheet. However, this off-balance sheet accounting approach led to concerns, prompting the transition to the ASC 842 standard.

How does ASC 842 impact lease classification?

ASC 842 mandates that both finance leases and operating leases be recognized on the balance sheet. This change ensures greater transparency in lease accounting.

• In ASC 842, finance leases are now considered right-of-use assets, categorized as intangible assets. Instead of being expensed, these assets are amortized over their useful life. Finance leases also entail the recognition of separate interest expenses, which decline over time as the lease liability decreases.
• Similar to finance leases, operating leases under ASC 842 involve the recognition of right-of-use assets as intangible assets. However, the key distinction lies in expense recognition. Operating leases are expensed using a straight-line method, where lease payments are evenly distributed over the lease term. This results in a consistent lease expense throughout the lease duration.

What is the Expense Profile for Operating vs. Finance Leases?

The expense profile for finance leases differs from that of operating leases. Finance leases have higher expenses in the initial months and progressively decrease as the lease term progresses. On the other hand, operating leases maintain a constant expense level throughout the lease duration.

Understanding the differences between finance leases and operating leases is essential for businesses navigating lease accounting under ASC 842. With both types of leases now recognized on the balance sheet, organizations can provide more transparent financial reporting. By grasping the nuances of these lease classifications and their respective expense profiles, businesses can comply with accounting standards and make informed decisions regarding lease arrangements.

• What is Off-Balance Sheet Financing?
• ASC 842 Impact on Reporting Leases
• Importance of On-Balance Sheet Reporting
• Legal Regulations: The SEC’s Strict Stance

Off-balance sheet financing refers to financial arrangements that are not reflected on a company’s balance sheet. Historically, operating leases were a prime example of off-balance sheet financing, where lease obligations were footnoted rather than recorded as liabilities. However, due to concerns surrounding transparency and misleading financial reporting, regulatory bodies like the FASB and the SEC have introduced measures to bring off-balance sheet items onto the balance sheet. In this blog post, we will explore the concept of off-balance sheet financing, its implications, and the influence of ASC 842 on lease accounting.

What is Off-Balance Sheet Financing?

Off-balance sheet financing encompasses financing arrangements that do not appear as liabilities or assets on a company’s balance sheet. This practice can create challenges in accurately assessing a company’s financial health and obligations. While some companies used off-balance sheet financing to manage their debt coverage ratios or ease their reporting workload, prominent cases of abuse and fraud, such as Enron, prompted regulatory actions to address these concerns.

ASC 842 and On-Balance Sheet Leases.

Under ASC 842, both operating leases and finance leases are now required to be recorded on the balance sheet, with limited exceptions for leases. The goal is to enhance transparency and provide investors with a comprehensive view of a company’s financial obligations. Companies are expected to comply with Generally Accepted Accounting Principles (GAAP) and disclose any non-GAAP financing, even if it is not reflected on the balance sheet.

Importance of On-Balance Sheet Reporting.

Bringing leases onto the balance sheet enables stakeholders to assess a company’s financial position more accurately. It eliminates potential distortions caused by off-balance sheet financing, allowing investors, creditors, and analysts to make informed decisions based on reliable financial information. The increased disclosure requirements ensure that companies are transparent about their financial commitments and avoid misleading practices.

Legal Regulations: The SEC’s Strict Stance.

The SEC has taken a stringent approach to off-balance sheet financing. Recent comments on company financial statements indicate a heightened focus on non-GAAP transactions. Companies are advised to exercise caution and maintain compliance with accounting standards to avoid repercussions and maintain investor trust. Non-compliance may lead to increased scrutiny and potential legal consequences.

Off-balance sheet financing, once prevalent in operating leases, has undergone significant changes with the introduction of ASC 842. By requiring companies to include lease obligations on the balance sheet, transparency and accuracy in financial reporting have improved. While there are limited exceptions for short-term leases, the overall trend is toward greater disclosure and accountability. Companies should adhere to GAAP guidelines, disclose non-GAAP transactions, and stay updated with regulatory requirements to foster trust and provide stakeholders with a comprehensive understanding of their financial position.

Ready to Streamline Your Lease Accounting under ASC 842?

The transition from off-balance sheet financing to on-balance sheet reporting under ASC 842 represents a significant shift in lease accounting. Companies should prioritize adherence to Generally Accepted Accounting Principles (GAAP) and stay vigilant about regulatory requirements to avoid legal consequences and maintain investor confidence. With tools like Visual Lease, you can simplify the process and ensure that your lease data is managed efficiently and accurately.

The post Unraveling Off-Balance Sheet Financing: Understanding Its Impact and ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/lease-controls-for-business-success/ Thu, 15 Jun 2023 15:08:41 +0000 https://visuallease.com/?p=8093 From Compliance to Optimization: Harnessing Lease Controls for Business Success Lease accounting standards implemented over the last few years (ASC 842, IFRS 16, GASB 87) require all organizations, whether they...
The post Lease Controls for Business Success | Visual Lease first appeared on Visual Lease.]]> From Compliance to Optimization: Harnessing Lease Controls for Business Success

Lease accounting standards implemented over the last few years (ASC 842, IFRS 16, GASB 87) require all organizations, whether they be private, public or government entities, to account for their leases on the balance sheet. This paradigm shift has ushered in a more comprehensive reporting process, demanding greater attention to detail from finance teams across industries.

While for many, the path toward achieving lease accounting compliance was a challenging one, it has also put organizations in a position to take advantage of their lease management practices and implement a strong lease controls framework. In doing so, they will recognize substantial business benefits, including:

Maximized Value and Reduced Costs

Real estate leases are an expensive portfolio of holdings for any business. On average, retailers spend about 11% of their annual gross sales on rent, according to data from NewMark Merrill, and office users can spend up to 20% of their business revenue on rent. Rent fees are just part of the cost structure of a lease. Most businesses will spend $2.14 per square foot on energy consumption, $2.15 per square foot on maintenance and $1.68 on cleaning – as real estate costs increase, business operating costs increase in step. 

Although real estate equates to significant cost expenditures, businesses rarely know the true extent. Research from the Visual Lease Data Institute (VLDI) found that 71% of organizations are not confident they know the full cost of their leases. Technology-backed lease controls – defined as policies and procedures designed to prevent or detect unauthorized acquisition, use or disposition of these assets – can change that. 

When organizations have proper systems and processes designed to safeguard and manage their leases, they will gain insight into the full value and cost of each lease, allowing them to be proactive in responding to lease obligations, like maintenance responsibilities, rate increases and CAM charges, as well as understanding termination rights if a lease isn’t working for or benefiting the business. In addition, proper lease control systems can help businesses save money. Data from Accenture shows that proper real estate optimization, which can only be achieved with strong lease controls in place, results in annual real estate operating expense reductions in the 12 – 20% range.

Streamlined Processes and Reallocated Resources

Sustained lease accounting compliance takes an enormous effort for finance and compliance teams as they attempt to keep track of all the moving parts and pieces of their organization’s lease portfolio. By implementing dedicated lease management technology that provides a customizable lease controls framework, organizations will greatly simplify their lease management and reporting processes.  

In fact, a 2022 VLDI survey shows private companies save an average of 600 hours when utilizing lease accounting software to manage lease controls. This is particularly valuable in light of the severe shortage of accounting professionals. 

A 2021 report from The American Institute of Certified Public Accountants found that fewer people are entering the accounting field with bachelor’s degree candidates down 2.8% and master’s degree candidates down 8.4%. Still, three-quarters of companies plan to continue to hire new graduates at the same rate each year. Implementing technology that facilitates strong lease controls can lessen the time spent on manual tasks and empower accounting and finance teams to tackle more strategic work, helping businesses address the talent shortage by better utilizing their existing resources.

Increased Focus on Business Objectives and Growth

The Visual Lease Data Institute found that 45% of companies have overpaid rent or expenses due to inadequate lease controls, meaning they’re not properly managing, tracking and analyzing these agreements. In many cases, this cavalier approach can compromise an organizations’ ability to grow in what are already challenging economic times. 

Businesses with technology that supports proper lease controls can better respond to market real estate availability, create a real estate strategy that reflects their needs and gain an upper hand in negotiations without the pressure of time constraints. With a functional and targeted real estate strategy, companies and government entities will improve operations, minimize capital expenditures and realize organizational growth. 

The post Lease Controls for Business Success | Visual Lease first appeared on Visual Lease.]]> https://visuallease.com/fixed-asset-accoutning-leasehold-improvements/ Tue, 30 May 2023 15:48:17 +0000 https://visuallease.com/?p=8057 Fixed Asset Accounting: Managing Assets and Leasehold Improvements In the realm of financial accounting, fixed asset accounting holds significant importance for companies. It involves the meticulous tracking and management of...
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Fixed Asset Accounting: Managing Assets and Leasehold Improvements

In the realm of financial accounting, fixed asset accounting holds significant importance for companies. It involves the meticulous tracking and management of owned assets, ensuring their existence, location, and allocation within the organization. Additionally, fixed asset accounting intersects with lease accounting, particularly concerning leasehold improvements. This blog post delves into the intricacies of fixed asset accounting, highlighting its role in lease administration and the need for distinct yet integrated systems.

What is Fixed Asset Accounting?

Fixed asset accounting revolves around the systematic recording and monitoring of a company’s tangible assets, such as buildings, machinery, equipment, and vehicles. These assets often represent substantial investments and have long-term value for the organization. To efficiently handle fixed asset accounting, companies employ a fixed asset register—a solution that works in tandem with accounting platforms like Visual Lease.

What are Leasehold Improvements?

One aspect where fixed asset accounting and lease administration intersect is leasehold improvements. When companies lease premises, they may need to undertake custom work to adapt the space to their specific requirements. These leasehold improvements can range from structural modifications to interior design alterations. The costs incurred in making these improvements, both reimbursed and self-funded, must be accounted for accurately.

Accounting for Fixed Assets:

The accurate handling of leasehold improvements becomes crucial when adhering to lease accounting standards such as ASC 842 or IFRS 16. These standards outline the guidelines for recognizing, measuring, and disclosing leases and lease-related expenses. To ensure compliance, the expenses related to leasehold improvements must be appropriately categorized within the lease accounting framework.

The Role of the Fixed Asset Register:

Within the fixed asset register, companies need to account for the materials and labor costs associated with leasehold improvements. This allows them to maintain a comprehensive overview of their fixed assets and their respective values. The fixed asset register serves as a repository for recording the financial impact of leasehold improvements, ensuring accurate reporting and compliance with accounting regulations.

Fixed asset accounting plays a vital role in accurately tracking, managing, and reporting a company’s tangible assets. When combined with lease administration, it becomes even more crucial to accurately account for leasehold improvements and comply with relevant lease accounting standards. By leveraging dedicated fixed asset registers and integrating them with lease accounting platforms, companies can effectively manage their assets, ensure compliance, and streamline financial reporting processes.

The post Fixed Asset Accounting: Leasehold Improvements first appeared on Visual Lease.]]> https://visuallease.com/esg-in-real-estate-and-industry-changes/ Mon, 15 May 2023 13:13:31 +0000 https://visuallease.com/?p=8026 ESG and the Future of Real Estate: How Sustainability is Changing the Industry The real estate industry is undergoing a significant transformation as sustainability becomes a top priority for investors...
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ESG and the Future of Real Estate: How Sustainability is Changing the Industry

The real estate industry is undergoing a significant transformation as sustainability becomes a top priority for investors and stakeholders. Environmental, social, and governance (ESG) factors are now being considered in real estate valuation, and investors are using ESG data to make informed decisions about asset performance. In this blog post, we will explore how sustainability is changing the real estate industry and what investors need to know about ESG.

What ESG Factors are being considered in real estate valuation?

ESG is gaining importance among capital providers, and investors are using ESG data to evaluate the sustainability of real estate assets. ESG factors such as energy efficiency, water conservation, and waste reduction are now being considered in real estate valuation, and buildings that meet sustainability standards are more attractive to investors.

1. Energy efficiency: Investors are looking for energy-efficient buildings with low carbon footprints. This includes buildings with efficient HVAC systems, LED lighting, and renewable energy sources.
2. Water conservation: Investors are also looking for buildings that conserve water and have efficient water management systems. This includes buildings with low-flow fixtures, rainwater harvesting systems, and water-efficient landscaping.
3. Waste reduction: Investors are looking for buildings that have effective waste management systems and reduce waste through recycling and composting.
4. Social impact: Investors are looking for buildings that have a positive social impact on the community. This includes buildings that provide affordable housing, support local businesses, and promote diversity and inclusion.
5. Governance: Investors are looking for buildings that have strong governance structures and ethical leadership. This includes buildings that have transparent reporting, strong risk management, and effective stakeholder engagement.

ESG is becoming a material risk and opportunity for real estate investors and other stakeholders. As climate change and other sustainability issues become more pressing, investors are looking for ways to future-proof their assets against shocks and disruptions. This means that real estate managers must take a proactive approach to sustainability and change their assets to meet ESG standards.

How is ESG driving innovation in the real estate industry?

Developers and investors are exploring new technologies and strategies to reduce the environmental impact of buildings and improve their sustainability. Here are the top 5 ESG-related technologies becoming more common in new real estate developments.

1. Solar panels: Solar panels are a popular way to generate renewable energy and reduce a building’s carbon footprint. They can be installed on rooftops or as standalone structures and can provide a significant portion of a building’s energy needs.
2. Efficient lighting: LED lighting is becoming more common in real estate developments as it is more energy-efficient than traditional lighting. Smart lighting systems can also be used to optimize energy use and reduce waste.
3. Insulation: Proper insulation is essential for reducing energy consumption and improving a building’s energy efficiency. Insulation materials such as spray foam, cellulose, and fiberglass can be used to reduce heat loss and improve indoor air quality.
4. Smart technology: Smart technology can be used to optimize energy use and reduce waste. For example, smart thermostats can be used to regulate heating and cooling systems, while smart sensors can be used to monitor energy use and identify areas for improvement.
5. Tankless water heaters: Tankless water heaters are becoming more common in real estate developments as they are more energy-efficient than traditional water heaters. They can provide hot water on demand and reduce energy consumption by up to 30%.

What are the benefits of embracing ESG in real estate? 

According to the US Green Building Council, green buildings cost 2% more to build on average, but they save 14% to 19% in operational expenditures. This means that while the upfront costs of green technology may be higher, the lifetime savings can be significant.

Energy-efficient systems can help reduce utility bills, while sustainable features can increase a building’s resale value. In fact, building owners are seeing a 10% or greater increase in property value after investing in green buildings. Additionally, sustainable real estate investments have been shown to outperform traditional real estate investments in terms of risk-adjusted returns.

If you’re looking for a solution to track ESG reporting across your real estate portfolio, check out VL’s ESG Steward.

 

The post ESG in Real Estate & Industry Changes first appeared on Visual Lease.]]> https://visuallease.com/related-party-leases-under-asc842/ Wed, 10 May 2023 12:42:44 +0000 https://visuallease.com/?p=7981 Related Party Leases under ASC 842 Recently, the Financial Accounting Standards Board (FASB) introduced new rules and clarifications regarding the treatment of related party leases under ASC 842. Although these...
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Related Party Leases under ASC 842

Recently, the Financial Accounting Standards Board (FASB) introduced new rules and clarifications regarding the treatment of related party leases under ASC 842. Although these rules apply to all related party leases, their impact is most significant for private business entities. This blog post aims to provide an overview of these developments and highlight the key considerations for companies navigating related party leases under ASC 842.

Related Party Leases: Key Considerations

1. Putting Agreements in Writing: FASB has introduced a crucial change requiring companies to document related party leases explicitly. Previously, private businesses often treated these leases informally to cut costs. The original rule required examining legally enforceable terms, leading to expensive attorney opinion letters. FASB’s amendment allows companies to account for related party leases based on the terms written in a simple agreement, simplifying compliance.
2. Accounting for Leasehold Improvements: Under ASC 842, related party leases involving leasehold improvements face important considerations. Previously, if the improvements had a longer lifespan than the lease term, it could result in accelerated write-offs and unusual expenses. The current standard allows companies to amortize leasehold improvements over their useful life. If the related party lease ends before the improvements’ useful life, adjusting entries are made to align the books properly. This prevents excessive burden on the subleasing company’s financial statements.

3 Considerations for Related Party Leases Under ASC 842

When considering related party leases under ASC 842, here are the top three things to keep in mind:

1. Document the Agreement: Regardless of the complexity or length, it is essential to put related party lease agreements in writing. This documentation should cover the majority of the terms agreed upon by the related parties. By formalizing the lease agreement, companies can ensure compliance with the accounting standards and avoid unnecessary complications.
2. Accounting for Leasehold Improvements: If the related party lease involves leasehold improvements with a longer lifespan than the lease term, companies should amortize the costs of these improvements over their useful life. This approach prevents accelerated write-offs and unusual expense patterns. In case the lease terminates before the completion of the improvements’ useful life, adjusting entries should be made to align the books accordingly.
3. Seek Professional Guidance: Given the complexity of accounting standards and the potential impact on financial statements, it is advisable to consult with accounting professionals or experts familiar with ASC 842. They can provide valuable insights and guidance tailored to the specific circumstances of related party leases.

Implications of Related Party Leases for Private Businesses

The recent developments introduced by FASB regarding related party leases under ASC 842 have significant implications, particularly for private business entities. By ensuring that related party leases are properly documented and by accounting for leasehold improvements in line with the rules, companies can comply with the standards while maintaining accurate and transparent financial reporting. Seeking professional guidance is crucial to navigating these accounting complexities effectively. By staying informed and adhering to the updated rules, businesses can mitigate risks and make sound financial decisions in the context of related party leases.

If your organization is struggling with sustainable ASC 842 compliance, you’re not alone.  Join the thousands of companies that have switched to Visual Lease to confidently maintain compliance.

 

The post Related Party Leases under ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/gaap-vs-tax-accounting-financial-reporting/ Tue, 02 May 2023 20:49:55 +0000 https://visuallease.com/?p=7964 GAAP vs. Tax Accounting: Navigating the Complexities of Financial Reporting With the introduction of ASC 842, some private companies are struggling with the requirement to record the vast majority of...
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GAAP vs. Tax Accounting: Navigating the Complexities of Financial Reporting

With the introduction of ASC 842, some private companies are struggling with the requirement to record the vast majority of their leases to the balance sheet. As a result, some organizations are turning to tax basis to file statements instead of following the new lease accounting rules.

GAAP (Generally Accepted Accounting Principles) and tax accounting are two different sets of accounting standards that companies are required to follow. While both are used to report financial information, they have different purposes and requirements.

What is GAAP?

GAAP is the set of rules and guidelines that publicly traded companies in the United States must follow when preparing financial statements for external stakeholders, such as investors, creditors, and regulators. GAAP principles are designed to ensure that financial statements are accurate, complete, and comparable across companies.

What is Tax Accounting?

On the other hand, tax accounting is used to calculate a company’s tax liability to the government. The Internal Revenue Service (IRS) requires companies to report their taxable income based on the tax code and regulations, which can differ significantly from GAAP principles.

GAAP vs. Tax Accounting

The main difference between GAAP and tax accounting is their objectives. While GAAP is focused on providing accurate financial information to external stakeholders, tax accounting is focused on complying with tax laws and regulations. This difference in objectives can lead to discrepancies between the two accounting methods, making it difficult to reconcile financial information.

What are some examples of discrepancies between GAAP and tax accounting?

• Timing of revenue: GAAP requires revenue to be recognized when it is earned, regardless of when it is received. On the other hand, tax accounting requires revenue to be recognized when it is received, regardless of when it is earned. This can create discrepancies in revenue recognition between the two methods, leading to different reported profits.
• Treatment of depreciation: GAAP allows for different depreciation methods, such as straight-line or accelerated depreciation, based on the useful life of the asset. Tax accounting, however, requires companies to use specific depreciation methods, such as the Modified Accelerated Cost Recovery System (MACRS), which can differ from GAAP methods.

These differences between GAAP and tax accounting can create challenges for companies when reconciling financial information. Companies must ensure that their financial statements are accurate and complete, while also complying with tax laws and regulations. This can require significant resources and expertise, as well as the use of specialized software and tools to manage the complexity of the reconciliation process.

Additionally, tax basis financial statements may not be accepted by all users, such as lenders and investors, who may require GAAP financial statements. Private companies that use tax basis financial statements may need to provide additional disclosures to explain the differences between tax basis and GAAP financial statements.

Finding The Right Technology:  GAAP Accounting Software

The biggest challenge in accounting, regardless of whether it is GAAP vs. tax accounting, is tracking down data, managing changes, and maintaining controls.  Managing leases, for example, can be a challenging and complex process, regardless of the accounting basis used.

• For example, if a company is using GAAP accounting, they need a lease management system that can track and manage lease data in accordance with GAAP principles.
• Similarly, if a company is using tax accounting, they need a system that can handle the specific tax regulations and requirements related to lease transactions.

Companies must have strong controls and processes in place to ensure that their lease accounting and management data is accurate and up to date. Companies may need to invest in specialized software and tools to manage the complexity of lease accounting and ensure compliance with accounting methods.

 

 

The post GAAP vs. Tax Accounting: Financial Reporting first appeared on Visual Lease.]]> https://visuallease.com/accrued-rent-and-deferred-rent-in-asc842/ Fri, 28 Apr 2023 18:32:59 +0000 https://visuallease.com/?p=7956 Table of Contents What is Accrued Rent? What is Deferred Rent? Accrued Rent vs. Deferred Rent: What’s the difference? Accrued Rent Example Deferred Rent Example Key Considerations for Rent Accounting...
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Table of Contents

• What is Accrued Rent?
• What is Deferred Rent?
• Accrued Rent vs. Deferred Rent: What’s the difference?
• Accrued Rent Example
• Deferred Rent Example
• Key Considerations for Rent Accounting under ASC 842

Understanding Accrued Rent and Deferred Rent in ASC 842 Accounting

Rent is one of the largest expenses that companies face, and it’s critical to properly account for it. Under the new accounting standard ASC 842, there are some changes to how rent is accounted for. Two important concepts to understand in rent accounting are 1. accrued rent and 2. deferred rent. In this post, we will explore what these terms mean, the difference between them, and what to keep in mind when it comes to rent accounting under ASC 842.

What is Accrued Rent?

Accrued rent is a type of rent expense that has been recognized but not yet paid. It represents the difference in timing between paying rent and the actual cash payment of rent. In a traditional straight-line application, rent is expensed equally across the lease’s entire term. However, the actual rent payments made may vary depending on the lease agreement. In some cases, the rent may be expensed when no rent is paid, resulting in accrued rent.

Accrued rent is a liability under the ASC 840 methodology, but under ASC 842, there is no accrued rent. This is because there is already an asset and a liability recorded for the lease under the new standard.

What is Deferred Rent?

Deferred rent is the difference between the amount of rent paid and the rent expense. In a straight-line rent application, the rent paid in the early months of the lease is less than the rent paid in later months. This results in deferred rent, which is recorded as a liability on the balance sheet.

Accrued Rent vs. Deferred Rent: What’s the difference? 

Accrued rent and deferred rent are both accounting concepts that relate to the timing of rent payments and rent expense recognition, but they represent different scenarios.  Accrued Rent represents a difference in timing, whereas Deferred Rent represents a difference of amount in the period.

Under the new lease accounting standard, ASC 842, accrued rent is not recognized separately as a liability because the right-of-use asset recognized on the balance sheet already reflects the straight-line rent expense. The difference between the right-of-use asset and lease liability represents the deferred rent or prepaid rent.

Accrued Rent Example

Consider a scenario where a company enters into a lease agreement for office space at $10,000 per month. The lease agreement requires payment at the end of each quarter. At the end of the first month, the company accrues $10,000 as rent expense because it has utilized the office space for that period. However, the actual payment of rent doesn’t occur until the end of the quarter. Therefore, at the end of each month, the accrued rent increases by $10,000 until the payment is made at the end of the quarter.

Deferred Rent Example

Imagine a company signs a lease for equipment with a total lease term of five years. The lease agreement stipulates that the monthly rent for the first year is $1,000, but it gradually increases by $100 each year thereafter. In this case, the company pays $1,000 per month in rent, but the rent expense recognized in the early years is lower than the actual rent paid due to the gradual increase. Consequently, the difference between the rent paid and the rent expense recognized constitutes deferred rent, which accumulates over the lease term.

These examples illustrate the distinction between accrued and deferred rent and how they manifest in real-world lease agreements. Understanding these concepts is crucial for accurate financial reporting under ASC 842 accounting standards. For further insights into accrued and deferred expenses, refer to the article here.

Key Considerations for Rent Accounting under ASC 842

Rent accounting under ASC 842 can be complex and requires careful consideration. Here are some key things to keep in mind:

1. Identify lease arrangements: The first step is to identify all lease arrangements, including embedded leases, and determine if they meet the criteria for recognition under ASC 842.
2. Determine lease term: The lease term is the period during which the lessee has the right to use the leased asset. It includes the non-cancellable period of the lease plus any periods covered by options to extend or terminate the lease if they are likely to be exercised.
3. Determine lease payments: Lease payments include fixed payments, variable payments based on an index or rate, and any other amounts the lessee is required to pay under the lease.  Not all are included in the calculation of the Lease Liability and Right of Use Asset.  The details of the lease agreement and your accounting elections will determine the proper payments to include.
4. Calculate lease liability: The lease liability is the present value of lease payments, discounted using the lessee’s incremental borrowing rate. Private business entities have the option to use a risk-free rate in place of the incremental borrowing rate.  This represents the obligation to make lease payments over the lease term.
5. Calculate right-of-use asset: The right-of-use asset is the lease liability plus any initial direct costs and lease payments made before the lease commencement date. Lease incentives, deferred, and accrued rent can also impact the right-of-use asset value.  It represents the lessee’s right to use the leased asset over the lease term.
6. Recognize lease expense: If the lease is an operating lease, the lease expense is recognized on a straight-line basis over the lease term, unless there is a more appropriate basis for allocation.   If the lease is a finance lease, the lease expense is recognized as straight-line amortization of the right-of-use asset plus the period interest expense.

Overall, rent accounting under ASC 842 requires a detailed analysis of lease arrangements, lease terms, and lease payments, as well as careful consideration of transition requirements. It is important for entities to have robust processes and systems in place to ensure compliance with the standard.

 

 

The post Accrued Rent and Deferred Rent in ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/why-lease-management-shouldnt-be-ignored/ Wed, 26 Apr 2023 12:51:42 +0000 https://visuallease.com/?p=7951 “Why Lease Management Shouldn’t Be Ignored: The High Cost of Underestimating Your Lease Portfolio and How to Optimize It for Your Business Needs” Many companies are underestimating the total cost...
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“Why Lease Management Shouldn’t Be Ignored: The High Cost of Underestimating Your Lease Portfolio and How to Optimize It for Your Business Needs”

Many companies are underestimating the total cost of their lease portfolio when in reality, leases are often the second largest expense for organizations with most businesses spending 5% to 10% of total revenue per square foot on rent. And in accordance with lease accounting standards (ASC 842, IFRS 16 and GASB 87), companies must now account for these expensive assets on the balance sheet, further emphasizing just how critical it is for business leaders to keep close tabs on these complex agreements.

While it’s undeniable that leases are a critical part of businesses’ operations and financial reporting, many organizations wrongly assume that once executed, their work on these agreements is done. However, failing to invest in ongoing lease management and controls typically results in excess costs and overutilization of leased assets, such as real estate. For example, a recent survey from Accenture found that companies today could reduce spatial needs by as much as 40% – which could free up funds that could be allocated elsewhere.

3 Steps to Optimize the Value of Your Lease Portfolio

There are 3 key steps that companies can take to optimize the value of their lease portfolio to best serve their organization’s needs: 

1. Gather & Evaluate Your Leases


Corporate leases have a lot of components, from the basics like rental rate and lease terms to maintenance obligations, utilities, and employee utilization rates. With so many components to keep track of, 71% of companies have reported that they are not confident about the complete cost of their lease, and a startling 90% of senior real estate executives feel they do not have access to all the data they need to make informed decisions about their company’s lease portfolio. These statistics are alarming when you consider that leases are typically the  second-largest expense for most businesses.

To get full control over your portfolio, first take stock of all real estate and equipment leases within your organization, which are likely scattered in various locations and departments within your company. Thoroughly review each component, including terms and responsibilities, like common-area maintenance fees, insurance minimums, and deferred maintenance.

2. Utilize Technology


While businesses successfully utilize Excel to tackle many different needs, the fact of the matter is  those spreadsheets simply can’t accommodate how intricate and dynamic leases are, which inevitably leads to major reporting errors.  Once you’ve gathered all your leases, consider investing in dedicated technology that is  purpose-built to help you manage all the moving parts and pieces of your leases throughout their entire lifetime.

The Visual Lease Data Institute found that currently, 83% of companies are not prioritizing investments in the dedicated technology, people, and processes needed to successfully manage their lease-related expenses despite the fact that in a 2022 report, 45% of companies reported that using lease accounting software decreased associated costs. A similar survey from EY found that a technology-paired lease management program unlocked constrained resources and helped employees focus on high-value tasks, a major benefit when today, many organizations are being asked to do more with fewer resources.

Technology is permeating throughout organizations because of its benefits in streamlining processes and driving efficiency, and the same benefits can be gained by infusing technology into lease management and accounting practices.

3. Implement Strong Lease Controls


Research from Deloitte found that companies utilizing cross-departmental collaboration could better respond to a broad range of challenges and were more likely to achieve digital maturity. Given how collaborative lease management is, an internal cross-functional task force should lead the efforts to evaluate solutions and ensure the technology is a good fit across departments that commonly interact with a lease portfolio, including real estate, legal, procurement, IT, and finance and accounting.

Once the right technology has been identified, you should work with your internal teams and solution provider to implement lease controls and align them to your existing systems. Doing so will ensure that the right people have the right access to your lease data at the right time, which will decrease your organization’s chances of missing deadlines or options, miscalculating lease costs, overpaying, overlooking important deadlines and missing the opportunity to exercise options. Amid the changing economic environment, businesses are focused on improving operational performance to weather the storm. An optimized lease portfolio gives companies the opportunity to respond and adapt to market changes and stay ahead of competitors – a vital asset during a bear run. To learn more about lease management, click here.

 

The post Why Lease Management Shouldn’t Be Ignored first appeared on Visual Lease.]]> https://visuallease.com/the-evolution-of-leasing-4-trends-to-expect-in-2023/ Tue, 25 Apr 2023 15:49:42 +0000 https://visuallease.com/?p=7948 The ongoing effects of the pandemic, evolving workplace trends and unique economic circumstances have driven businesses to reconsider how and why they enter into new leases.  But how exactly are...
The post The Evolution of Leasing: 4 Trends to Expect in 2023 first appeared on Visual Lease.]]>

The ongoing effects of the pandemic, evolving workplace trends and unique economic circumstances have driven businesses to reconsider how and why they enter into new leases.  But how exactly are companies adapting? Better yet, what are the implications of these new behaviors?

A recent study from The Visual Lease Data Institute (VLDI) answers all these questions and more:

1. Organizations are prioritizing lease terms that enable adaptability.

The pandemic has changed how companies operate, and as a result, many have found themselves locked into leases for space that they no longer require.

To combat this challenge, nearly 88% of companies report that they are planning for physical space needs only one year or less in advance, which is a 151% increase from 2022. The majority of real estate executives have also reported that their businesses were planning to add space as a part of their 2023 real estate strategy – but more than half (52%) of these companies are planning for some or all of this space to be in the form of new satellite locations.

What does this all mean? Organizations value the ability to revisit lease agreements, negotiate flexible terms and explore alternative real estate options that align with their evolving business strategies.

2. Business leaders are focused on new workforce needs.

Business leaders are also looking for leases that support their ability to accommodate remote or hybrid work arrangements – something that has become a “must-have” for many when considering job opportunities. In fact, a 2022 survey by McKinsey found that the third-most-popular reason employees looked for a new job was to find a flexible working arrangement.

To remain competitive in the job market, companies are reimagining how they utilize their available space. Forty-six percent of surveyed senior real estate executives say that shared desks or offices that can be booked as needed by workers provide the best office environment for their companies. The ability to sublease, communal building amenities and flexible lease termination were also identified as top priorities for companies, ideally providing business leaders with options when it comes to how and where they occupy physical space.

By entering into lease agreements that provide these various possibilities, companies are more likely to be able to pivot to appeal to existing and potential employees.

3. Poor lease management continues to cost companies… big time.

It’s no secret that mismanaged leases can lead to expensive mistakes. In fact, 45% of senior real estate executives admit that their companies have overpaid rent or expenses due to inadequate lease controls. Further underscoring the need for strong lease management practices is the reality that lease accounting standards (ASC 842, GASB 87 and IFRS 16) require companies to accurately represent their leases on the balance sheet. Without controls in place, businesses open themselves up to the very real risk of regulatory scrutiny and costly fines or audits.

Despite how high the stakes are, 83% of companies aren’t investing in the technology, people and processes required to properly manage lease-related expenses.

To stay ahead of costly errors, organizations must prioritize implementing strong controls to safeguard their lease portfolio, which is often their second largest expense just after people-related costs.

4. Organizations can leverage their leases in their ESG program development and reporting.

Although 99% of senior real estate executives believe it’s important for their company’s future leases to help reduce its carbon footprint, 95% of companies still don’t have a fully established ESG program in place and 41% report they haven’t begun any ESG initiatives yet.

But regardless of where organizations stand in their ESG journey, they need to be able to accurately track and record where the bulk of their carbon emissions occur, which is across its lease portfolio. Investing in the right technology that offers carbon measurement and reporting features will give leaders a clear line of sight into their environmental impact, allowing them to meet reporting requirements.

For more information on how Visual Lease can help your business take control of its leases and take charge of what’s next, schedule time with our team.

 

The post The Evolution of Leasing: 4 Trends to Expect in 2023 first appeared on Visual Lease.]]> https://visuallease.com/mastering-lease-accounting-internal-controls-part-2-top-7-control-activities-and-how-technology-can-help/ Mon, 24 Apr 2023 12:49:12 +0000 https://visuallease.com/?p=7944 This is part II of our Mastering Lease Accounting Compliance series. If you missed part I, you can read it here. Adopting a lease accounting standard can have a significant...
The post Mastering Lease Accounting Internal Controls [Part 2]: Top 7 Control Activities and How Technology Can Help first appeared on Visual Lease.]]>

This is part II of our Mastering Lease Accounting Compliance series. If you missed part I, you can read it here.

Adopting a lease accounting standard can have a significant impact on your organization’s balance sheet and financial statement footnotes. Moreover, it also expands lease disclosures and comes with the added burden of complying with lease accounting standards. In this post, we’ll share insights on controls and how technology can help organizations meet the challenges of lease accounting compliance.

What are some of the top lease accounting control activities?

Today we’re highlighting 7 of the top control activities that can help organizations with lease accounting compliance.

These activities can be classified into two buckets: control activities and monitoring activities.

The control activities include standardization of documentation, separation of duties, authorization and approvals, system access controls, and safeguarding of assets. The monitoring activities are audit trail and reconciliation.

What are the Control Activities?

• Standardization of Data and Documentation

Every lease agreement is different, and the concept of standardization helps control both documents as well as the data they contain. Standardization helps control chronology such as original lease, amendments, renewals, etc. Also, completeness of both the document and package as well as any missing data elements and consistency that everything shows up in the same place within the platform. It also provides for ease of auditability through input templates defined, data fields, a contract repository, and the ability to set up fields for clauses, this is truly the concept of a single source of truth.

• Separation of Duties

Separation of duties is a critical control activity in lease accounting compliance. Organizations should ensure that folks in accounting should not be allowed to make changes to the system for things that can be operationally critical, such as term dates, and other aspects of the lease that are critical to the operations of that lease. User-defined roles can be set up in a system to ensure that lease admins have a certain level of activity within the system, while lease accountants can perform other activities, but never the two shall meet, so to speak.

• Authorization and Approvals

Authorization or approvals is another control activity that intersects with system access controls. Someone who is not in the system daily making changes, updates, etc. should be the one that approves the change log right these changes and reviews the log. They shouldn’t be making it the same way that someone who is inputting data daily is.

• System Access Controls

System access controls are vital in ensuring the security and integrity of lease data. Setting up user profiles that grant specific access levels is a good way to restrict access to sensitive data. For example, you can set up different profiles for admins, accountants, supervisors, reviewers, and auditors. Additionally, security features like SSL and two-factor authentication provide extra security not just for internal users but also for external users accessing the system.

• Safeguarding of Assets

Lease agreements often involve valuable assets that are critical to a company’s operations. Thus, it’s important to safeguard these assets by ensuring that you have a system in place that alerts you to critical dates and events related to lease agreements. For instance, if a lease agreement is coming to an end, you should be notified in advance, giving you enough time to renew the lease or negotiate favorable rates. Failure to safeguard these assets can result in a loss of critical business locations or unfavorable rates, which could be detrimental to the business.

What are the Monitoring Activities?

• Reconciliation

Reconciliation is a vital process in lease accounting that ensures the accuracy and completeness of lease data. It involves comparing lease data across different periods to identify any discrepancies or errors. However, reconciliation is not 100% satisfied by the system, and compensating user controls are necessary to complete the process properly. Fortunately, lease accounting software provides a variety of role reports that enable the reconciliation of different activities within the lease accounting process.

• Audit Trail

Auditing is a critical part of lease accounting that ensures compliance with lease accounting standards and regulations. In addition to compliance, audit trails are also essential in establishing the accuracy and completeness of lease data. In Visual Lease, for example, there’s a quantitative disclosure report that provides a summary of all the information needed to pop into your footnote. The report also allows users to drill down into each of those summary numbers to see how they were built up. This feature provides an audit trail that users can use to establish the detail behind those numbers. Furthermore, the audit trail can be handed off to auditors to test the report and the audit trail that has that drilled-down feature.

How can I implement better controls?

Adopting a lease accounting standard can have a significant impact on an organization’s balance sheet and financial statement footnotes. To comply with these standards, organizations need to implement controls around accounting and reporting, which must be audited and continuously monitored. Collaboration between departments is necessary to ensure compliance, and auditors may need to engage with folks outside of accounting to test the controls in place. Fortunately, technology like Visual Lease can help organizations meet the challenges of lease accounting compliance. To learn more about Visual Lease’s Lease Accounting solutions, click here.

 

 

The post Mastering Lease Accounting Internal Controls [Part 2]: Top 7 Control Activities and How Technology Can Help first appeared on Visual Lease.]]> https://visuallease.com/mastering-lease-accounting-internal-controls-part-1-unveiling-the-key-categories-for-compliance/ Mon, 24 Apr 2023 12:44:59 +0000 https://visuallease.com/?p=7942 This is part I of our Mastering Lease Accounting Compliance series. If you’re looking for part II, you can read it here. Lease accounting standards such as ASC842 and IFRS16...
The post Mastering Lease Accounting Internal Controls [Part 1]: Unveiling the Key Categories for Compliance first appeared on Visual Lease.]]>

This is part I of our Mastering Lease Accounting Compliance series. If you’re looking for part II, you can read it here.

Lease accounting standards such as ASC842 and IFRS16 have significantly changed companies’ financial reporting requirements. These standards require companies to be more diligent in their financial reporting and lease management processes. The implementation of these standards requires a series of controls to ensure accuracy and compliance.

What are some of the key categories for Lease Accounting Internal Controls?

Lease accounting internal controls fall into four main categories: Transition-related Controls, Financial Reporting Controls, Activity-related Controls, and IT General Controls.

1. Transition-related controls are short-term controls that focus on the transition period when implementing the new lease accounting standards. These controls include ensuring accurate lease listings during the transition, appropriate documentation, and other related processes. It is important not to lose track of these controls, as some of them have ongoing relevance even after the transition period. Some of these controls may become relevant again when companies move across the technology maturity spectrum.
2. Financial Reporting Controls are critical to ensuring that companies comply with the new lease accounting standards. These controls include familiar checklists for disclosure and IFRS16 reporting and existing internal controls for financial reporting. In addition, lease-specific controls such as reconciling lease disclosures with related system reports are essential to ensure accuracy in financial reporting.
3. Activity-related controls refer to controls around lease management processes such as lease modifications, lease terminations, and lease renewals. These controls include ensuring that there are appropriate approvals in place for these processes and that lease modifications and renewals are reflected accurately in the company’s financial statements. Activity-related controls also include lease classification reviews, which ensure that leases are classified correctly as operating or finance leases. This is important because it affects the way leases are recorded in the company’s financial statements.
4. IT General Controls are controls that ensure the integrity of the company’s IT systems, data, and processes. These controls include ensuring appropriate access controls, data backups, and data security. IT General Controls are particularly important for lease accounting standards as they involve significant data and calculations.

To learn more about lease accounting internal controls – including the top seven control activities and how technology can help with lease accounting, check out part II of this blog. If you’re looking for reliable lease controls and audit-ready financial reports, learn more about Visual Lease’s Lease Accounting Solution.

 

 

The post Mastering Lease Accounting Internal Controls [Part 1]: Unveiling the Key Categories for Compliance first appeared on Visual Lease.]]> https://visuallease.com/why-sustained-lease-accounting-compliance-depends-on-automation/ Tue, 20 Dec 2022 19:19:12 +0000 https://visuallease.com/?p=7732



On-demand webinar summary

How do you maintain confident, ongoing lease accounting compliance as your leases evolve?

In our recent webinar, Why Sustained Lease Accounting Compliance Depends on Automation, lease accounting experts from Visual Lease shared:

• The post-adoption lease accounting landscape
• The difficulties and risks of using spreadsheets
• Why auditors prefer software for reliability

 

 



Joe Fitzgerald

SVP of Lease Market Strategy
Visual Lease



Jason Lucas

Manager, Sales Engineering Visual Lease

Track changing lease terms

As leases change, it’s virtually impossible to track them manually or using a spreadsheet. This is often because businesses typically have a large volume of leases – and each one contains its own unique, complex lease terms that must be interpreted.

Lease accounting technology is the only way to update lease clauses and options without having to manually sift through contracts. This saves a lot of time – and headache – when maintaining compliance.

Further, having easily-accessible lease data also enables you to leverage your lease data beyond compliance and make smarter business decisions, such as identifying gaps and savings opportunities.

 

Provide historical lease data for audits

Without technology that offers a complete audit trail of every update made to your leases, you, internal stakeholders and your auditors will be left wondering if your lease data is fully reliable or up-to-date.

Unlike spreadsheets, lease accounting technology also ensures you can track who, what, where and when updates were made, so you can be fully confident in the accuracy of the data at the time of an audit.

 

Accurate calculations and reports

Just one error within your lease accounting calculation can lead to a failed audit.

Technology, like Visual Lease, ensures precise calculations and reports – and reduces time and resources needed to do so. Additionally, if you use a spreadsheet, you are also going to be limited to the number of transactions that can be tracked and reported. This will create issues that can be avoided from using automated technology that offers calculations that are explained in every screen and backed by SOC I Type II audits that ensure consistency.

 

Want to see more? View the on-demand webinar for a closer look at how Visual Lease supports Day 2 lease accounting compliance: Why Sustained Lease Accounting Compliance Depends on Automation.

 

The post Why Sustained Lease Accounting Compliance Depends on Automation first appeared on Visual Lease.]]> https://visuallease.com/how-to-prepare-for-day-2-lease-accounting/ Thu, 15 Dec 2022 21:25:00 +0000 https://visuallease.com/?p=7743



On-demand webinar summary

Your lease portfolio requires consistent upkeep to remain compliant with ASC 842. As your leases change, how will you stay audit-ready?

In our recent webinar, How to Prepare for Day 2 Lease Accounting, experts from Visual Lease and BDO shared insight into:

• What’s required to remain compliant throughout Day 2
• When to reassess and remeasure
• Processes to implement now for success later



Joe Fitzgerald

SVP of Lease Market Strategy
Visual Lease



Matthew Coker

Managing Director, Accounting & Reporting Advisory Services BDO USA, LLP

Key Elements to Sustain Lease Accounting Compliance



 

When identifying a process to ensure ongoing lease accounting compliance, ask yourself:

1. Have leases been added, terminated, shortened, extended or impaired?​
2. Have there been changes to service agreements (embedded leases)?​
3. Have assumptions changed related to extensions or purchase options?​
4. Have leasehold improvements been made?​
5. Do you have a process in place to maintain completeness and accuracy?

 

When to Reassess Leases

As leases evolve, you will need to continuously review them. In particular, it’s important to be aware of the following:

• A significant event or change within the lessee’s control directly affects whether the lessee is reasonably certain to exercise (or not to exercise) an option​
• An event occurs that contractually obliges the lessee to exercise (or not to exercise) an option to extend or terminate the lease​
• The lessee elects to exercise an option even though the entity had previously determined that the lessee was not reasonably certain to do so​
• The lessee elects not to exercise an option even though the entity had previously determined that the lessee was reasonably certain to do so​

 

When to Remeasure

There are numerous conditions that impact when to remeasure a lease.



To learn more about what is required to maintain ongoing lease accounting compliance, view the on-demand webinar: How to Prepare for Day 2 Lease Accounting.

 

 

The post How to Prepare for Day 2 Lease Accounting first appeared on Visual Lease.]]> https://visuallease.com/the-future-of-accounting-goes-beyond-excel/ Fri, 30 Sep 2022 15:57:20 +0000 https://visuallease.com/?p=7560 By: Joe Fitzgerald, Senior Vice President of Lease Market Strategy  Spreadsheet applications are easily the most important and universal accounting tools used today—so much so that you’d never guess the...
The post The Future of Accounting Goes Beyond Excel first appeared on Visual Lease.]]>

By: Joe Fitzgerald, Senior Vice President of Lease Market Strategy 

Spreadsheet applications are easily the most important and universal accounting tools used today—so much so that you’d never guess the first version was actually developed as a school project.

As the story goes, in 1978, computer programmer Dan Bricklin was pursuing an MBA at Harvard Business School. His finance class was tasked with an assignment to make financial projections for a hypothetical corporate merger using ledger sheets, the painstaking way that accountants manually tallied numbers in the bygone analog era.

Bricklin, apparently intent on getting an A while also eluding the heavy workload, developed a spreadsheet on a personal computer to electronically process the calculations. The idea was completely novel and would prove to be revolutionary. In less than a decade, spreadsheet programs like Lotus 1-2-3 and Microsoft Excel were dominating the market. Nearly 40 years later, not much has changed. Excel and (now) Google Spreadsheets are still widely used applications in accounting – a fact that astounded Bricklin himself. “It’s like whoa, we haven’t thought of something better yet,” he said in a 2015 interview with Quartz.

It is surprising that Excel continues to be the prevailing accounting practice because it is limited in addressing today’s sophisticated accounting practices and standards, and for that reason, it has become notoriously error-prone.

Here are some of the ways that spreadsheets are falling short for businesses.

Managing Stakeholders and Line Items

Accounting requires managing a lot of moving parts. Many businesses have several – and sometimes, even hundreds of assets and multiple stakeholders (Real Estate, Finance, Legal and HR, among others), which each translate into different line items on a balance sheet.

When it comes to spreadsheets, this ever-growing list of assets and stakeholders is a hotbed for errors. Research has repeatedly shown that 90% of spreadsheets contain errors and 50% of spreadsheet systems have “material defects.” Not only can these errors be destructive to business fundamentals and operations, but poor accounting practices can lead to failed audits, internal control deficiencies, fines, blown debt covenants and reduced credit ratings.

Some companies have been transitioning to sophisticated and targeted software programs to help mitigate errors in bookkeeping, while also giving financial professionals time to perform higher-level tasks. In lease accounting, for example, specialized software is designed to address the critical and often nuanced needs of managing real estate leases, creating space for collaboration across different departments and stakeholders. These types of systems can track lease details both at the property level and throughout a portfolio, resulting in accurate financial reporting, efficient auditing and also, guaranteeing that critical deadlines are met.

This has become a common trend throughout the business sector. There is a widespread exodus to more targeted accounting solutions. Mark Garrett, the former CFO at Adobe Inc., summed up the problem with spreadsheet applications back in 2017 when he told the Wall Street Journal, “I don’t want financial planning people spending their time importing, exporting and manipulating data, I want them to focus on what the data is telling us.” Adobe transitioned away from Excel last year.

Navigating Complexities

New lease accounting standards are also minimizing the effectiveness of spreadsheet applications like Excel. The Financial Accounting Standards Board (FASB) issued accounting guideline ASC 840 in 1976, two years before Bricklin first dreamed of a spreadsheet. ASC 840 has been the practicing standard until 2019, when FASB’s ASC 842 went into effect for public companies, requiring these enterprises to record leased assets on the balance sheet. And this year, the ASC 842 standard goes into effect for all private companies, as well. These regulations are a shake-up to the standard accounting practice, requiring more sophisticated financial calculations and involved accounting practices—and spreadsheets just aren’t designed for this level of complexity.

The business community at large is recognizing the limitations of spreadsheet applications as a result, and many companies—Levi’s, P.F. Chang’s and Coca-Cola, to name a few—are transitioning to tailored accounting solutions that better address modern practices. “Excel just wasn’t designed to do some of the heavy lifting that companies need to do in finance,” said Paul Hammerman, a business applications analyst at Forrester Research Inc., in an interview with the Wall Street Journal.

The pandemic has also ushered in changes in business strategy that is leading to the need for more sophisticated technology. Real estate has been central to these changes because for many businesses, real estate costs became a major liability during the pandemic. In the Commercial Real Estate in 2022: Outlook for an Industry in Recovery survey from Visual Lease, 100% of real estate professionals reported their tenants had requested changes to a commercial property lease in response to the pandemic, and in a separate survey conducted by Deloitte, 67% of respondents said they are executing a real estate rationalization program to either reduce, rightsize, expand or reduce ownership responsibilities. Under new lease accounting standard ASC 842, accountants are required to record these modifications.

Bricklin was right; it is time to find something better. As accounting standards and business practices evolve, business organizations need to upgrade their technology, as well—and the toolkit should include a dedicated accounting software program that is designed to accommodate accounting complexities and modifications while empowering companies to maintain compliance with the new accounting standards.

That is certainly true when it comes to proper lease management and accounting. We are seeing more and more organizations recognize the need for dedicated technology solutions to not only achieve, but maintain compliance with new standards and regulations. These solutions are bringing the industry into a new age, and it’s about time.

The post The Future of Accounting Goes Beyond Excel first appeared on Visual Lease.]]> https://visuallease.com/capital-lease-accounting-for-asc-840-and-asc-842/ Wed, 08 Sep 2021 11:48:10 +0000 https://visuallease.com/?p=2982 Table of Contents What is Capital Lease Accounting? What is a Capital Lease? Main Differences Between a Capital Lease vs. Operating Lease What are the 4 Criteria for a Capital...
The post Capital lease accounting for ASC 840 and ASC 842 first appeared on Visual Lease.]]> Table of Contents
• What is Capital Lease Accounting?
• What is a Capital Lease?
• Main Differences Between a Capital Lease vs. Operating Lease
• What are the 4 Criteria for a Capital Lease under ASC 842?
• What is the Difference Between a Capital Lease vs. Finance Lease?
• How is a Capital Lease Recorded on the Balance Sheet?
• Capital Lease Journal Entry Example
• How Does the Transition to ASC 842 Affect Businesses?

What is Capital Lease Accounting?

Capital lease accounting refers to the set of financial reporting rules and procedures used to record and disclose the financial implications of a capital lease arrangement in a company’s financial statements.

A capital lease is a contract allowing a renter to use an asset temporarily. This lease shares the same economic characteristics of asset ownership in accounting, as the lease requires book assets and liabilities to cover the lease should the lease contract meet specific criteria.

A lessee must use the capital lease accounting method in their new lease accounting journal entries and subsequent records if the rent contract entered into satisfies any of the four criteria set by the Financial Accounting Standards Board (FASB). Here are the basics of the capital lease accounting method.

What is a Capital Lease?

A capital lease or finance lease is a contract between the business acting as the lessee, and the lessor. The two parties agree that the lessor’s property will be rented out by the business in exchange for periodic rental payments. The business can never claim ownership of the asset and is required to return the said asset to the lessor after the rental period is over.

Under the capital lease accounting, the lessor transfers the rights and risks of owning a rental asset to the business renting the property. Thus, the asset is treated like it has been bought and paid for by a loan. The asset will then be depreciated over the rental period.

What are the Differences Between a Capital Lease vs. Operating Lease?

An operating lease differs from a capital lease because each follows a different accounting treatment and structure. An operating lease is a contract allowing the renter to use an asset but it does not offer any ownership rights to the lessee.

Operating lease accounting is a one-off recording in the balance sheets. This means that a rented asset and related liabilities of future payments are excluded from the company’s balance sheet so that the ratio of debt to equity is kept low. Traditionally, operating leases helped American companies keep billions of assets and liabilities from being included in their balance sheets.

A lease must meet specific requirements of the generally accepted accounting practices or GAAP to be recorded as an operating lease and exempted from being classified as a capital lease. Firms must assess their contracts using the “bright line” test to determine whether their rental contracts should be booked as operating vs. capital leases.

What are the 4 Criteria for a Capital Lease under ASC 842?

According to ASC 842, there are four tests to determine whether a lease is an operating lease or capital lease. An assessment must be conducted upon signing of the rental contract. Below are the four tests:

1. Will the ownership or title of the asset be transferred to the renter when the lease term ends?
2. Is a bargain purchase option available?
3. Is the lease life equal to or greater than 75 percent of the remaining asset’s economic life?
4. Is the present value, or PV, of the lease payments equal to or greater than 90 percent of the asset’s fair market value?

A lease is classified as an operating lease if none of the above conditions are met. Otherwise, it can be classified as a capital lease. In some cases, the Internal Revenue Service has reclassified an operating lease as a capital lease, which has resulted in an increase in a firm’s tax liability and taxable income.

What is the Difference Between a Capital Lease vs. Finance Lease?

A capital lease, according to the ASC 842, is now referred to as a finance lease. This is because a large number of rental contracts are now capitalized except for those with a lease term of 12 months or less. The nomenclature capital lease is no longer appropriate, which is why the correct term to use is the finance lease.

Below is an excerpt from ASC 842, defining what a lease is:

Under the lessee accounting model in previous GAAP, the critical determination was whether a lease was a capital lease or an operating lease because lease assets and lease liabilities were recognized only for capital leases. Under Topic 842, the critical determination is whether a contract is or contains a lease because lessees are required to recognize lease assets and lease liabilities for all leases— finance and operating—other than short-term leases (that is, if the entity elects the short-term lease recognition and measurement exemption).

How is a Capital Lease Recorded on the Balance Sheet?

Given the capital lease’s nature of being a financing arrangement, businesses must break down the periodic rental payments into interest expense according to the firm’s applicable depreciation expense and interest rate.

Capital Lease Journal Entry Example

For this capital lease accounting example, say the company makes $1000 in monthly rental payments with an estimated interest of $200. The following should then be entered in the balance sheets:

$1000 credit to the cash account

$200 debit to the interest account

$800 debit to the capital lease liability account

It is important for businesses to depreciate the leased asset to factor in the useful life and salvage value of the asset. In our example, let us assume that the asset still has a useful life of 10 years and zero salvage value using the straight-line basis depreciation treatment. The firm has to record an $833 debit entry to the depreciation expense account monthly and a credit recorded to the accumulated depreciation account. Once the leased asset has been disposed of, then the fixed asset must be credited while the accumulated depreciation account should be debited to reflect the remaining balances.

How Does the Transition to ASC 842 Affect Businesses?

There are changes in lease accounting with the transition from ASC 840 to ASC 842. For example, there is another criterion in determining whether the leased asset should be treated as a capital lease or operating lease. It then becomes imperative for businesses to select a lease accounting software with features reflecting these changes in the GAAP such as our software at Visual Lease.

Let our experts help you today.




The post Capital lease accounting for ASC 840 and ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-pulse-check-how-two-healthcare-organizations-successfully-transitioned-to-asc-842/ Tue, 04 May 2021 19:05:06 +0000 https://visuallease.com/?p=5703 Lease accounting (ASC 842, IFRS 16 or GASB 87) is not your average one-and-done disclosure. This whole new approach to accounting requires you to account for lease changes throughout the year with a higher level of scrutiny.   A...
The post Lease accounting pulse check: How two healthcare organizations successfully transitioned to ASC 842 first appeared on Visual Lease.]]> Lease accounting (ASC 842, IFRS 16 or GASB 87) is not your average one-and-done disclosure. This whole new approach to accounting requires you to account for lease changes throughout the year with a higher level of scrutiny.  

A daunting process for many healthcare organizations, lease accounting is a large project that demands cross-functional effort. But with the right preparation, it doesn’t have to be intimidating. 

In this blog, we share an excerpt from a recent presentation featuring two major healthcare organizations, Penn State Health and Montefiore Health System, where they share how they transitioned to ASC 842 and maintained lease accounting compliance throughout the year. 

Featured Speakers:



Joe Fitzgerald, Visual Lease: 

Leases are inherently cross functional. There are many stakeholders involved with leasing, each with their own processes, systems and silos – (such as brokers, procurement, legal operations, accounting, tax, IT, you name it). 

You need to make sure you’re maintaining an accurate audit trail and implementing guardrails so the changes being made by everybody are by the book. 

What are some of Penn State Health’s considerations regarding cross–functional changes that affect accounting? 

James Rogers, Penn State Health: 

A lot of times, we found it’s believed that [lease accounting] is just a finance function. But finance relies heavily on supply chain, real estate and other departments when identifying leases. 

To successfully work cross-functionally, we’ve set in place processes and policies, including ongoing communication between the real estate lease coordinators and finance – built around our Visual Lease solution. 

You really have to take some time determining those policies and procedures because the process flow or the workflow will inevitably change with this new guidance, and you will as a finance department be leaning on this to help you stay compliant. 

Joe Fitzgerald: 

Two words come to mind, they both start with C – cooperation and collaboration. How about at Montefiore? 

Fred Berardinone, Montefiore Health System: 

Exactly, very similar to James. The importance of us leveraging automated lease accounting software was to have a centralized lease management system that we can build workflows according to our policies.  

Similar to James, it’s all really finance’s domain, we would say liaison in this. But once again, this goes back to all the parties involved. 

It’s really building the automation from the front end, from the data abstraction to Visual Lease or whatever software that whoever goes with, and into the general ledger and into accounts payable, and it’s all really getting blessed through least admin and finance.  

So just as James mentioned, it’s really building that workflow, building those policies and procedures, and we still go back and test them, we’ll go back. We had internal audit actually take a look at our policies too, just verify that that’s how the system was working.  

Joe Fitzgerald: 

It sounds like what you both did at the start of the project in terms of working with the other folks has really paid off as you move forward in terms of cooperation and collaboration, that’s great. 

 

To hear more about how Penn State Health and Montefiore Health System successfully use software to get and maintain audit-ready with lease accounting requirements, check out the full panel session here.



The post Lease accounting pulse check: How two healthcare organizations successfully transitioned to ASC 842 first appeared on Visual Lease.]]> https://visuallease.com/incremental-borrowing-rate-what-you-need-to-know-for-lease-accounting/ Mon, 22 Mar 2021 14:00:21 +0000 https://visuallease.com/?p=5631 Among the many different calculations used in lease accounting, the incremental borrowing rate may be one of the most misunderstood. The incremental borrowing rate (IBR) is the interest rate a lessee would...
The post Incremental borrowing rate: what you need to know for lease accounting first appeared on Visual Lease.]]>

Among the many different calculations used in lease accounting, the incremental borrowing rate may be one of the most misunderstood. The incremental borrowing rate (IBR) is the interest rate a lessee would have to pay to borrow funds to finance an asset similar to the lease’s ROU asset in value, over a similar term and in a similar economic environment. 

And according to FASB ASC 842, lessees are now allowed to use the incremental borrowing rate to determine the discount rate used to measure their leases. 

Let’s take a closer look at when and how to use the incremental borrowing rate in lease accounting. 

When is the incremental borrowing rate used in lease accounting? 

All the latest lease accounting standards, including ASC 842, require lessees to determine a reasonable discount rate for establishing the Net Present Value (NPV) of all their future lease payments. Lessees then use the NPV as the basis for determining the different components of lease schedules, including lease liabilities, ROU assets and amortization. 

However, the accounting board also acknowledges the discount rate is not always easy to determine. In many leases, the rate is not clearly spelled out (explicit) or the information that could be used to determine the (implicit) discount rate may be missing or incomplete. 

For instance, a lease might not specify an interest rate used to calculate the payments or the residual value at the end of the lease might be subject to change. 

Therefore, ASC 842 guidelines allow lessees to use the incremental borrowing rate as an alternative method for determining the discount rate when they don’t have access to all the information (explicit or implicit) used to determine lease payments. 

Why is IBR so important in lease accounting? 

The incremental borrowing rate is used to discount future cash flows to reflect the impact of time on the remaining lease obligation. 

For instance, on a lease with payments of $1,000 a month for five years, the organization’s lease accounting needs to recognize not only current payments but also what will be paid in the future, using the IBR to reflect the timing of individual cash flows. 

Using the IBR as the discount rate has a tremendous impact on an organization’s balance sheet. That is because every piece of data in a lease schedule is generated off the NPV, which is determined by the discount rate — in this case, IBR — and the date and amount of each lease payment. 

How is the incremental borrowing rate determined? 

An organization’s incremental borrowing rate is generally a reflection of its creditworthiness based on two components: 

• The risk-free rate, determined by the current rate on Treasury bills (T-bills) 
• The individual organization’s specific credit rating

The current risk-free rate for different term lengths can be found in trusted sources such as the Treasury Department website or publications such as Bloomberg or the Wall Street Journal.  

Ideally, the IBR should also consider an organization’s current credit rating, including its debt structure and capital. This is especially true with real estate and other high-value leases. 

For instance, a small startup company may pose more of a credit risk and therefore pay a higher IBR on real estate leases compared to a larger and more established company. 

In addition, determining the incremental borrowing rate is often more difficult for a private organization than for a public company. 

How is IBR different for public and private companies? 

Public companies typically know what their IBR is, due to the ongoing financial tracking and reporting required from publicly traded companies. By necessity, these organizations usually know their average cost to capital, borrowing interest rates and other factors that affect their credit. 

Private companies are less likely to know those factors and may not have up-to-date credit information readily available. Instead, they may have to pick a theoretical IBR based on a wide range of issues such as: 

• The interest rate paid the last time they borrowed money 
• How much above the risk-free rate they are likely to pay 
• The type of asset — for example, the interest on financing a vehicle vs. financing a building 
• Whether the asset will depreciate or appreciate 
• The length of time over which payments will be made 
• The organization’s borrowing activity and credit risk 
• Market conditions and borrowing costs 

Therefore, for simplicity, private companies often opt to use the risk-free rate as their IBR — for example, basing the IBR for a five-year lease on the rate at which five-year T-bills are currently trading.  

What is the impact of using the risk-free rate as your IBR? 

Looking up the risk-free rate and using it as an organization’s incremental borrowing rate is certainly easy. However, it will inflate the organization’s liabilities. 

The risk-free rate is always the lowest borrowing rate, minus the inflation expectation. But when factored over time, the lower the interest rate is, the higher the NPV will be. That means the risk-free rate has a larger impact on the balance sheet. 

Therefore, while it is less work to use the risk-free rate, it may not be as advantageous as determining your actual incremental borrowing rate. 

When must the incremental borrowing rate be updated? 

The good news is ASC 842 says once a lease schedule is established, you don’t need to recalculate the discount rate unless you need to remeasure future lease obligations due to changes such as: 

• Renewals or options that add time and payments to a lease 
• Abatements or other modification of existing leases 

For example, if you decide to exercise an option for a new five-year term on an existing lease, you will want to calculate the additional time and payments at a current rate rather than use the rate established at the start of the original lease. 

However, it is important to stay up to date on inflation expectations and market rates, as well as the organization’s current credit standing. That way, if and when lease remeasurements are needed, the organization will be prepared to recalculate its IBR. 

IBR is simpler with lease accounting technology. 

To the extent you can determine the discount rates used to calculate lease payments, you should use those rates in your lease accounting. But when you cannot reasonably determine a discount rate, the incremental borrowing rate is a quick and easy alternative allowed by ASC 842. 

Determining the incremental borrowing rate is a complex issue, and there is no simple formula. However, a lease technology solution like Visual Lease makes it easy to manage and track borrowing rates. 

For instance, the platform’s Borrowing Rate table lets you establish a series of IBRs based on type of asset, organization credit rating, country, currency and the remaining lease term. 

With all the necessary values in one place, you can easily track and modify the data points as needed. In addition, when you create a lease schedule, the Visual Lease platform will automatically select the appropriate rate based on the parameters you set up in the table. 

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

The post Incremental borrowing rate: what you need to know for lease accounting first appeared on Visual Lease.]]> https://visuallease.com/deferred-rent-accounting-101-for-asc-842-and-asc-840/ Wed, 10 Mar 2021 14:05:54 +0000 https://visuallease.com/?p=5645


What is Deferred Rent Under ASC 842? 

In lease accounting, deferred rent happens when the cash rental payment varies from its expense recognized on the financial statements and occurs when the tenant is provided free rent in one or more periods, or if there are escalating rent payments. Here is everything you need to know about deferred rent under ASC 840 and ASC 842 rules. 

Is Deferred Rent an Asset or Liability? 

Deferred rent is a balance sheet account traditionally used in legacy accounting standards as defined in ASC 840. Deferred rent arises when the amount expensed exceeds the amount paid. A balance will build up and then burn off when the cash paid exceeds the amount expensed.

ASC 842 requires the total rent expense to be recognized on a straight-line basis during the lease period even if rent payments differ. The debiting or crediting of the deferred rent account monthly allows the lessee to record the rent expense using the straight-line basis and catch whatever difference is between the amount paid and the expense recognized in this account. The cumulative balance of the deferred rent when the lease is terminated has to be equal to zero. 

Where is Deferred Rent on the Balance Sheet? 
Deferred rent journal entries are liabilities on the balance sheet and occur when rent payments are lower than the straight-line rent expense. 
What is the Accounting for Deferred Rent? 

Accounting for the free rent period and subsequent periods are as follows: 

Add the total cost of the rent payments for the entire lease period. Then divide this total amount of payments by the total number of periods in the lease, including any early access period. So although the first month was technically “free,” we still have a payment that appears on our balance sheets.

ASC 842 Deferred Rent Example

If the lease term is one year with the first-month rental being free and the rental rate for the coming months being $1,000, then the total rental cost will be $11,000 .

Divide the total rental cost by the total number of periods in the lease contract including the free rental month. In our example, we will divide $11,000 by 12 months and get $917. 

Each month of the lease, the average monthly rate should be charged as an expense, regardless of whether there was an actual payment made. In our example, the expense for the first month is $917 even if there is no actual payment since the tenant did not pay for the first month. This means that the $917 debited to expenses is offset by a credit to the deferred rent account. 

For the remaining months of the lease, the same average amount should be charged as an expense. This is $917 in our example. Should there be an offsetting of the rental payment and if the payment and expense don’t match, then the difference should be applied to the deferred rent account. 

In our example, the monthly payment for the remaining period after the free month has lapsed is still $1,000, an amount that’s higher by $83 than the amount charged as rent expense, which is $917. This difference should be used to reduce the amount of the deferred rent liability during the remaining months of the rental period until it becomes zero. 

The same accounting approach should be used even if the rental amount changes throughout the lease period. For example, if the lease rate increases in the succeeding months, then the average rent expense should be charged in all months with a portion of it forming part of the deferred rent liability. 

What is the Difference Between Prepaid Rent and Deferred Rent? 

There’s a difference between deferred rent vs. prepaid rent. The former is a liability and occurs when the lessor provides free rent, usually at the start of the lease term, or there are escalating rent payments. Prepaid rent is rent paid up front that is to be expensed in a future period. 

How ASC 842 Transition Affects Deferred Rent Accounting 

The concept of straight-line rent expense on operating leases was retained despite the transition to the ASC 842. But under the new mechanics, the deferred rent should be replaced by the Right of Use (ROU) asset and lease liability accounts. The ASC 842 guidelines are much more complicated than its predecessor, ASC 840. Thus, any lease accounting software must have ROU Asset functionality in place. It is best to go for trusted accounting software such as ours. 

At Visual Lease, we make compliance to ASC 842 and other standards a breeze
 To learn more about how Visual Lease can help your business contact us now.
Learn More

The post Deferred rent accounting 101 for ASC 842 and ASC 840 first appeared on Visual Lease.]]> https://visuallease.com/tenant-improvement-allowance-accounting-for-landlords/ Fri, 01 Jan 2021 19:30:43 +0000 https://visuallease.com/?p=2908


Cell phone companies offer new phones to entice clients to renew their contracts. Retailers slash their prices to draw consumers to purchase. Car dealerships hand out freebies and discounts. In the world of consumption, who would refuse attractive incentives?

Landlords also entice prospective tenants with alluring offers, especially when the real estate market is in a slump. One of the popular incentives is a commercial tenant improvement allowance (TI allowance or TIA for short). But what exactly is it and how is tenant improvement allowance accounting handled? Here are the basics:

What is a tenant improvement allowance?

A TI allowance is money provided by the landlord to a tenant to help fund any improvements to space. Fast tenant improvement allowances can also be used to pay for costs associated with moving to the rented property.

What qualifies as a tenant improvement?

Normally, a landlord allows the TI to be used on hard and soft costs of a renovation project.

Hard costs pertain to improvements that can be left behind after the tenant leaves the property. Such improvements are beneficial to the landlord.

On the other hand, soft costs barely provide any direct benefits to the landlord but, are required components of the renovation like construction management fees.

Below are some examples of hard costs:
• Electric
• HVAC
• Plumbing
• Walls
• Framing
• Windows
• Doors
• Carpet
What is typically not covered by a Tenant Improvement Allowance?

Most landlords do not allow the TI allowance to be used for miscellaneous expenses incurred to cater to the specific needs of the client or improvements that do not provide any value to the landlord. Improvements that can be removed once the tenant leaves are not covered by the TI allowance either. However, in some cases, landlords would be willing to contribute a small share of the TI allowance for some expenses to secure a rental contract.

Below are some examples of costs normally not covered by a TI allowance:
• Data cabling
• Furniture
• Fixtures
• Equipment
• Electronic equipment
• Moving expenses
How were tenant improvement allowances accounted for under ASC 840?

Under ASC 840, tenant improvement allowances (TIAs) were treated as lease incentives. Lease incentives are payments made by a lessor to a lessee to induce the lessee to enter into a lease. Under ASC 840, lease incentives were recognized as reductions to rent expenses by the lessee on a straight-line basis over the term of the lease.

The lease incentive obligation liability was then amortized over the term of the lease, with a corresponding reduction to rent expense.

It is important to note that TIAs should not be netted against leasehold improvements. Leasehold improvements are improvements made by a lessee to leased property, and they are accounted for as fixed assets. TIAs are simply payments made by a lessor to a lessee, and they are accounted for separately.

How to account for tenant improvement allowances under ASC 842

Under ASC 842, tenant improvement allowances (TIAs) are still classified as incentives, but they are no longer reported as a lease incentive obligation liability to be amortized over the life of the lease. Instead, they are reflected in the initial measurement of the right-of-use asset (ROU asset) and sometimes the lease liability at the inception of the lease, depending on when the allowance is received.

When initially adopting ASC 842, any unamortized lease incentive obligation liabilities are eliminated and reclassified to the new ROU asset’s opening balance. After initial implementation of the new standard, TIAs will continue to be recognized in the ROU asset and potentially lease liabilities.

ASC 842 describes lease incentives as “paid” or “payable” depending on the timing of their receipt. This article uses the same terminology and describes how to account for both types.

How much is the typical tenant improvement allowance?

Prospective tenants should provide a detailed and accurate cost projection of the planned renovation. Otherwise, they would be seeing a TI allowance of $10 to $20 for every square foot, amounts that would barely cover the costs of plumbing, electricity, or carpeting. The excess amount needed for the renovations not covered by the TI allowance would be paid for by the tenant.

It is the landlord who will decide how much he or she is willing to spend on the TI allowance. The amount the landlord spends depends on the real estate market conditions, the value of the tenant and the value-added of the proposed commercial lease build out clause.

Is a tenant improvement allowance a loan?

The typical TI allowance is not a loan that has to be paid back by the tenant. However, there is an amortized TI allowance, which is a combination of a TI and a loan provided by the landlord.

The tenant improvement allowance amortization is a provision in the contract that has to be negotiated between the tenant and the landlord.

An amortized TI provides for additional funds needed to complete the renovations. It allows the tenant to borrow money with interest from the landlord. The loan is like a bank loan where tenants have to pay the amortization over the term of the lease.

How is tenant improvement allowances accounting done?

Tenant improvement allowance accounting depends on who initially funds the improvement and oversees the renovation work. Different scenarios impact the accounting for TI allowance:

Landlord
owns the improvements

Tenant
owns the improvements

Flow-through
arrangement

The journal entries depend on which of the above scenarios are chosen.

Landlord owns the improvements

When the landlord pays for the renovation and tenants supervise the work or when the landlord pays and oversees the improvement, then it is the landlord who owns the improvements.

In this scenario, the landlord is required to record the improvements as a fixed asset and then depreciate the value of the improvements over a specified period.

For example, if the improvement costs a total of $10,000, the landlord will use this figure and divide it throughout the lease. The figure from this division would be subtracted from the rental income annually.

The length of time depends on the classification of the rental property: residential or non-residential. Generally, residential property is depreciated for 27.5 years and a non-residential property is depreciated over 39 years. However, costs that are not covered by the TI allowance such as fixtures, furniture, and equipment are depreciated over 7 years.

The landlords will be depreciating the cost of the improvements over the lease period. If there is a new tenant who doesn’t require any improvements to the property, then the landlord can simply carry on with the depreciation schedule until the value of the improvements has been exhausted.

If the property was damaged or destroyed, then the landlord has to write off the remaining undepreciated balance of the asset that will appear as a loss in the income statement.

Tenant owns the improvements

If the tenants provided the funds for the majority of improvements, then it is the tenant who owns the improvements. In this scenario, the tenant will record the TI allowance received as an incentive. The amount spent on improvement will be amortized over the period of the rental term.

In cases when the amortization period is longer than the rental period, then the tenant is required to write off the remaining amount.

Flow-through arrangement

In this scenario, tenants have to declare the deductions from rent as income. For the landlord, the rent will be treated as a cash payment but the cost of the improvements will be depreciated.

 

Tenant improvement allowances paid at or before commencement of the lease

TIAs can be paid at or before the commencement of the lease.

 

Event
TIA paid at or before commencement of the lease
Transition to ASC 842
TIA received at lease commencement

Accounting Treatment
Reduces the ROU asset’s opening balance
Any unamortized balance of a TIA is debited and reclassed to the ROU asset’s opening balance
Debit to cash and adjust the initial ROU asset recognized

Under ASC 842, TIAs are accounted for as a direct adjustment to the right-of-use (ROU) asset’s opening balance. The ROU asset is the asset that a lessee obtains by entering into a lease. It is calculated as the present value of the lease payments.

When a TIA is paid at or before the commencement of the lease, it reduces the ROU asset’s opening balance. This is because the lessee is essentially receiving a payment from the landlord that reduces the amount of money that they will have to pay over the life of the lease.

In the month/period of transition to ASC 842, any unamortized balance of a TIA is debited to remove the lease incentive liability from the balance sheet and reclassed to the ROU asset’s opening balance with a credit. This journal entry ensures that the ROU asset is accurately reflected on the balance sheet after the transition to ASC 842.

After the transition, TIAs received at lease commencement are recognized as a debit to cash and adjust the initial ROU asset recognized. The remaining line items to record a new lease are a credit to the lease liability and a debit to the ROU asset, adjusted to equal the initial liability balance less the TIA received.

Tenant improvement allowances payable after the commencement of the lease

When TIAs are paid after the commencement of the lease, they are factored into both the lease liability and right-of-use (ROU) asset measurement. The lease liability is calculated as the present value of all future payments, including those received for the allowance. The ROU asset is the asset that a lessee obtains by entering into a lease. It is calculated as the present value of the lease payments.

The payments for improvements will be reflected in the periods they are expected to be received during the lease term and netted with the rent payments for that period. This means that the lease liability will be lower due to factoring in the expected cash receipts, and subsequently, the ROU asset balance will also be lower.

Tenant improvement allowances neither paid nor payable at the commencement of the lease

ASC 842 does not provide specific guidance on how to account for tenant improvement allowances (TIAs) that are neither paid nor payable at the commencement of the lease. This can make it difficult for lessees to determine how to properly record these allowances in their financial statements.

Here are two approaches to accounting for TIAs that are not paid or payable at the commencement of the lease:

1. Maximum reimbursement approach: This approach assumes that the lessee is reasonably certain to incur the maximum amount of reimbursable costs under the lease. The maximum amount of the TIA is then treated as an incentive payable, which is recognized through a reduction of the lease liability and right-of-use (ROU) asset.
2. Actual reimbursement approach: This approach waits until the reimbursable costs have actually been incurred before reducing the ROU asset and lease liability. The reduction of the ROU asset is then recognized prospectively over the remainder of the lease term.

The best approach to accounting for TIAs that are not paid or payable at the commencement of the lease will depend on the specific facts and circumstances of the lease. However, the maximum reimbursement approach is generally considered to be the most conservative and straightforward approach.

Tenant improvement allowance accounting made easier

The TI allowance is a concession with outstanding benefits both for the landlords and tenants. It helps landlords in securing lease contracts while allowing tenants to improve the space.

However, tenant improvement allowance accounting isn’t always easy, since who pays and oversees the improvements affects how the allowance should be accounted for. Fortunately, there is reliable lease accounting and lease administration software like Visual Lease that can help.

For more information on how Visual Lease can help your business evaluate your leases, reach out to us today.
Learn More

The post Tenant improvement allowance accounting for landlords first appeared on Visual Lease.]]> https://visuallease.com/2020-guide-to-ifrs-16-lease-accounting-software/ Fri, 01 Jan 2021 14:00:00 +0000 https://visuallease.com/?p=3021 Changes in accounting standards have made lease accounting more difficult. Adopting IFRS 16 lease accounting, for example, has made compliance cumbersome as it involves adjusting to new policies, systems and...
The post 2021 Guide to IFRS Compliant Lease Accounting Software first appeared on Visual Lease.]]> Changes in accounting standards have made lease accounting more difficult. Adopting IFRS 16 lease accounting, for example, has made compliance cumbersome as it involves adjusting to new policies, systems and processes. But with IFRS lease accounting software, a firm’s compliance with new standards can be a breeze.

While the January 1, 2019 deadline for IFRS 16 compliance has passed, research shows that many firms are still lagging in their transition to the new standard. This is probably because some are still practicing IFRS 16 illustrative examples using Excel sheets, while others are using accounting software that doesn’t deliver on its promises.

If compliance with the new standard remains a problem, then it’s time to find a reliable software solution. Here’s a basic guide to the new standard and how a reliable IFRS 16 software solution can help your business.

How are IFRS 16 leases calculated?

Under IFRS 16, lessees must recognize their assets and liabilities coming from a lease. After all, the standard’s goal is to report information that offers a basis for companies to determine the timing, amount and uncertainty of cash flows arising from rentals, as well as a faithful representation of lease transactions.

IFRS 16 mandates that lessees recognize the assets and liabilities for all short-term rentals, or those with a lease term of 12 months or below, except in cases where the asset value is low. Lessees must also recognize the right-of-use asset that represents the underlying rented asset, as well as the lease liability that represents the obligation to make rental payments.

What is IFRS Compliant Accounting Software?

Lease accounting software is an application designed specially to automate the report processing for the new standards — GASB 87, ASC 842, SFFAS 54 and IFRS 16. The software gathers information about a rental contract, such as payment frequencies, rent formulas and discount rates, then does the necessary calculations to generate the required journal entries for financial statements.

IFRS 16 Software Key Features & Benefits

There are plenty of software solutions promising quick and easy compliance with the IFRS 16 standard. However, since not all software is created equal, businesses should look for the following key features.

Configured to meet All IFRS 16 disclosure requirements

The new standard contains plenty of changes when it comes to disclosures. There are now more disclosures needed, including the total outflow of leases, right-of-use assets and interest expenses for lease liabilities.

A reliable IFRS 16 software solution should have the proper configurations to generate all the disclosure reports the business needs.

Data intelligence

The accounting software should be designed to handle all the complexities of IFRS 16 to ensure accuracy and save the business a lot of time. Some of the data features that the software should have include borrowing rate charts, practical expedient elections and useful life charts.

Full support for all internal controls

Reflecting the bulk of the lease contracts into the balance sheets highlights the company’s lease accounting controls. It is essential, then, to opt for IFRS 16 software that can provide support to internal controls. 

This means choosing a software solution offering features like data entry validation and role-based access.

Cloud-Based SaaS system

A centralized location and availability of data are some of the primary benefits of having a SaaS tool for lease accounting. 

A SaaS system allows the accounting department staff to access lease documents anywhere as long the person has access to the internet. A centralized location and easily accessible information save companies time and space, eliminating the need for hordes of files in hard copies. 

In addition, users in accounting and other departments can have custom access levels for lease contract data. This feature allows the company to provide access to those who need it without compromising data security. 

Automated critical alerts

Missed, late or over payment of leases can happen if companies stick to the manual way of doing things. Fortunately, these can all be avoided with a stable IFRS 16 software solution. Automated alerts that are sent via email every time an important date is coming up prevents missed or late lease payments.

Does IFRS 16 apply to software licenses?

There are also software leases in lease accounting, entertaining the right-to-use for the software once the lease contract starts. The software should be treated as an intangible asset in compliance with IAS 38. However, accounting for software leases is outside the scope of IFRS 16.

IFRS 16 software can ease the transition

Transitioning to new accounting standards, including IFRS 16, will always be complicated. Businesses would do well to invest in a reliable lease accounting software to manage the changes and help the accounting department adopt IFRS 16. 

At Visual Lease, we ensure a smooth transition to the new standards with our reliable software.

The post 2021 Guide to IFRS Compliant Lease Accounting Software first appeared on Visual Lease.]]> https://visuallease.com/visual-lease-launches-the-integrations-hub-providing-powerful-flexible-open-access-to-lease-data/ Thu, 10 Dec 2020 21:24:33 +0000 https://visuallease.com/?p=3733 Lease portfolios often account for a massive portion of a company’s risk exposure and overhead. And yet, most businesses lack visibility into their leases to understand their obligations and options – and...
The post Visual Lease launches the integrations hub, providing powerful, flexible & open access to lease data first appeared on Visual Lease.]]> Lease portfolios often account for a massive portion of a company’s risk exposure and overhead. And yet, most businesses lack visibility into their leases to understand their obligations and options – and make agile decisions as their businesses grow.

There are several reasons for this:

Leases are complex, constantly evolving agreements with high-stakes terms often buried in the contracts. Managing leases can be difficult due to data silos and distributed responsibilities across operations, real estate and accounting teams. This means there’s a lot of room for crossed wires, missed deadlines and costly mistakes.

Lease accounting compliance brought the pressing need for lease portfolio management to light. When FASB announced ASC 842, several solutions flooded the market to solve this problem. However, not all of them could.

Technology that attempts to do it all (lease administration, business intelligence, accounts payable, etc.) generally does not. Often, efficiencies promised within all-in-one solutions are lost to mediocre functionality and execution. This is especially true in a software category as new as lease accounting.

The stakes are too high to take chances. Companies require specialized lease administration and accounting tools, and they need those tools to seamlessly integrate into their processes and technology stacks at each stage of the lease lifecycle.

How to Optimize the Lease Lifecycle

From sourcing to contract negotiation to termination, there’s a lot that goes into the lifecycle of the lease – and each stage is dependent on the last.

• Procurement decisions are better when you have informed analytics on asset utility.
• Lease accounting reports are better when you have all your lease management information centralized and accessible.
• It’s easier to manage your leases when you can easily reference important clauses and deadlines embedded in contracts.

 



There are countless software and service providers dedicated to streamlining every stage of a lease. But they can only maintain accuracy if data flows between them securely, automatically and asynchronously.



 

 

With the right solution for each facet of your business and a secure, flexible tech stack, companies can leverage their leased properties and equipment as strategic financial assets vs. overhead expenses.

Integrations are the key to connect those solutions, drive efficiency and unlock insights and financial opportunity.

Introducing the Integrations Hub, a powerful new way to automate workflows, unlock insights and achieve end-to-end compliance across your lease portfolio and your business.

The Integrations Hub offers flexible, open platform access to any third-party application. Users can simply schedule, monitor, manage and automate data imports and exports to and from Visual Lease at any time. (Think of it as a lease lifecycle electrical socket, allowing you to supercharge your tech stack with a simple plug-in.)

Given the complexity and often customized configurations in accounting technology, a one-size-fits-all API isn’t enough. We believe there is no such thing as a silver bullet integration – whether it’s built by us or anyone else.

With the Integrations Hub you’ve got more options to leverage your lease data, including:

• Low-maintenance Managed File Transfers for schedule automated data imports and exports
• An accessible Developer Portal with a comprehensive REST API Library enabling customized, real-time data connectors. With just a few lines of code, a developer can access accurate data along with powerful and complex processes in a repeatable way.
• Track every transfer in real-time with the integrations hub Dashboard to cat ensure data integrity and auditability.

It’s all backed by the industry’s most informed and experienced professional services team.

Imagine the possibilities:

• Align every line in your general ledger by connecting journal entries from Visual Lease or tracking payment information in accounts payable.
• Convert currencies across continents by plugging in currency rate tables to Visual Lease for always-accurate calculations, no matter the location.
• Inform Business Intelligence by surfacing the right data at the right time in the system and format where it’s most helpful.

The technology team at Newmark was instrumental in helping us build and test this new technology, and they’re already using the Integrations Hub to leverage lease data across their tech stack.

Newmark is a Visual Lease customer and a leading commercial real estate firm that provides a fully integrated platform of services to prominent multinational corporations and institutional investors across the globe.

The technology team at Newmark was instrumental in helping us build and test this new technology, and they’re already using the Integrations Hub to connect lease data to their Business Intelligence tool, NavigatorCRE.

According to Carla Hinson, Newmark’s Executive Managing Director, Global Technology, this opens up possibilities.



At our live launch event, Hinson sat down with Bobby Paulus, Visual Lease’s Director of Strategic Alliances, to talk through her experience getting Newmark’s integrations set up, the value they’re are already experiencing and what’s next on their roadmap. To listen to the full conversation, watch the event recording.

If you’re ready to supercharge your tech stack– and integrate your lease data across systems, we’re excited to help you get you plugged in. Check out this page on our website for more information.

The post Visual Lease launches the integrations hub, providing powerful, flexible & open access to lease data first appeared on Visual Lease.]]> https://visuallease.com/how-to-solve-for-the-top-asc-842-lease-accounting-challenges/ Mon, 23 Nov 2020 19:25:02 +0000 https://visuallease.com/?p=3680 How to Abstract, Manage and Report on Lease Data  When FASB issued its update to the lease accounting standard, the main goal was to increase the transparency and comparability of financial reporting.  ...
The post How to solve for the top ASC 842 lease accounting challenges first appeared on Visual Lease.]]>

How to Abstract, Manage and Report on Lease Data 

When FASB issued its update to the lease accounting standard, the main goal was to increase the transparency and comparability of financial reporting.  

Unfortunately, there are many complex decisions and actions required to successfully achieve compliance. You’ll want to make sure to provide yourself with enough time and resources to get it done right. 

Fortunately, you’re not alone – and hundreds of public and private companies have already gone through this process. With proper insight into common potential obstacles, you can more clearly navigate through the process and achieve success. 

While there is certainly no shortage of difficult tasks to achieve compliance, we’ve narrowed down the top 4 common lease accounting challenges experienced by public companies – and how to solve them.  

 

Challenge 1: Centralizing all leases in one place   

A crucial first step in the transition to ASC 842 is to identify all leases held by an organization and enter the pertinent information in one location. 

To do so, you will need to start by gathering each lease within your organization, including any leases that may be part of a contract, such as an embedded lease. This effort requires careful analysis and judgment – and typically involves extensive coordination across departments and business units to ensure all leases are included.  

Often a time-consuming and cumbersome exercise, it is crucial to provide your organization with ample time to complete this step. (For help with your project timeline, request a customized milestone planner to outline when to begin).  

Once all the leases within your company have been identified, you’ll need to import important lease information into a centralized location to help you view all your leases in one place and access lease information at any time. 

This step often contains a high volume of labor-intensive work. Extracting lease data (also known as abstracting) from complicated contracts is a complex task that will need to be done for every lease – and any time your company signs new leases and modifies existing lease contracts.  

Depending on the size of your company and resources available, you may need to assess whether it is better to perform this this task in-house or with external professional abstracting resources.

 

Challenge 2: Identifying technology that does more than calculate  

Your chosen lease accounting technology is just as critical to the lease accounting standard transition and will greatly impact your ongoing ASC 842 compliance.  

While some solutions may sound similar on paper, only a select few are able to provide you with the proper tools to ensure your company’s lease information is accurate at the get-go, and remains up-to-date over time with minimal effort. 

If you are in the market for a system, don’t settle for any solution that promises to produce accounting calculations. You’ll need to make sure it also makes it easy to facilitate ongoing, long-term compliance by properly tracking lease updates. 

From the start, look for a tool that can deliver the following: 

• System Integration Capabilities: Lease accounting data should be able to easily integrate into necessary third-party applications to further automate of journal entries, financial disclosures and accounts payable information. Previously, many companies did not pay attention to integrating their leases within their accounts payable system, but with the advent of the new standard, your business may benefit from re-examining its payment processes through a solution that facilitates integration between accounts payable and the lease information. 
• Lease Management Features: Ensure up-to-date lease information with a tool that makes it easy to track and manage leases on an ongoing basis. With lease information that is searchable and available at a glance, your business can stay on top of payments, renewals and options, as well as compliance requirements. 
• Modern Software Updates: Don’t get stuck using a system that doesn’t prioritize developing new features and capabilities. To keep up with the most current trends in lease accounting, you’ll want to make sure your chosen system is dedicated to helping you achieve your goals and saving you time by releasing new innovative features and functionality. 

Save yourself the trouble and inefficiencies of a tool that under–promises its ability to deliver what you need – and more importantly, consider the long-term impact of lease accounting software to avoid having to start all over again after you’ve already done the hard work of preparing for the lease accounting deadline. 

 

Challenge 3: Making critical decisions that impact business financials 

In the early stages of transitioning to ASC 842, there are a number of essential, albeit challenging decisions that companies are responsible for, which impact overall lease accounting and reports. 

• Applying the ASC 842 Guidance: When transitioning to the new standard, companies can elect one of two approaches to apply the guidance: 
• • Most commonly, you can retrospectively apply the guidance at the beginning of the period of adoption through a cumulative-effect adjustment, known as the modified retrospective approach. In this approach, you no longer are responsible for capturing leases you no longer hold. However, this option presents its own challenges, requiring all lease data to be current and up to date. 
• • Uncommonly, you can retrospectively apply the guidance to each prior reporting period presented in your financial statements along with the cumulative effect of the initial application, to the earliest period presented. In this approach, you are restating prior periods as the standard had applied to them, which presents an enormous challenge to recalculate and apply the current standard to leases you no longer hold. 
• Determining Discount Rates: Companies need to exercise judgment when determining their discount rates. The elected discount rate can have a substantial impact on your balance sheet. 
• • For lessees, if the discount rate is clearly stated within a lease – called an explicit rate – the lessee is required to use that. However, it is rare for a lease to include this – and nearly impossible to calculate without it. To do so, the lessor would need the lessor’s financial information to determine this discount rate. 
• • If that rate cannot be easily determined, companies can use the incremental borrowing rate (IBR). The IBR is the rate you would have to pay or borrow on a collateralized basis over a similar term. While this is a more common option to select, it also presents its own challenges. IBRs are often easier for big companies, but more difficult for private companies. However, it’s common for private companies to pick a risk–free rate.  
• Payments and Allocations: When calculating lease liability, companies must decide whether to consider renewal periods and termination periods, which ultimately impact the length of liability (and financial obligation) in financial reports.  
• • You may also choose to allocate lease payments between lease components and non-lease components, depending on what practical expedients (see below) your company has elected.  
• Policy Elections: When choosing policy elections, it’s important to consider the current policies and types of lease contracts.  
• • Selecting policy elections help to determine the broader impact, rather than just the immediate impact on your financials.  
• Disclosure Requirements: While the new standard includes quantitative and qualitative disclosure requirements, companies are responsible for more than the minimum reports documented in the guidelines. 
• • Company management needs to consider the disclosure requirements within existing lease contracts and plan how to gather the relevant disclosure information. Organizations must be able to explain the changes made within their balance sheet period–over–period – and may do so through a roll-forward report. 
• Practical Expedients: FASB allows certain practical expedients to facilitate transition accounting and general lease accounting.  
• • You should select the practical expedients carefully after considering your current accounting policies and the broader impact of these practical expedients.  
  • You may need to choose some of these elections as a package, as described in ASC 842 Practical Expedients and Transition Requirements.  

Challenge 4: Meeting ongoing auditing, risk management and tax accounting needs 

Early coordination with auditing, risk management and tax functions of your company is another important element of planning that commonly presents challenges for companies while adopting ASC 842. 

• Auditing – This standard is brand new – and there’s flexibility in the guidelines, which leaves some areas open to interpretation. Meet with your auditors early in the adoption process to help substantiate your decisions – which will only save you time when it comes for the time of the audit. This helps ensure that any questions about system controls are addressed prior to transition to ASC 842, including: 
• • The overall control environment surrounding leases 
  • Automated versus manual controls 
  • System implementation requirements 
• Risk Management – There are now higher stakes to having an accurate balance sheet with up-to-date lease information. Therefore, effective risk management includes a high level of interaction between lease accounting and administration to keep accurate lease financials and ensure payments are made on time. To do this properly, a selected lease accounting system should include the ability to identify and maintain leases. 
• Tax Accounting – While tax accounting is often separate and distinct from financial accounting, recognition of deferred taxes may be a component of lease accounting. So, confer with your tax expert to make sure the general ledger and the lease accounting system properly consider deferred taxes. 

Although there are various decisions ahead that require careful consideration for the lease accounting deadline, there are many resources available to help. Hundreds of public and private companies have already navigated the various requirements – and achieved success, which you can learn from.  

By arming yourself with as much information as you can ahead of time, you too can be prepared to reach lease accounting compliance. Furthermore, a lease accounting system can provide you with an automated, easy transition to the new guidance – and result in significant savings for your business that you may have previously overlooked to help control, reduce or negotiate lease costs. 

  

 

The post How to solve for the top ASC 842 lease accounting challenges first appeared on Visual Lease.]]> https://visuallease.com/lease-vs-buy-analysis-under-asc-842-ifrs-16-and-gasb-87/ Fri, 28 Feb 2020 10:54:42 +0000 https://visuallease.com/?p=3071 Leasing vs buying is not an easy decision to make regardless of the asset involved. While there are lease vs buy analysis Excel sheets, choosing one over the other is...
The post Lease vs buy analysis under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> Leasing vs buying is not an easy decision to make regardless of the asset involved. While there are lease vs buy analysis Excel sheets, choosing one over the other is still no walk in the park. After all, several factors must be considered such as how the purchase will affect the company’s financial health over time, the asset’s fair market value, and the current capital of the business, to name a few.

Are Leases a Waste of Money?

Many companies choose to buy property or equipment for a variety of reasons. For one, purchasing is usually considered a valuable long-term investment especially since rental payments often increase each year. Businesses that intend to lease for a long-time and will have a high fixed overhead are better off purchasing the asset. This is especially true for real estate properties and for stable enterprises that intend to stay in the same place for years.

When Should Leasing be Preferred Over Purchase?

There are many cases where leasing is a better option than purchasing. Leasing, after all, lets the business have the advantages of ownership without shouldering the asset-related risks. For example, in leasing vs buying a car, a company can use the vehicle but maintenance costs will be shouldered by the lessor. 

Leasing property or equipment also helps improve a company’s liquidity. This is because buying an asset means tying up resources that enterprises might need in the future.

When Should a Leasing Be Preferred Over Purchase?

Businesses who are working on their lease vs buy analysis must ask the following questions:

1. How much is the asset worth and how long does the business need it?

Regardless of the industry, the company is in, the business will need specific equipment to get their work done. Some equipment like laptops or computers and mobile gadgets will need updating regularly. Having a lease lets the business stay up-to-date. Plus, equipment such as golf carts, forklifts, and other tools can be quite pricey. Renting them instead means being able to use them without paying for their high price.

2. What fits the company’s budget?

Leasing property or equipment is often cheaper than purchasing it. However, businesses must be fully aware of the terms of the lease. This means that companies must ensure that their lease ends at the same time they will be moving into a different space or when they are already finished using the equipment. Companies must also keep in mind that some equipment may be sold off when they’re no longer needed.

3. Will the property or equipment need customization?

It’s not enough to look at the lease price vs purchase price since some assets may need to be customized to fit the business’s requirements. For example, with a real estate property, the need to renovate the space the company will be moving into can be part of the contract. Sometimes, the lessor may offer a tenant improvement allowance (TIA) to make the lease contract more attractive. 

4. What about depreciation?

Real estate and equipment depreciate over time. Leasing means not having to worry about the depreciation in the equipment or property’s value. However, companies will enjoy tax breaks either in the near or long-term future if they buy the equipment. Under Section 179, enterprises can deduct 100 percent of the qualified item if it uses the asset or equipment within the first year from purchase. The Bonus Depreciation lets companies recover their expenses over time.

5. How’s the business income statement looking?

Businesses that lease instead of buy won’t have to worry about their tied up money or capital especially if they are relatively new. Before shelling out money for equipment or property, it is essential to determine whether the business can shoulder the cost of the loan or lease. Enterprises should remember that rental payments usually increase over time and that there are related costs in owning the real estate or equipment such as maintenance, taxes, and insurance, to name a few.

What are the Effects of the New Lease Accounting Standards ASC 842, IFRS 16 and GASB 87?

Accounting standards such as IFRS or US GAAP, require all leases to be reflected on the balance sheet. This means that the company’s ability to avoid the lease classification is no longer a consideration when choosing between buying or leasing. Thus, the decision on whether to lease or purchases should be based on the asset and cost as well as the cost change over time.

There are no easy answers in the buy vs lease debate. For some businesses, it’s better to purchase a property but for others, it makes more business sense to either enter a lease or renegotiate one. Thus, enterprises should take the time to conduct their lease vs buy analysis before signing a lease or sales contract.

The post Lease vs buy analysis under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> https://visuallease.com/lease-accounting-for-service-contracts-under-new-lease-accounting-standards/ Thu, 06 Feb 2020 11:08:49 +0000 https://visuallease.com/?p=3073 There have been several major changes in the way businesses address service contracts in recent years given the new standards and updates on the existing standards.  For one, the new...
The post Lease accounting for service contracts under new lease accounting standards first appeared on Visual Lease.]]> There have been several major changes in the way businesses address service contracts in recent years given the new standards and updates on the existing standards. 

For one, the new lease accounting standards have made accounting for leases more complicated while the Accounting Standard Update or ASU 2018-15 has provided clarity and simplified cloud computing contracts accounting. Just what exactly are the changes in accounting for long-term service contracts? Here’s a rundown.

Is a Service Contract an Asset?

Before we get into a deep dive into service contract accounting journal entries, we must first discuss whether a service contract is an asset. Certain contracts like sales contracts, employment, affiliation, and advertising can be treated as intangible assets since they provide value to a business. For example, contracts like long-term leases with below-market rates offer a big overhead saving. Or subscription contracts for a cable company or other long-term service contracts that provide revenues for a firm are examples of intangible assets.

 

What Happens When Leases Are Embedded in Service Contracts?

IFRS 16 and ASC 842 mandates businesses to be more transparent when it comes to their lease obligations. Compliance with these two standards means evaluating service contracts to identify which have embedded leases. Unfortunately for companies, the determination of embedded leases is a tedious and time-consuming task. A survey by KPMG showed that identifying embedded leases was ranked as the fourth most difficult aspect of implementing the new standards.

 

There are no shortcuts available to firms when it comes to determining embedded leases. Plus, one has to have a good grasp of what constitutes a lease given that contracts do not usually contain words like “rent” or “lease.”

Below is an example of how to evaluate a contract.

Company Y has a warehouse contract with AB Warehouse. AB warehouse provides the warehouse facility, monitors, and equipment for Company Y. The contract states that Company Y will have full usage of the facility, equipment, and monitors. The contract details each item that can be used by Company Y.

Company Y has 100 percent control over the warehouse facility, equipment, and monitors and will gain substantial benefits from the warehouse. The equipment portion of this contract between Company Y and AB warehouse meets all the criteria of an embedded lease of the standards given the following:

 

• The assets are identified
• Company Y has full control of the identified assets
• Company Y gains almost all of the economic benefits from the identified assets

Generally, logistics, security, and warehousing contracts have embedded leases.

How to Account for Software Leases and Cloud Computing Contracts?

The FASB in 2018 released new guidelines on how firms must do the accounting for the upfront costs and implementation related to cloud computing contracts. The standard update, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement in ASU 2015-05 clarifies how businesses must treat software as service contracts.

The new guidance says that the phrase “hosting arrangement” is now applicable or covers any arrangement that allows customers to use or have access to the software but without real possession. This means businesses have to account for implementation costs on cloud computing arrangements just like one accounts for the related internally-hosted software arrangements.

The new guidance and new standards on accounting for service contracts can be too much for companies. The new standards may have clarified the processes but these simplification and clarification are offset by the tedious work in complying with new accounting guidance. After all, there’s too much legwork in determining whether contracts have embedded leases or not and businesses may need to implement new processes to identify which ones have embedded leases. Fortunately, there are reliable service providers like Visual Lease that can make the transition to new standards easier.

The post Lease accounting for service contracts under new lease accounting standards first appeared on Visual Lease.]]> https://visuallease.com/asset-retirement-obligation-under-asc-842-ifrs-16-and-gasb-87/ Thu, 30 Jan 2020 11:05:02 +0000 https://visuallease.com/?p=3072 If you have signed an operating lease for space, built leasehold improvements, and determined that you are legally required to take out the leasehold improvement when the lease expires, then...
The post Asset retirement obligation under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> If you have signed an operating lease for space, built leasehold improvements, and determined that you are legally required to take out the leasehold improvement when the lease expires, then you have already encountered an asset retirement obligation or ARO for short.

What is Fixed Asset Retirement?

Asset retirement occurs when either capitalized goods or property is removed from service either because of disposal, sale, or any kind of removal. When the asset has been retired, then it no longer has the utility for which it was originally either constructed, acquired, or developed.

What is an Asset Retirement Obligation?

An ARO pertains to the legal obligation related to retiring a long-lived, tangible asset where the firm is responsible for either cleaning up the hazardous materials or removing equipment or structure at a later date. Companies must account for AROs in their financial statement to reflect a holistic and more accurate picture of the enterprise’s overall value.

Some examples of ARO are when a shop constructs on the rented space according to a specific design or layout to suit the business’ needs or when the business updates and paints the rented space for their branding. If the lease contract requires the lessee to take out the improvements or repaint the space to its original color, then the lessee has an ARO and is required to return the rented asset to its original condition the lessee found it. Likewise, a firm that leases a lot and installs water tanks on the property and is required to remove such a tank after the lease ends also has an asset retirement obligation.

 

Is Asset Retirement an Obligations Debt?

Asset retirement obligation is a liability, considered a common legal requirement to return an asset to its old condition according to asset retirement obligation accounting IFRS IAS 37 and the Accounting Standards Codification Statement No. 41- or FASB ASC 41.

What is the Accounting Entry for Asset Retirement?

During ARO accounting, business must recognize the fair value of the ARO upon incurring the liability if it can obtain a realistic estimate of the ARO’s fair value. But if the fair value is initially unobtainable, then the ARO must be recognized at a later date when the fair market value is already available.

Our Lease Accounting software can ensure you that you are properly accounting for your ARO. Don’t believe it, request a demo to see for yourself. We provide our users with a time-saving, compliant ARO accounting solution.

How Do You Calculate Asset Retirement Obligation?

A firm that acquires a fixed asset with an ARO already attached should recognize the ARO’s liability as of the fixed acquisition date. There’s a benefit to recognizing the liability immediately as possible since it provides the readers of the firm’s financial statements a more realistic grasp of the company’s actual state of obligations given that ARO liabilities can be quite big.

Generally, there’s only one way to identify the fair value of the ARO, which is by using an expected present value technique by using several possible outcomes. Those computing for the expected present value of the future cash flows must include the following into the calculation:

Probability distribution– When there are only two outcomes possible when determining the ARO’s expected present value, one must assign a 50 percent probability to each one until the additional information altering the initial probability distribution becomes available. If not, one must spread the probability across all the possible scenarios.

Discount rate– A risk-free, credit-adjusted rate must be used for discounting cash flows to their current value. Hence, the business’ credit standing will affect the discount rate to be used.

The following steps must be followed when calculating the expected present value of an ARO:

 

1. Estimate the amount and timing of the cash flows related to the retirement activities
2. Determine the risk-free, credit adjusted rate
3. Record the period-to-period increase, if any, in the carrying amount of the ARO’s liability as an accretion expense. This can be done by multiplying the starting liability by the risk-free, credit-adjusted rate from when the liability was initially measured
4. The upward liability revisions must be recognized as a new liability layer, then discount the reduction using the rate used for the first recognition of the related liability layer

 

When the ARO liability has been initially recognized, then the related asset retirement cost must be capitalized. It can be done by adding the related asset retirement cost and carrying amount of the related fixed asset.

 

If ARO liability changes over time

In many cases, the ARO liability will change over time. Thus, should the liability increase, then one must consider the incremental increase for every period so it becomes an additional layer of liability on top of any previous liability layers. The following points must be considered when recognizing these additional layers:

1. Each layer must initially be recognized at its fair value
2. Allocation of the ARO liability must be systematically be allocated to expense during the useful life of the asset
3. The changes in the liability due to the passage of time must be measured using the risk-free, credit-adjusted rate when each layer was initially recognized. One must also record the cost of the liability’s increase. This should be classified as accretion expense when charged as an expense.
4. When the ARO yet has to be realized and the time period has already shortened, then the amount, timing, and probabilities related to cash flows will improve. There might be changes in the ARO liability according to these changes in the estimate.

 

AROs are just a sample of the complex nature of the new lease accounting standards. Fortunately, there’s Visual Lease accounting software designed by seasoned accountants that can help any comply with various accounting standards. Our software can improve a company’s lease accounting to ensure compliance.

The post Asset retirement obligation under ASC 842, IFRS 16 and GASB 87 first appeared on Visual Lease.]]> https://visuallease.com/what-is-the-definition-of-a-practical-expedient-under-asc-842-and-ifrs-16/ Thu, 23 Jan 2020 14:40:38 +0000 https://visuallease.com/?p=3020 The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are not blind to the tedious task facing firms once the new standards take effect. Hence, the creation...
The post What is the definition of a practical expedient under ASC 842 and IFRS 16? first appeared on Visual Lease.]]> The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are not blind to the tedious task facing firms once the new standards take effect. Hence, the creation of practical expedients.

What is a Practical Expedient?

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

The ASC 842 Transition Examples

There are various practical expedients published by the boards shortly after the release of the new lease accounting standard.

The ASC 842 Practical Expedient Package

One of the practical expedients provided to ease the ASC 842 lessor accounting is the package deal where companies have the option of using all three lease portfolio practical expedients together or none at all. Electing this practical expedient package lease means applying them all consistently across all leases. Plus, according to the ASC 842 disclosure requirements, businesses must disclose that they have used all three expedients.

The three all-or-nothing practical expedients are the following:

• Businesses don’t have to reassess the lease classification for both expired or existing leases
• Businesses don’t have to reevaluate if the expired or existing contracts have leases
• Businesses don’t have to reassess already recorded initial direct costs of any of the existing leases

 

These three practical expedients can reduce significantly the time spend on re-evaluating leases, thus also reducing the costs of preparing the financial statements to comply with the ASC 842 transition requirements.  Companies that choose not to use this package will have to deal with the following:

• Reassessing initial direct costs also means dealing with an equity adjustment
• Re-evaluating of all leases to determine whether each lease should be classified as a finance or operating lease following the new standards
• Re-evaluating all existing expired leases

Companies, however, might not want to use the package since they might benefit from reassessments of their leases. For example, if most of a business’s operating leases would qualify as finance leases following the ASC 842 standard, then reclassification would impact the EBITDA. Thus, businesses may decide not to use the practical expedient package.

Learn about expedients now, choose your options early!

The ASC 842 practical expedients you elect to use will have a huge impact on:

• What lease data you need to collect
• How you need to break the data down
• How you will configure your lease accounting system

While a practical expedient might save you time, your decision must also consider its potential impact on your financial reporting. So, although FASB has extended the compliance deadline — giving private companies until 2021 to report their leased assets on balance sheets — it’s important to understand the implications and make your decisions about ASC 842 practical expedients as soon as possible.

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

The post What is the definition of a practical expedient under ASC 842 and IFRS 16? first appeared on Visual Lease.]]> https://visuallease.com/2016518the-making-of-a-corporate-real-estate-executive/ Wed, 18 May 2016 17:32:07 +0000 http://visuallease.wpengine.com/?p=176 In this blog entry I would like to introduce the topic of CRE leadership and management. I hope to explore the topic over the next several weeks with the hope that these personal observations will be useful to those readers who aspire to make corporate real estate management a long term career. 
The post The Making of a Corporate Real Estate Executive first appeared on Visual Lease.]]>

In this blog entry I would like to introduce the topic of CRE leadership and management. I hope to explore the topic over the next several weeks with the hope that these personal observations will be useful to those readers who aspire to make corporate real estate management a long term career. As background I spent nearly thirty years in various CRE jobs both at Xerox and later at Dun & Bradstreet. I also worked as a broker at Jones Lang LaSalle and as a consultant at PricewaterhouseCoopers. In the last ten years of my career, I shifted to the IT industry as a technology analyst at Gartner Inc., and focused on real estate software solutions, most notably Integrated Workplace Management Systems (IWMS).  Also at Gartner I led a major research study in conjunction with MIT on the changes in the workplace enabled by information technology. The study report, “The Agile Workplace,” identified trends that are now playing out and have become mainstream today.

It’s with these thirty years of experience that I presume to have some insights in the success criteria for effective CRE leadership and management. Notice that I distinguish between leadership and management. It’s an important distinction and one that must combine to ensure success as a CRE executive over the long term.

In terms of management skills, the CRE executive must develop impeccable planning and operational capabilities. The superior CRE executive must approach planning from both a strategic and tactical perspective. On one hand the planning should address long term objectives, and integrate portfolio plans with business strategy.  On the other hand, the plans must have a short term focus and address priorities important to the business units and corporate management. Obviously the plans must address financial goals, but also address employee productivity and satisfaction. The CRE executive is not only a portfolio manager, but the executive must also be a workplace manager and provide the environment to support workplace flexibility and employee collaboration.

The CRE executive must have a strong grounding in financial management and have astute analytical and budgeting skills. In addition, the management skill set should include strong negotiating skills, as well as strong communication skills. In this regard, I encourage CRE managers, to submit papers to professional publications such as those for Corenet and IFMA. I would also encourage CRE managers to submit proposals for presentations at both national and regional meetings of these organizations. These communication efforts strengthen the manager’s personal brand and enhance visibility within the industry.

On the leadership side, I would begin with the topic of innovation. The successful CRE executive develops the ability to seek out opportunities for positive change by creating a vision for future success. When MIT and I explored the topic of the agile workplace we discovered amazing examples of workplace innovation, both in terms of strategy and implementation. Along with innovation, the successful CRE executive is an effective team builder and collaborator not only within the CRE organization but within the over-all corporate organization. Listening skills are crucial to effective leadership, and those CRE executives who rise to the top are distinguished by their ability to gauge expectations and “sense” the underlying mood of the enterprise, what I call “reading the tea leaves.”

This leads me to the final topic under CRE leadership, and that’s a highly developed set of political skills. The CRE executive must create and sustain a viable network of advocates within the corporation, and within the broader real estate industry.  Invariably the CRE executive will encounter “push back” even hostility among individuals or groups primarily around change initiatives. I recall the battles I fought in the early stages of workplace innovation, particularly by those middle managers who resented the loss of private offices, or the advent of telecommuting which was perceived as a loss of control.  With these political battles, it’s imperative that the CRE executive has built coalitions and relationships that can be brought to bear when needed.

In the weeks ahead I’ll drill down into these topics, and hopefully provide a roadmap for those readers who are aspire for a career in corporate real estate management. In many respects I believe we‘ve entered a new phase of CRE management which will be highlighted by greater senior management emphasis on portfolio and workplace excellence.

 

The post The Making of a Corporate Real Estate Executive first appeared on Visual Lease.]]> https://visuallease.com/2015928more-detail-on-the-real-estate-strategic-plan/ Tue, 22 Sep 2015 20:49:00 +0000 http://visuallease.wpengine.com/?p=155

            In this morning’s New York Times, it was reported that Goldman Sachs recently consolidated from three floors to two in its major Manhattan office tower. The Times reports that “the changes in real estate have helped Goldman reduce its cost by 17 percent since 2010.” This is yet another example of the value in corporate real estate strategic planning and why I wanted to spend a bit more time on the subject.

The post More Detail on the Real Estate Strategic Plan first appeared on Visual Lease.]]>

In this morning’s New York Times, it was reported that Goldman Sachs recently consolidated from three floors to two in its major Manhattan office tower. The Times reports that “the changes in real estate have helped Goldman reduce its cost by 17 percent since 2010.” This is yet another example of the value in corporate real estate strategic planning and why I wanted to spend a bit more time on the subject.

In the last blog entry I outlined the key components of the corporate real estate strategic plan. In this blog, I examine in greater detail specific areas of focus in the strategic plan

Plan components:

·      As a first step, the strategic plan (the Plan) should include key objectives, including financial summaries, environmental goals, and workplace flexibility goals.

·      The Plan should include a demand forecast of total square feet over five years as a function of headcount growth or other relevant growth factors.

·      The Plan should include an executive summary, graphically presenting the financial results of the Plan by year, over a five year time frame.

·      The Plan should include a summary of market benchmarks and then compare actual rental rates, and space ratios to benchmarks. This analysis should be   particularly done for major locations.

·      The Plan should include major projects by year, and highlight timing and budget (both expense and capital) for each major project.

·      The Plan should contain a separate section which highlights the major city consolidation plan, including targeted locations, project details, and financial results.

·      The Plan should tie with the two year annual operating budget by location, and then extend the financial summary for an additional three years; for a total five year financial forecast.

·      An addendum to the Plan should include a complete inventory of both leased and owned locations, with action items highlighted that would require lease renewals, extensions, terminations, and relocations within the first two years of the strategic plan. Ideally this data could be a feed from the Lease Management System.

·      The Plan should include a separate section that summarizes the asset and liability values as required by the new FASB and IASB lease standards.

·      The Plan becomes the primary communication vehicle to convey plan objectives to real estate partners including tenant representatives, design consultants, and other third party service providers that would be contracted to implement key projects in the Plan.

·      Similarly, the Plan should also be communicated to key stakeholders such as corporate finance, office of general counsel, IT, and human resources.

·      Ideally, the Plan needs to be kept current through quarterly reviews and updates.

Some Final Thoughts: The Corporate real estate strategic plan is separate from the lease management system. Ideally the lease management system should feed data to the Plan, but the systems are two distinct tool sets with common data bases.

This outline of the corporate real estate plan is only one version of what will vary by company based on the company’s core business, size, culture, and asset types. Retail companies will focus more on location criteria and consumer market demographics. Manufacturing companies will emphasize labor markets and supply chain considerations in its strategic plan. Government entities will have yet another set of priority considerations in its real estate strategic plan. But the basic elements as discussed above will more or less be common across business entities.

Perhaps the most important responsibility of the head of corporate real estate is the development of a detailed and well conceived real estate strategic plan. Without it the corporate real estate function is failing to align its facilities and leases with corporate goals, and communicating these plans to its various constituents.(particularly senior management)

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In the last blog entry we reviewed how the strategic planning process evolved from forming the planning team, benchmarking performance indicators, and setting priority objectives. Outlined below is what the strategic plan looks like:

The post The Corporate Real Estate Strategic Plan first appeared on Visual Lease.]]>

In the last blog entry we reviewed how the strategic planning process evolved from forming the planning team, benchmarking performance indicators, and setting priority objectives. Outlined below is what the strategic plan looks like:

Over-all objectives:

·      Management has set forth the following strategic objectives for the corporate real estate function: 1.) Reduce over-all occupancy costs; 2.) strive for environmental sustainability in the company’s portfolio, 3.) and evolve a flexible work environment that fosters collaboration and employee mobility

·      From the benchmarking phase, the planning team determined that the corporation’s occupancy cost was at the high end of comparable companies in most leasing markets, at least 15% above competitive benchmarks. It further determined that space per person was high (300 sq ft per person) and set a goal to reduce this ratio by 50%. Finally the benchmarking study revealed that most office locations were neither energy efficient nor consistent with current environmental standards.

·      From a review and analysis of leased locations, the team determined that as high as 50% of the lease file was due for termination within 10 years, and 20% of the leased portfolio had leases expiring within 15 years. There was a major opportunity to reposition the leased facilities in more efficient, lower cost locations. From a FASB lease standard, it would appear that the lease repositioning would substantially reduce the total asset and liability levels once new leases were put in place.

·      Another key finding of the portfolio review determined that in at least 20 major metropolitan areas, the company had multiple locations that could be consolidated into two or three major locations, thus reducing space, cost, and improving operational efficiency by sharing support services and infrastructure. The strategic plan referred to this aspect of the plan as “the major city consolidation plan.”

Plan Summary:

·      The plan outlined the key leasing actions to be completed over the next five years, striving to reduce space, and occupancy cost. Over-all annual occupancy costs and associated capital spend was summarized by year over the five year time frame.

·      The plan outlined a set of new office standards that included alternative office techniques like office hoteling and desk sharing. The new leased locations would adopt open plan work stations and a multitude of small and medium size conference rooms for team collaboration.

·      The plan set forth the major city plan and included detailed leasing actions for office consolidations.

·      The plan also set forth environmental standards that would improve energy efficiency, air quality, and office location sustainability.

·      The plan included a financial summary listing occupancy costs by location, by year, over a five year time frame. Associated capital costs, and project expenses were also included in the plan.

·      The strategic plan (once approved) became the basis for engaging tenant representatives in executing the leasing actions across the portfolio, by year.

Summary:

·      The strategic real estate plan was successful in reducing occupancy costs through smaller location footprints, tighter lease rates, and consolidated locations

·      New office standards achieved operational flexibility by adopting alternative workplace standards and worker mobility techniques. (laptops, tablets, and cell phones)

·      By adopting new environmental standards, new locations achieved improved sustainability as offices were relocated into new standardized locations.

The post The Corporate Real Estate Strategic Plan first appeared on Visual Lease.]]> https://visuallease.com/2015717the-benefits-of-having-a-lease-audit-service-combined-with-a-lease-management-system/ Fri, 17 Jul 2015 21:49:37 +0000 http://visuallease.wpengine.com/?p=146 There’s compelling logic to combine a lease audit service with a lease management system such as Visual Lease..
The post The Benefits of Having a Lease Audit Service Combined with a Lease Management System first appeared on Visual Lease.]]>

There’s compelling logic to combine a lease audit service with a lease management system such as Visual Lease. Commercial leases represent complex legal documents, and each market has its unique peculiarities requiring sophisticated legal and accounting expertise. Leases require constant monitoring, since landlord charges occur continuously, and the issue of erroneous charges including escalation rental increases and CAM (common area maintenance) charges require constant review and reconciliation.

There are several key benefits by having a lease audit firm combined with a lease management system. First, the audit firm can insure that the lease management system contains the required data fields, organized in a way that facilitates efficient lease administration. Second, the lease system can identify problematic charges and flag these charges to the audit staff for review and reconciliation. Third, there will be periodic instances such as lease renewals, option servicing, estoppels, and other lease requirements where the lease administrators will need specialized expertise such as legal or accounting expertise. The lease audit staff can fill this void for these types of leasing actions.

Perhaps one of the greatest benefits of having a lease audit staff associated with the lease management  systems relates to problematic escalation charges. The lease system will flag these unusual charges, but having a lease audit staff available to scrutinize the charges, and reconcile with the lease provisions can save time and money. For example, one of the common errors in escalation charges relates to maintenance expenses. Typically these charges should be limited to legitimate expense items; however, some landlords may include capital items in these charges; a blatant violation of most CAM charges. A skilled auditor will identify these discrepancies, resulting in significant savings, sometimes in the high six figures.

With the anticipated changes to the FASB  and IASB lease accounting standards, there will be enormous pressure to insure compliance with these standards once enacted. Having the legal and accounting expertise on hand will greatly facilitate the transition to the new standard, and to insure that the leasing system is fully up to date in reflecting the necessary balance sheet  accounting for both Type A and Type B leases. The lease audit staff can oversee the transition to the new standard and certify that the lease management system is in full compliance.

KBA is unique as a lease auditing firm in developing a state of the art lease management system. Typically a corporate client would need to contract separately with a lease auditing firm to conduct periodic lease audits. At KBA these services are fully aligned and available as part of the Visual Lease  lease management system. Synergies between these two entities both in terms of management and expertise, accrue directly to the client, ensuring efficient, time saving, and cost saving benefits.

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