If your department was changing office locations, would you wait until moving day to pack and figure out who has each office? Most likely, you would build a detailed plan to handle the logistics. The same goes for your lease accounting compliance project. By considering the resources you’ll need, where your lease data is located, and who will manage the project on an ongoing basis, your project will go more smoothly. Building an understanding of the people, controls and processes involved with your lease accounting plan will make the project easier.
Let’s look at a healthcare management company scenario. The company has two real estate leases and a few IT leases and didn’t think they would need a specialized software due to the small number of leases. They created a spreadsheet to help get them through the initial adoption process. However, the lease contracts were being updated frequently and substantially across their organization. They realized quickly that their spreadsheet couldn’t keep up. The lease portfolio doubled within the next 12 months, making it clear they needed to adopt a more effective lease accounting tool.
Here is what they learned:
It’s no secret that technology is an important part of the lease accounting process. Lease accounting software can provide a centralized repository, automate data validation, and produce journal entries and disclosures automatically. Software makes it so your team doesn’t have to know all the ins and outs of the standards (EZLease was made by experts to help reduce stress/strain on accounting teams). Technology can also accelerate audit readiness for the lease accounting plan. However, you’ll still need to consider what internal and external resources you’ll need.
When building a lease accounting plan, it is important to have an understanding for key data that is critical for compliance. The number of leases, start and end date of the lease, the income-based repayment, economic life, fair value, and rent information of a lease are terms that help to better understand the condition of a lease portfolio. Capturing accurate data for lease accounting is critical to ensure that not only are operations running smoothly, but lease accounting statements are complete and ready for auditing.
Some special terms for accounting data help to understand the lifecycle of a lease. Lease incentives, initial direct costs, guaranteed residual value, deferred rent rollover, salvage value, and variable payments are all worth considering at the beginning and during the lifecycle of a lease. It is important to know and understand a lease’s renewal options and end-of-term events to formulate future action regarding the lease.
The timeline of your lease accounting project can be planned into three steps:
Once a plan is completed it is time to prepare for your first audit. To make that easier, here is a list of what auditors typically require:
By building your plan around the resources, controls and processes you’ll need to comply with the lease standards, you’ll be ready for approval from your auditor. For more guidance on choosing the right tool to help, visit our buying guide page.