Getting compliant with lease accounting standards often means starting with a scavenger hunt so you can find out how many leases you have and where they are within your organization. Because equipment and property leases can be scattered throughout an organization, your accounting team probably has to search through file shares, document repositories, and enterprise applications for copies of leasing contracts.
Where should you start for your organization?
Below is a list of the top 15 places where you can generally find your company’s lease agreements.
One of the first places to check is your organization’s procurement or sourcing system. These systems are usually where information about new suppliers and contracts is entered and tracked. It is likely that leases for buildings, vehicles, computers, and other types of assets can be found in this system. In most cases, the procurement system will identify the lessor name and asset description as well as the business unit and stakeholder who originally requested the lease.
Your organization’s contract management system is another good place to start looking for leases as it will often act as a repository for customer and vendor agreements. In many cases, the original lease agreement will be uploaded into this system when it is executed. These contract management systems automate every stage of the lifecycle from the upfront authoring and negotiation of an agreement to the final expiration and renewal. Chances are good that many of your master lease agreements and schedules are housed in your contract management system.
The contract management system should also contain information about any amendments or modifications that have been made to the lease over time. Ask the legal team to provide a report of any relevant contracts stored in the system. Don’t just ask for contracts that have the word “lease” in the title. You will need to examine outsourcing and service contracts as well for possible embedded leases.
Another potential place to find your organization’s leases is in the accounts payable system. This is because many leases are accounted for as operating leases on the balance sheet, which means that they are not capitalized. The payments made under these types of leases will usually show up as a line item in the accounts payable system.
To find these lease payments, run a report of all vendor invoices for the past year (or more) and then filter by the lessor name. This should give you a list of all payments made to that particular vendor. You can then cross-check this information against your other records to see if there are any missing lease payments.
If your organization is required to file financial statements with a regulator (like the SEC), then there is a good chance that some information about your leases can be found in these filings. In particular, you should look for Schedule K of Form 10-Q, which is where lessees are required to disclose certain information about their operating leases.
The schedules for other forms (like 10-K and 8-K) may also contain some limited disclosures about material leases. For example, companies will often describe new or material real estate leases in their 8-K filings. Reviewing these documents can give you an idea of which locations are leased and from which landlords.
Another place to look for information about your organization’s leases is in corporate treasury and tax filings. In particular, you should review the footnotes to the financial statements, which is where many companies disclose information about their material leases. For example, Microsoft discloses information about its real estate leases in Note 8 of its 10-K filing.
These filings can also provide insights into how your company accounts for its leases (i.e. as operating or capital leases). This is important to know as it will affect where the lease payments show up in the financial statements. For example, if a lease is classified as a capital lease, then the payments will be included in the depreciation expense line item on the income statement.
If your organization has a dedicated lease administration team, then they will likely have their own files and records that you can review. These files can contain useful information about the terms of your leases, renewal options, and contact information for the landlords.
The lease administration team may also be able to provide helpful insights into which leases are up for renewal in the near future. This can be especially useful if you are trying to negotiate better terms on a particular lease.
In some cases, your organization’s leases may be tracked in the IT asset management system. This is because many leases contain provisions for the leased equipment to be maintained and serviced by the lessor. As a result, these types of leases are often classified as operating leases on the balance sheet.
To find these leases, run a report of all assets in the IT asset management system and then filter by the lease agreement start date. This should give you a list of all assets that are currently being leased by your organization.
If your organization outsources its IT functions to an external provider, then there is a good chance that some of your leases are with these providers. Firms such as Accenture, Wipro, and TCS can assume day-to-day responsibility for everything from end-user desktops and email systems to ERP applications and data center infrastructure. IT outsourcing companies may have purchased desktops, printers, servers, networking, or storage devices that they operate on your behalf. These IT equipment assets might be considered “embedded leases” under the new standards even though they are owned by the outsourcing provider.
To find these leases, review your organization’s contracts with its IT outsourcing providers. These contracts should contain information about the leased equipment and the terms of the lease agreement.
Organizations with large fleets of vehicles may have invested in a formal fleet management system. Details such as identification numbers, driver assignments, and service histories are maintained for each vehicle from delivery trucks to company cars. If your organization leases its vehicles, then there is a good chance that some of this information is being tracked in the fleet management system.
To find these leases, run a report of all vehicles in the fleet management system and then filter by the lease agreement start date. This should give you a list of all leased vehicles in your fleet.
Most large companies and many mid-sized organizations have established centralized corporate real estate teams to manage their properties. These teams are responsible for activities such as lease administration, space planning, and construction management. As a result, they often maintain their own real estate administration systems.
These systems can be used to track information about individual properties such as square footage, number of occupants, and lease terms. If your organization leases its office space or retail locations, then the real estate administration system is a good place to start your search for lease agreements.
If your organization leases office space, industrial facilities, or retail locations, then the landlord is likely to be a property management company or a commercial real estate firm. These organizations manage buildings on behalf of their owners and are responsible for activities such as lease administration, tenant relations, and maintenance.
To find these leases, review your organization’s contracts with property management companies and commercial real estate firms. These contracts should contain information about the leased premises and the terms of the lease agreement.
Real estate building owners and landlords are another source for obtaining your property leases. Use the landlord names collected from lease administration, accounts payable, procurement, or other systems to identify these lessors. Even if you have copies of your leases, we recommend that you contact landlords to get their latest documentation.
Additional schedules or amendments may have been signed that include updated base and variable rents, renewal clauses, and expansion options. Having the latest leasing data will be critical to perform the proper accounting.
Organizations often lease equipment from companies that specialize in providing this type of financing. This can include items such as vehicles, IT, machinery, and production line components. You will likely have a much longer list of equipment lessors than real estate lessors. Commercial banks, vendor captives, and independent leasing companies are all players in the equipment financing sector.
To find these leases, review your organization’s contracts with equipment leasing companies. It may be a good idea to simply request a copy of all your leases from these companies to ensure that you have the correct payment schedules, end-of-term options, and residual values needed to perform the proper accounting.
If your organization outsources its finance and accounting activities, then the provider may be maintaining your lease records. This is often the case for larger organizations that have established shared service centers or business process outsourcing (BPO) arrangements. The provider may be a Big 4 accounting firm, a global BPO provider, or a smaller specialist.
To find these leases, review your organization’s contracts with finance and accounting providers. These contracts should contain information about the services being performed and the locations of the leased assets. You may also want to request copies of all relevant documentation from the provider, including any subleases that have been signed.
Your organization’s IT systems may contain leases for software, cloud services, and telecommunications equipment. In addition to contacting the owners of various business applications such as Real Estate, Fleet, and Accounts Payable, you should also consider contacting the corporate IT organization as well.
To find these leases, review your organization’s contracts with software, cloud service, and telecommunications providers. These contracts should contain information about the leased assets and the terms of the lease agreement. You may also want to request copies of all relevant documentation from the provider, including any subleases that have been signed.
In addition to these 15 common areas to find your lease agreements, there are a few other considerations that you should keep in mind.
First, if your organization is public, then you may be required to disclose certain leases in your financial statements. For example, US GAAP generally requires leases with terms greater than one year to be capitalized on the balance sheet as an asset and liability. As a result, you will need to have accurate records of all your leases in order to prepare your financial statements in compliance with GAAP.
Second, if your organization is a lessee under a master lease agreement, then you may be responsible for maintaining records of the leased assets and providing this information to the lessor upon request. Master lease agreements are often used by large organizations that have multiple leased assets in different locations. Under a master lease agreement, the lessee is typically responsible for maintaining records of all the leased assets, even if they are not all located at the same site.
Finally, if your organization leases real estate from a government entity, then you may be required to disclose certain information about the lease in your financial statements. For example, US GAAP generally requires leases with terms greater than one year to be capitalized on the balance sheet as an asset and liability. As a result, you will need to have accurate records of all your leases in order to prepare your financial statements in compliance with GAAP.
Once you’ve pulled all your leases together, you’ll want to set up a process to stay in touch with these teams and stakeholders to help you stay compliant in the long-term. Choose software that helps you centralize and automate your lease accounting. With the lease inventory that results from your thorough scavenger hunt, you will have more confidence in the accuracy and completeness of your lease accounting.
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