What Is a Lease Commencement Date?

A lease commencement date is the date when 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.

For example, if a company signs a lease in March but can’t move in until July 1st, then the lease commencement date is July 1st.

Important Lease Commencement Date Terms

Lease Term or Lease Period

The lease term or lease period is the total length of time the tenant has the right to occupy the leased property. It starts on the lease commencement date and ends on the lease expiration date.

Rent Commencement Date

The rent commencement date is when rent payments begin under the lease. 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. For example, they could be different in commercial leases where rent starts after a build-out or rent-free period.

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.

Move-in Date

The date when a lessee or tenant <>physically moves into a space. It may differ from the occupancy date, which is when they are legally allowed to begin using the property—such as when a tenant starts paying rent but delays moving in.

Lease Effective Date

The lease effective date is when the lease agreement becomes legally binding, while the lease commencement date is when the lessee takes possession of the property. They may or may not be the same date.

Lease Execution Date

The lease execution date is when all parties sign the lease agreement. It establishes the legal commitment and usually precedes the lease effective date and lease commencement date.

Lease Inception Date

The lease inception date is when the parties agree to the lease terms and the agreement is formally created. It comes before the lease execution date, which is when all signatures are added to the agreement.

Commencement Certificate

The commencement certificate is 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

Rent abatement is 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 holdover period 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.

Key Lease Dates Timeline

Thhis chart outlines the differences between dates involved with a lease agreement, in the order they would typically take place. Some of these dates may or may not be the same, such as lease effective date and lease commencement date.

How Do You Determine A 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.

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.

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.

Lease Commencement Date for Accountants vs. Attorneys

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.

What Happens if the Lease Commencement Date Is Not Determined Accurately?

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.

Understand the Lease Commencement Date to 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.

Lease Commencement Date FAQ’s

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

The lease commencement date is when the tenant can begin using the leased property. The effective date is when the lease becomes legally binding, typically when both parties sign the agreement.

In some leases, these dates are the same; in others, the effective date comes first. 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 marks the start of the lease term and tenant occupancy. The lease inception date is essentially the starting point of the contractual relationship between the landlord and the tenant, when the lease agreement itself is formed.

Is the lease commencement date the same as the rent commencement date (the date of the first rent payment)?

The lease commencement date, rent commencement date, and lease effective date can all be the same day, but they often differ depending on lease terms. The lease agreement should specify each date clearly. There are situations where the rent commencement date can be later than lease commencement, especially in commercial leases.

Can the lease commencement date vary depending on the circumstances?

Yes, from an accounting perspective the lease commencement date can depend on when the tenant gains access—such as the move-in date, the day keys are delivered, or the start of construction use. Whichever event occurs first will be considered the lease commencement date for accounting purposes. It’s essential to document this date accurately for compliance and to minimize disputes and legal complications, promoting a smooth and mutually beneficial leasing experience for all parties involved.

Getting All Your Lease Dates Right

Understanding lease commencement dates is a crucial aspect of lease accounting and it’s essential to have the right tools in place. Visual Lease’s lease accounting software simplifies the process by automating the tracking of key lease dates, calculating right-of-use assets, and ensuring compliance with the latest accounting standards. Take control of your lease management process today with Visual Lease.

1. What CAM Charges Are: Common Area Maintenance (CAM) charges cover shared property expenses like lobbies, hallways, parking lots, landscaping, and utilities. CAM fees are the actual amounts tenants pay based on their pro-rata share of the property.
2. Reconciliation and Reimbursement: CAM reconciliation compares estimated fees with actual expenses to ensure fairness. Overpayments result in CAM reimbursements or credits, while underpayments require additional tenant payment.
3. Managing Excessive CAM Charges: Tenants can face overcharges when inappropriate costs are included or fees rise unexpectedly. Clear lease definitions, audit rights, and caps help prevent disputes and ensure cost transparency.
4. Lease Accounting and Operational Insights: CAM charges impact financial statements under ASC 842 and differ from general operating expenses. Understanding CAM and negotiating fees helps tenants forecast occupancy costs and maintain a transparent landlord-tenant relationship.

In the world of commercial real estate leasing, Common Area Maintenance (CAM) charges play a pivotal role, impacting both landlords and tenants. CAM rent, often referred to as CAM fees, can significantly influence a tenant’s overall occupancy costs. n this comprehensive guide, we will delve into the intricate details of CAM charges, demystifying what CAM encompasses, the intricacies of CAM fees in leases, how it differs from operating expenses and implications for lease accounting.

Read our comprehensive guide for a deep dive into lease accounting standards and changing guidelines.

What is Common Area Maintenance (CAM) in Real Estate?

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.

What Are CAM Charges?

Common Area Maintenance (CAM) charges are the shared expenses that tenants pay to cover the cost of operating, maintaining, and repairing the common areas of a commercial property. These are the spaces and systems that all tenants use—such as lobbies, parking lots, elevators, and landscaping—and are critical to keeping the property safe, clean, and functional.

What is a Common Area Maintenance Fee?

A Common Area Maintenance (CAM) fee—sometimes simply called a CAM rent—is the actual amount tenants pay to reimburse the landlord for maintaining and operating shared spaces within a commercial property. While “CAM charges” refer to the types of expenses included, the CAM fee is the financial obligation tenants owe as part of their lease agreement.

CAM fees are typically billed monthly or quarterly, either as a fixed estimate or as part of the tenant’s rent invoice. These payments go toward covering expenses like landscaping, janitorial services, building maintenance, and other shared costs associated with the property’s operation.

The total CAM fee a tenant pays depends on their pro-rata share of the property’s total leasable area, as outlined in the lease. At the end of each year, landlords reconcile estimated CAM fees against actual expenses, issuing CAM reimbursements or adjustments as needed.

By understanding how CAM fees are structured and billed, tenants can more accurately forecast occupancy costs and identify opportunities to negotiate fairer, more transparent lease terms.

What is Included in CAM Charges?

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.

CAM Fee Calculation 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.

How CAM Fees are Calculated

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.

Understanding and managing CAM fees requires clear documentation and consistent oversight, especially when lease terms vary across properties. A platform like Visual Lease can help you centralize lease data and improve accuracy across every aspect of lease management.

Excessive CAM Charges

While CAM fees are a standard part of commercial leasing, disputes often arise when tenants believe they are being billed for excessive or inappropriate CAM charges. Excessive CAM charges occur when landlords include costs that fall outside the scope of legitimate common area maintenance expenses or when fees increase dramatically without clear justification.

Common Causes of Excessive CAM Charges

• Improper Expense Allocation: Charging tenants for costs that don’t directly relate to the maintenance or operation of shared areas, such as capital improvements, marketing, or administrative overhead beyond reasonable management fees.
• Lack of Transparency: Limited or unclear reporting on how CAM funds are spent can create confusion or mistrust between landlords and tenants.
• Unexpected Increases: Sharp year-over-year CAM escalations can occur when no caps are in place, or when landlords fail to accurately estimate expenses in advance.
• Inclusion of Non-Recurring or Capital Costs: Some landlords attempt to pass through one-time capital expenditures—like roof replacements or major renovations—that should be amortized or excluded altogether.

How Tenants Can Protect Themselves

• Request Detailed CAM Breakdowns: Ask landlords to provide itemized statements showing what expenses are included in CAM.
• Negotiate Audit Rights: Many tenants secure the right to audit CAM statements annually to verify that billed charges align with the lease terms.
• Set Caps or Limits: During lease negotiations, tenants can request caps on annual CAM increases (often referred to as “CAM caps”) to maintain cost predictability.
• Clarify Inclusions and Exclusions in the Lease: Ensuring the lease clearly defines what expenses can and cannot be included in CAM helps prevent disputes later.

By understanding what constitutes excessive CAM charges and taking proactive steps to manage them, tenants can better control occupancy costs and maintain a fair, transparent relationship with their landlords.

CAM Tips for Tenants

• 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. Common area maintenance 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.

Read our complete guide on ASC 842 requirements to ensure your lease accounting is fully compliant.

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.

Ready to simplify your accounting processes? Lease accounting software like Visual Lease can help you manage all of your commercial leases on a single, organized platform.

With the right approach, businesses can overcome these challenges and transform their real estate portfolio into a strategic asset.

What is Corporate Real Estate Benchmarking?

Corporate Real Estate benchmarking can be defined as comparing one’s business processes and performance metrics to the best practices and metrics from other companies. The processes and methodologies of benchmarking can be a valuable tool in the management of corporate real estate.

Why is Corporate Real Estate Benchmarking Important?

Corporate real estate benchmarking is important because it provides companies with a systematic way to measure and compare the performance, costs, and efficiency of their real estate assets against industry standards or competitors. Here’s why it’s particularly valuable:

1. Cost Control and Optimization: Benchmarking reveals where real estate expenses may be higher than the industry average, identifying areas for cost reduction or improved efficiency.
2. Improved Decision-Making: When making decisions about expansions, lease renewals, relocations, or consolidations, having benchmarks helps companies make more informed choices.
3. Resource Allocation and Efficiency: Real estate benchmarking helps businesses assess how efficiently they use space and resources. It allows companies to see if they’re using their facilities effectively and make adjustments when needed.
4. Risk Management: With benchmarks in place, companies can identify performance gaps that signal potential risks.
5. Strategic Planning and Growth: For companies planning to grow or enter new markets, benchmarking offers insights into market standards.
6. Sustainability Goals: As more companies focus on sustainability, benchmarking can be used to measure environmental performance, such as energy consumption or waste reduction, against other organizations.

Corporate real estate benchmarking methodology

Robert Camp wrote a book with an amazing 12-stage methodology on corporate real estate benchmarking. This methodology applies to a comprehensive benchmarking effort. A more abbreviated process can be used. Camp’s process was as follows:

1. Select subject
2. Define the process
3. Identify potential partners
4. Identify data sources
5. Collect data and select partners
6. Determine the gap
7. Establish process differences
8. Target future performance
9. Communicate
10. Adjust goal
11. Implement
12. Review and re-calibrate

Usually benchmarking is used to identify a specific problem in the company’s real estate portfolio such as space utilization, unit costs, leased rates, comparison of real estate values to prevailing market values, or cycle times such as average project cycles.

To take advantage of benchmarking, it’s essential that you have a robust lease administration system that can provide the space and cost data to be used in the benchmarking process.

Benchmarking for corporate headquarters

Benchmarking for corporate headquarters involves comparing the costs, utilization, and operational efficiency of a company’s headquarters with industry standards or peer organizations. By examining elements like space utilization, operating expenses, and energy efficiency, companies can determine if their headquarters are performing optimally or if there is room for improvement.

This type of benchmarking helps organizations identify potential cost-saving opportunities, optimize space, and ensure the corporate headquarters meets both operational needs and sustainability targets. Understanding how similar companies manage their headquarters can provide insights into best practices for layout design, employee count, and occupancy costs.

Optimizing facilities and costs

Another use of corporate real estate benchmarking can be used to measure the metrics of internal facilities and costs. Here management is concerned with those facilities that represent unusual variances either in utilization or costs, as a way to target remedial action.

Optimizing facilities and associated costs through benchmarking allows companies to simplify real estate expenses while improving the efficiency of their properties. Benchmarking metrics such as maintenance costs per square foot, and facility utilization rates can reveal areas where expenses are higher than industry norms. This helps identify inefficiencies in operational processes or facility management practices.

Companies can then target specific strategies for cost reduction, such as negotiating lease terms or revising maintenance schedules. Good benchmarking in facilities management supports cost control, ensuring that each property within the portfolio operates efficiently without sacrificing quality.

Commercial real estate performance metrics to target

Corporate real estate benchmarking should be a fundamental tool in the CRE manager’s tool kit. I would urge CRE managers to include a series of benchmarks in the annual real estate plan.

Such benchmarks as average space per person, average facilities cost per person, and average cost per square foot as compared to market rates can provide management with a keen insight to the portfolio’s performance relative to best in class metrics.

Corporate real estate benchmarking can be a way to establish annual performance goals. Using benchmarks can set the stage for strategic actions to meet these goals such as facilities relocations, consolidations, and/or lease renewals/ renegotiations.

Why Corporate Real Estate Benchmarking Can Be Challenging

Corporate real estate benchmarking offers insights, but the process can be challenging. One common issue is data availability — finding comprehensive and consistent data across different locations can be difficult, especially for international companies.

Another challenge lies in data consistency and comparability. Even when data is available, companies may face discrepancies in how metrics are defined and calculated. Without standardized definitions, it’s difficult to make comparisons.

Regional and market variations also complicate the benchmarking process. The real estate market is highly localized, and what works as an ideal benchmark in one area may be unrealistic in another due to variations in demand, occupancy rates, and economic conditions. These differences require companies to approach benchmarking with flexibility and allow for adjustments while maintaining corporate standards.

How Lease Accounting Software Can Benefit the Benchmarking Process

Real estate lease accounting software is a valuable tool in the benchmarking process. By consolidating lease data into a single platform, the software allows companies to access accurate and up-to-date data across all real estate assets. This eliminates manual data entry and spreadsheet tracking, which can lead to inconsistencies and inaccuracies.

Advanced lease accounting software provides reporting and analytics tools that allow users to generate customized reports aligned with specific benchmarking metrics. The ability to narrow down metrics by region, asset type, or department also helps companies better understand performance gaps and areas for improvement.

Many lease accounting platforms offer forecasting and scenario analysis, allowing companies to model potential outcomes based on future lease decisions. This is useful for long-term benchmarking and it helps companies project the impact of potential changes in occupancy, rent escalations, and other variables. These platforms also enable companies to compare lease terms across global service‑center locations, providing insights that support optimized renegotiations and more strategic lease management. Learn more about these capabilities.

What benchmarking can a platform provide to compare occupancy cost versus industry peers?

A strong lease accounting and real estate management platform should enable companies to benchmark occupancy costs against industry peers. Visual Lease provides built-in analytics and reporting that aggregate and normalize occupancy data across properties, allowing users to compare their space utilization and cost per square foot to market and industry standards. This insight helps real estate and finance teams quickly identify where costs are above average and take action to optimize lease terms, space allocation, or operational efficiency.

By understanding and applying benchmarking data, businesses can find areas for cost savings, improve resource allocation, and make data-driven decisions that align with their goals and growth strategy.

Although benchmarking presents challenges, especially in terms of data consistency and regional variability, a strong lease accounting platform can streamline data management, enhance accuracy, and provide the analytics needed for meaningful comparisons.

As companies increasingly prioritize sustainability, efficiency, and financial performance, benchmarking will remain a powerful strategy for maintaining a competitive edge in real estate portfolio management. Contact our team today with any questions or schedule a demo.

ATLANTA–(BUSINESS WIRE)–Visual Lease (“VL”), a CoStar Group (NASDAQ: CSGP) brand and the premier platform for integrated lease management, accounting and reporting, in collaboration with CoStar Real Estate Manager, today released a new report from the Visual Lease Data Institute (“VLDI”), “2026 Outlook: The Trends, Risks and Opportunities Shaping Lease Portfolio Management.” In this third-annual, national survey, senior finance and real estate executives at enterprise organizations shared insights into their lease management strategies, financial and real estate priorities, technological innovations and more amidst a fluctuating economic and regulatory landscape.

“Lease portfolios are no longer just a line item on the balance sheet — they are a source of valuable and actionable insights,” said Mark McDonald, President of Visual Lease and CoStar Real Estate Manager. “Our survey found that finance and real estate executives are increasingly utilizing portfolio data to guide strategic planning. With more companies returning to the office, sustainability goals still top of mind and market conditions shifting, leaders agree that clear visibility and cross-team collaboration are more critical than ever for managing risk and making informed decisions.”

Key findings from the report include:

• Executives are elevating strategic decision-making with lease portfolio data: Real estate executives are utilizing this data to enhance financial forecasting and budgeting (57%) and optimize lease renewals and negotiations (51%), while finance executives are using it to improve forecasting (49%), drive cost savings (47%) and inform decisions around adopting new technologies (46%).
• Visibility and control are crucial for lease compliance and reporting: Without proper visibility and control over lease portfolios, companies struggle with compliance and accurate reporting. The share of real estate executives who are “very” or “extremely” confident in understanding the total costs, risks, and opportunities in their lease portfolio grew from 52% in 2024 to 71% in 2025.
• Companies plan to add leases, but cautiously: While more real estate leaders are looking to lease additional space in 2026 (70% said adding space is part of their upcoming strategy, compared to 56% in 2024), flexible terms remain a priority amidst market uncertainty. Even further, 64% say their company is extremely or very likely to delay making needed upgrades or moving facilities in the coming year due to the state of the economy.
• Sustainability reporting is still a priority: Even with national sustainability reporting requirements rolled back, leaders continue to invest in environmental-related reporting as stakeholder appetite remains strong. In fact, 80% of real estate leaders and 88% of Finance Leaders are prioritizing sustainability reporting more this year than in 2024.
• Finance executives have high hopes for AI: 70% of finance executives believe the value of generative AI lies in providing resources and information in record time, helping their teams move more quickly. Specifically, they hope that AI will help reduce reporting errors (69%), streamline manual tasks (45%) and analyze key data sets (41%) – all of which are dependent on correct and comprehensive data.
• Collaboration between real estate and finance saves money: Finance and real estate leaders see the benefits of collaboration, especially when it comes to lease portfolio management, which touches multiple functions across finance, real estate, legal and IT. From 2024 to 2025, the share of real estate executives saying their finance team is completely collaborative rose from 4% to 26%. Interestingly, a much larger percentage of finance executives (81%) believe they are completely collaborative with their real estate colleagues.

“Companies that get their lease data in order today will be best positioned to navigate risks and seize new opportunities going into 2026 and beyond,” said McDonald. “While we never have a crystal ball into what the future will hold, proper lease management and valuable data insights can make the vision clearer and planning more informed.”

To download the report and view the full data findings, click here.

Visual Lease conducted national surveys of 200 U.S. senior Finance and Accounting Executives and 200 U.S. senior Real Estate Executives at private, public and government organizations with more than 1,000 employees.

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.

Depreciation of Capitalized Lease Assets

Once a lease-related asset is capitalized, it must be depreciated over its useful life. For capitalized lease assets, such as leasehold improvements or equipment, the depreciation period is often the shorter of the asset’s useful life or the lease term.

Common depreciation methods include straight-line depreciation, which spreads the expense evenly over the asset’s life, or an accelerated method, which front-loads the depreciation cost. Depreciation expenses are recorded on the income statement, reducing the value of the asset on the balance sheet over time.

Common Mistakes to Avoid in Asset Capitalization for Leases

Misclassifying lease-related costs is a common mistake businesses make when deciding whether to capitalize or expense these costs. One common error is capitalizing costs that should be expensed immediately, such as routine maintenance or minor repairs, which can lead to inflated asset values on the balance sheet.

Another mistake is failing to properly allocate costs between tenant improvements and general operating expenses, leading to incorrect depreciation schedules.
Businesses also sometimes overlook the need to capitalize costs associated with lease modifications, such as expanding a leased space or extending the lease term. To avoid these errors, it’s essential to maintain accurate records, review lease agreements closely, and ensure compliance with lease accounting standards.

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’s lease management software 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.

Which KPIs Does the Platform Surface to Support Strategic Capital Allocation Decisions?

To help organizations use their lease portfolio as a financial lever, the platform highlights key performance indicators (KPIs) such as:

• Lease Liabilities: Shows the total financial obligations tied to leases, helping teams assess cash flow needs and funding requirements.
• Right-of-Use (ROU) Asset Value: Reflects the worth of capitalized assets, allowing finance teams to evaluate asset utilization and balance sheet health.
• Weighted Average Lease Term (WALT): Provides visibility into the length of commitments, enabling better forecasting and capital planning.
• Incremental Borrowing Rate (IBR) Impact: Highlights how discount rate assumptions affect capitalization and debt profile, supporting cost-of-capital analysis.
• Depreciation and Amortization Trends: Tracks expense recognition over time, giving insight into when resources will be freed for redeployment.
• Compliance Status Across Standards (ASC 842, IFRS 16, GASB 87): Surfaces adherence metrics that reduce risk and protect access to capital markets.

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.

Below are eight benefits of using accounting software for your small or medium-sized business (SMBs).

Advantages of Accounting Software for SMBs

1. Enhanced Financial Organization

An accounting software provides a comprehensive platform for organizing and managing financial data. By automating repetitive tasks like data entry, invoicing, and expense tracking, businesses 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. 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.

6. 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, a lease accounting software specifically caters to the complexities of lease accounting, helping SMBs comply with ASC 842 or IFRS 16 guidelines. Let’s deep dive into the benefits of using lease accounting software.

7. Audit Ready Data

Traditional methods of lease management often involve scattered documents, spreadsheets, and manual tracking, making it difficult to pull together accurate and comprehensive information during audits. Lease accounting software centralizes all lease data into one system, allowing businesses to keep detailed, time-stamped records of lease modifications, payments, and other financial transactions. This fosters more transparent and organized data, and reduces the risk of inaccuracies or inconsistencies during an audit.

8. Forecasting and Budgeting

By having all lease-related financial data readily available, businesses can project future lease expenses, track upcoming lease renewals, and estimate how lease obligations will impact future budgets. It also allows businesses to model different scenarios, such as how signing new leases or terminating existing ones would affect their financials. This helps companies align their lease strategies with business goals and ensures that they have the financial flexibility to meet future needs.

There are many things to consider when choosing a lease accounting software. You want to be able to find exactly what your business needs and find a software with a good price and value. 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. A quality lease accounting software like Visual Lease’s platform ensures your company can reap all of these benefits for improved financial organization.

Lease Accounting Software for SMBs FAQs

Why is accounting software important for SMBs?

Accounting software centralizes all financial transactions in one system, reducing manual errors and saving valuable time for SMB finance teams. With real-time reporting and automated workflows, business owners gain clear insights into cash flow and operational costs.

How does lease accounting software help a small business?

Lease accounting software automates calculations for right-of-use assets and lease liabilities, ensuring accuracy and saving hours of manual effort. It generates audit-ready schedules and disclosure reports, giving small businesses confidence in meeting ASC 842 and IFRS 16 requirements.

Do I need lease accounting software for my small business?

If your small business manages multiple leases or must comply with ASC 842 or IFRS 16 requirements, lease accounting software is essential. The software centralizes lease terms and automates right-of-use asset and liability calculations. It also generates audit-ready reports to reduce errors and save finance teams hours of manual work. Centralized data and real-time reporting improve cash-flow forecasting, risk management, and strategic decision-making as your business grows.

How does accounting software help SMBs maintain compliance with lease accounting standards like ASC 842 and IFRS 16?

Lease accounting software automatically calculates right-of-use assets and lease liabilities according to ASC 842 and IFRS 16 guidelines, eliminating complex spreadsheets. With built-in practical expedients and audit-ready reports, SMBs can confidently meet disclosure requirements and streamline the audit process.

What kind of support and training is available for SMBs?

Visual Lease provides tailored onboarding, live training sessions, and a dedicated customer success manager to guide SMB finance teams. Access to on-demand resources, regular product updates, and proactive best-practice reviews ensure your team maximizes software value from day one.

What is Asset Retirement?

Asset retirement refers to the process of removing, disposing of, or decommissioning an asset that is no longer in use or has reached the end of its useful life. In many industries, asset retirement obligations (AROs) are recognized as a liability. These obligations represent the estimated future costs of retiring certain assets, especially in cases where environmental or safety considerations are involved.

When Is an End of Term Obligation an Asset Retirement Obligation?

The guidance of ASC 842, Leases, and ASC 410, Asset Retirement Obligations, can be somewhat circular and hard to follow.  Each standard refers to the other, and both discuss contract versus regulatory requirements, as well as a host of other considerations.  While these factors may impact the ultimate determination, ASC 842 gives us a simple rule of thumb:

• If the obligation is to remove an improvement to the underlying asset, and the asset has been recognized on the lessee’s balance sheet, the obligation to remove that asset should generally be accounted for as an ARO.
• If the asset is owned by the Lessor, then the cost to remove the asset would be considered a lease payment. It increases the lease liability and the right of use of assets. Amortization of this asset increase will then increase the lease expense.  
  • Note that this “ownership” issue is based on accounting ownership, not legal ownership, which may be different.

There is a third subset of end of lease obligations which arise out of environmental considerations.  These are covered by a different section of ASC 410. 

Examples of Asset Retirement Obligation (ARO)

1. Biglaw, LLC, leases 40,000 square feet in a class A office building. The landlord agrees to build out offices and conference rooms to Biglaw’s specification, at a cost not to exceed $1 million. Biglaw approves the plans but is not involved in the construction.  They are obligated to return the space to its original condition at the end of the lease term.  Biglaw does not place a Tenant Improvement on their balance sheet.This end of lease obligation is not considered an ARO. Biglaw will estimate the cost to remove the improvements at the end of the lease and consider that a final lease payment. The lease liability and right of use asset include the cost to remove.
2. Justeatz, Inc. leases 4,000 square feet to use as one of their chain restaurants.  The space requires significant work to accommodate all their restaurant equipment, both general kitchen equipment and their signature finishes and signage. At the end of the term, Justeatz will remove their equipment and branded materials. Justeatz pays the contractor and puts a Leasehold Improvement on their balance sheet, then the landlord reimburses them. While the asset and liability are reduced by the amount of the incentive, the estimated cost to remove the leasehold improvements is handled as an ARO.

Differences ARO in Other Standards

IFRS 16 does not contain this sort of differentiation. Any obligation to dismantle and remove an underlying asset, the site or the underlying asset is accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets and is treated as an adjustment to the Right of Use Asset.

GASB 87 does not specifically address ARO for lessees. A clarifying statement in GASB 83, Certain Asset Retirement Obligations, goes further to require that lessors must recognize ARO’s associate with the leased property, but “a lessee’s liability as a result of obtaining the right to use an underlying asset generally would be incorporated into lessee’s lease payments”.

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. 

Note that this does not apply if there is just uncertainty as to the amount of the obligation, only when the entity has insufficient information to estimate the present value. All three accounting standards contain similar provisions.

How Are Asset Retirement Obligations (AROs) Treated Under Different Accounting Standards?

ASC 410 (FASB, US GAAP)

Under ASC 410, the initial measurement starts with a recognition of the expected future costs to retire the asset. ASC 410 notes that using the expected cash flow technique is usually the only appropriate method for measuring the liability. This method calls for the entity to estimate the costs to meet the obligations today. If there are several possible scenarios or costs to estimate, the entity should establish a weighted average cost based on the probability of each being the correct value. This weighted average cost should then have an expected inflation factor applied to estimate the cost to be incurred at the time of remediation. 

Note that the time of remediation is not necessarily the end of the lease term. The expected date of remediation may occur before or after the lease expiration date.

This expected expenditure is then discounted using a risk-free interest rate, adjusted for the entity’s credit risk. This discounted value is the Asset Retirement Obligation, which is recorded as a liability on the balance sheet. Interest (at the discount rate) accretes to the obligation each period.

When recording the ARO, the offsetting debit entry is the Asset Retirement Cost. This cost is expensed “using a systematic and rational method over the useful life of the asset.” This is commonly amortized on a straight-line basis, although other methods may be used.

IFRS 16 (IASB)

IFRS 16 and IAS 37 work together to account for asset retirement obligations in leases.  IAS 37 starts with a best estimate of the expenditure to settle the obligation. The future obligation is discounted just as in ASC 410, except that the discount rate is a pre-tax rate that reflects current market assessments and the risks specific to the liability. The resulting value is called the Provision. Interest accretion is recognized as a borrowing cost.

The provision is then entered as an increase to the Right of Use Asset in the lease accounting schedule, with an offsetting credit against the IAS 37 provision. The Provision is therefore expensed in equal monthly installments as the ROU asset is amortized.

GASB 87 

Recall that GASB 87 does not specifically address ARO for lessees. GASB 83, Certain Asset Retirement Obligations, states that “a lessee’s liability as a result of obtaining the right to use an underlying asset generally would be incorporated into lessee’s lease payments”. Therefore, the cost of satisfying the asset retirement obligation is merely considered a final payment during the lease term.

How Are ARO Changes Accounted For?

As ARO’s are always a forward projection of likely expenses, they are subject to change.  Inflation factors can change, technology can change the cost of accomplishing the work, and regulatory influences can change the scope, just to name a few factors.  Each of the standards provides for re-measuring the ARO as these conditions change.  

The factors to consider and thresholds for change are too many to consider here.  However, each standard calls for a periodic review, which may be supplemented when conditions are known to change. Changes which are material would be handled as remeasurements, as in ordinary lease accounting.

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.

What is Lease Amortization​

Lease amortization refers to the process of gradually reducing the value of a lease over its term. It involves spreading out the lease’s total cost (such as the present value of lease payments) over the duration of the lease, similar to how loan amortization works.

For accounting purposes, this is typically used for leases that fall under the guidelines of operating leases or finance leases under the current accounting standards, like IFRS 16 or ASC 842. The purpose of lease amortization is to allocate the lease expense over the lease term.

Key components involved in lease amortization:

• Lease Liability: The amount that the lessee owes to the lessor over the lease term. This amount is the present value of lease payments.
• Right-of-Use (ROU) Asset: The value of the asset the lessee has the right to use under the lease, which is also amortized over the lease term.

Understanding a Lease Amortization Schedule

A lease amortization tables is designed to outline the timing of lease payments and allocate them between principal and interest components. It is a schedule reflecting the gradual reduction of the lease liability balance over time. This split of the payments into principal and interest is required for the undiscounted cash payments to reduce the discounted liability to zero at the end of the lease term.

How To Create 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 your discounting calculations will be based on payments made at the beginning or end of each period. This choice will influence your calculation methodology. The actual timing of the payments is not relevant to this decision. Although many companies choose beginning of period methodology to align with real estate rent due the first of the month, others choose end of period to be consistent with calculations created in Excel.
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, subtract the full current period payment from the previous period’s ending balance, then apply the interest rate. For end-of-period payments, apply the interest rate to the previous period’s ending 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.

What about the Assets?

Assets are also amortized in a Lease Amortization Schedule, but with some important differences. The initial value of the asset is first adjusted by things like lease incentives, initial direct costs, prepaid rent, and more. The amortization of that asset depends upon the lease classification.  Operating leases are amortized based on straight line rent and interest, while finance leases amortize the asset on a straight line basis.

Ordinary modifications further complicate the asset valuation, while impairments and abandonments completely change the amortization schedule. This level of complication is another driving factor behind companies leveraging dedicated lease accounting software to remain in compliance.

How to Get a Lease Amortization Schedule or Template

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.

Prepaid rent refers to lease payments made in advance for a future period. It represents a ROU 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.

Prepaid vs accrued rent under ASC 842

Under ASC 842, prepaid rent and accrued rent represent the opposite timing of lease payments. Prepaid rent occurs when a company pays rent in advance before the lease period begins, and it is included as part of the right-of-use (ROU) asset on the balance sheet. When rent is prepaid, the liability decreases but the ROU remains the same. When you have accrued rent, you decrease the ROU because the expense has been recognized, but the liability is unchanged.  No liability is added. The liability just has not been removed. 

Is prepaid rent an asset? 

Yes, prepaid rent is considered an asset in accounting. Under ASC 842, prepaid rent is no longer classified as a current asset but is instead included as part of the right-of-use (ROU) asset for operating and finance leases. 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 part of the ROU 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.

How is prepaid rent recorded?

When a company pays rent ahead of time, it records this payment as prepaid rent, which is considered an asset because it represents future use of the rented space. Instead of counting it as an expense right away, the company first lists it under current assets on the balance sheet. Each month, as the rent is “used up,” a portion of the prepaid rent is moved from the asset category to rent expense on the income statement. This way, the company spreads out the cost over time, matching expenses to the months they apply to. If the prepayment covers more than a year, the part that applies to later years might be listed as a long-term asset instead.

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 a prepaid asset 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 (ROU) 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, the prepaid rent 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, but the expense has not yet been recognized.

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. 

For more assistance with lease accounting solutions, contact Visual Lease today!

There’s been increasing interest in what is known as beacon technology. Usually associated with retail marketing, beacon technology first emerged in 2013. Today the technology is driving a huge growth in sales with an expected increase in sales from $519 million in 2016, to $56 billion in 2026.

Apple invented the standard for beacon technology in 2013. Essentially the technology depends on users downloading the app on their smart phone which allows them to receive messages from Beacon enabled locations. In essence, the technology employs Bluetooth low energy (BLE) wireless technology that sends a signal that can be received on a user iPhone that is near the beacon transmitter. The user must opt in to the specific Beacon application. The beacon sends out a signal every second or more to a short distance which can range from a few feet to several hundred yards.

While Apple invented the technology, it does not provide the hardware. There are several leading vendors of the beacon transmitters including Kontakt, Bluesense, Gelo, Estimote, and Google’s version, Eddystone.

How Different Industries are Using Beacon Technology

So why should CRE managers have an interest in beacon technology? Essentially beacon technology is an extension of the smart building format that focuses on building automation and the Internet of Things (IOT). With beacon technology, managers can keep track of space utilization by tracking workstation use, vacancies, etc. Beacon technology can also track such things as energy use, by tracking temperature fluctuations, floor space use, employee traffic patterns, etc. CRE managers can use the technology to push messages to visitors such as meeting location, daily event schedules, and other information helpful to visitors.

In the event of emergencies, beacon technology can alert employees of incident status, exit routes, and alert rescue personnel of employee locations, and status.

Beyond office and retail use, beacon technology is being widely employed in the sports industry. Major League Baseball has deployed beacon technology in nearly all of the 30 major league parks as of 2024. Baseball fans can get information on concession deals, seat upgrades, and game schedules. And museums have discovered the benefits of beacon technology by delivering exhibit information, floor plans, and information on specific exhibits that replaces the audio headsets. Museums gather information on attendee interest with specific exhibits that help with future planning.

Enhancing Tenant Experience

Beacon technology allows property managers to deliver personalized updates and notifications directly to tenants’ smartphones. This can include reminders for lease renewals, maintenance schedules, or upcoming building events. Tenants can also receive location-based messages, such as details about nearby amenities or promotions for services available within the building.

For large office complexes, beacons can guide tenants and visitors through the property with turn-by-turn directions. This is especially helpful for first-time visitors or individuals with accessibility needs.

With beacon-powered apps, tenants can easily request services such as cleaning, IT support, or conference room bookings. This improves tenant satisfaction and simplifies communication between property managers and tenants.

Streamlining Property Management Operations

Beacon technology integrates with building management systems to monitor equipment and systems in real time. Property managers can receive alerts when a system requires maintenance, preventing breakdowns and minimizing downtime.

Beacons track occupancy rates across various building spaces and allow property managers to identify underutilized areas. This data can be used to optimize space usage or reallocate resources.

By monitoring foot traffic, energy usage, and building patterns, beacon data helps identify inefficiencies. Property managers can use this data to reduce energy consumption, adjust cleaning schedules, and optimize staffing, leading to significant cost savings.

Security & Emergency Management

Beacons can integrate with access control systems to monitor and restrict movement within the building. This ensures that only authorized personnel have access to specific areas.

During emergencies, beacons provide guidance to employees and visitors, showing the nearest safe exits or alerting them to blocked pathways. Rescue teams can also use beacon data to locate individuals quickly.

With beacon-enabled visitor authentication, guests can receive temporary digital passes on their smartphones, eliminating the need for physical badges. This not only enhances security but also improves the visitor check-in process.

Concerns about beacon technology

Beacon technology raises the issue of personal privacy. Critics note that the technology can be abused by tracking individual’s buying behavior and location within stores and offices. The fact that users can opt out of a beacon technology solves the privacy issue, but is not a long-term solution.

Beacon technology: another trend to watch

Beacon technology is yet another example of how technology is transforming the personal experience from the workplace, to retail, sports, education, hospitality, entertainment, and an almost limitless variety of activities at the intersection of people and places. We’ve stressed the need for CRE managers and professionals to stay abreast of real estate technology trends since it is surely technology that will define the CRE mission of the near future.

Similarly, advanced tools like real estate lease accounting software are revolutionizing how businesses manage their lease portfolios. These platforms provide CRE managers with critical insights into lease data, operational costs, and compliance requirements, enabling smarter decision-making. By combining innovations like beacon technology with good lease accounting solutions, CRE professionals can optimize their lease management strategies, reduce costs, and maximize ROI while staying ahead in a competitive real estate market.

This article dives into the key elements of these reports, their value to CRE , managers, and how to leverage them to make better decisions.

What CRE can learn from a real estate market analysis report

Virtually all real estate service firms offer some type of real estate market analysis. These reports are typically offered at no cost and some are quite good. Some larger firms such as CBRE, Jones Lang La Salle (JLL), and Cushman and Wakefield, offer global reports with focus on all the major market cities. Typically reports covering market analysis of real estate are issued quarterly with annual forecasts and summaries.

The reports are based primarily on brokerage activity, and most are quite detailed and accurate.

What real estate market analysis reports cover

Generally the reports cover the following categories:

• Gross and net rental rates (in $ per square foot) by property type, including office, industrial, retail, apartments, land valuation.
• Key statistics include absorption rates, vacancies, implicit interest rates, and major transactions including major leases, subleases and sales.
• Markets are organized by major metropolitan areas (both suburban, and central business district). Markets are further divided by property quality: A, B, C. Many of the reports cover international markets including Canada, UK, Continental Europe, Asia, Australia, and Middle East.
• Most reports provide forecasts of rental rate trends, interest rate trends, and outlook on availabilities, and shortages.
• Key statistics include vacancy rates, absorption (rate at which space is absorbed), space growth or reduction, interest rates, and major transactions.
• The reports usually provide commentary on market conditions, and key factors influencing market dynamics such as employment trends, new construction, regulatory changes, and changes in key factors such as zoning changes, etc.

The value of a focused real estate market analysis report

CRE managers can order special market reports that focus on specific markets and sub-markets. Ordinarily, real estate service firms will provide market analysis as part of a brokerage assignment. Sometimes it’s wise to have more than one report to validate projections and trends.

The Power of Analyzing Historical Trends in CRE Market Analysis

Analyzing historical trends is essential for providing context to current market conditions and predicting future shifts. By reviewing data on vacancy rates, rental growth, and absorption rates over several years, CRE managers can identify patterns that inform their leasing and investment strategies.

For instance, historical data may reveal seasonal trends in leasing activity, helping companies time their lease negotiations for the best terms.

Historical analysis is also important for understanding how external factors, like economic downturns or pandemics, impact commercial real estate. During the COVID-19 pandemic, for example, companies that examined historical responses to previous crises were in a better position to pivot their portfolios toward emerging trends like flexible workspaces and suburban real estate.

Leveraging historical trends allows CRE managers to make data-driven decisions rather than reactive ones, which protects their portfolios against market volatility.

Real estate market analysis: the latest trends

In reviewing the latest reports, here are some key findings:

• The Tech industry is the key driver in office markets nationwide, particularly in West Coast markets.
• The trend of growth in urban markets is beginning to subside with a resurgence in suburban markets.
• Growth in shared offices continues to trend upward, with growth in most urban and suburban markets.
• In general, the real estate markets worldwide are in good shape with no contraction anticipated over the next three years. Some analysts raise concerns with a downturn possible after three years, but there is no consensus on this possibility.

Role of Lease Accounting Software in Market Analysis

Real estate lease accounting software can be a game-changer in tracking and responding to market trends. Tools like Visual Lease centralize lease data and allow CRE managers to easily analyze financial obligations, lease terms, and performance metrics across their entire portfolio. This integration of lease data with market insights enhances strategic decision-making.

For example, lease accounting software can automate the calculation of occupancy costs, which helps CRE managers compare their current portfolio to market benchmarks. Features like customizable dashboards, automated alerts for lease renewals, and ad-hoc reporting helps decision-making and allows quick responses to market changes.

Advanced analytics tools within the software can also identify opportunities to optimize expenses, like renegotiating leases in oversaturated markets or leveraging favorable market conditions to expand. By incorporating lease accounting software into their strategy, CRE managers can ensure their decisions are data-driven and aligned with the current market.

CRE managers need to stay abreast of real estate market trends and adjust leasing and portfolio strategy as appropriate. We recommend taking a five year view of the markets, and update your company’s real estate strategy based on a five year rolling forecast. This means becoming knowledgeable about the insights provided by real estate market analysis reports, and following the trends on a quarterly basis.

By staying updated on trends and leveraging insights from reports, CRE managers can optimize leasing strategies, reduce risks, and seize opportunities in a competitive market. Integrating tools like lease accounting software ensures accurate tracking and simple management of lease data, enhancing the ability to respond to market shifts with confidence. Trust a superior lease accounting software like Visual Lease to aid in your market analysis process.
Want to see how it works? Request a demo now.

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 Lease Accounting Complexities using Excel

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 was 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. 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— have transitioned 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 also ushered in changes in business strategy that leads 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.

The Benefits of Lease Accounting Software vs Excel

Lease accounting software offers a suite of benefits that far exceed the capabilities of Excel, especially for organizations managing large or complex lease portfolios. Unlike spreadsheets, which rely heavily on manual entry and fragmented processes, lease accounting software provides a centralized platform designed to simplify lease management and compliance.

One of the most critical advantages is centralized data management. Lease software stores all lease-related information in one place, allowing teams across departments to access accurate and up-to-date data at any time. This eliminates the risk of working with outdated spreadsheets or duplicate files, which can lead to errors.

Additionally, software offers automated compliance tools that streamline reporting under accounting standards like ASC 842 and IFRS 16. These tools handle complex calculations, such as right-of-use assets (ROU) and lease liability adjustments, ensuring accuracy without manual entry. With automated compliance, businesses can prepare accurate financial reports, avoid audit risks, and meet regulatory standards.

Lease accounting software is also scalable. As businesses grow, their lease portfolios often expand. Unlike Excel, which becomes increasingly difficult to manage with larger datasets, specialized software can easily accommodate more leases by offering tools to manage the additional volume without decreasing efficiency or accuracy.

Data Security Features

Data security is a growing concern for organizations managing sensitive financial information, and Excel simply doesn’t provide the safeguards needed to protect lease data. Spreadsheets are often stored on local machines or shared via unsecured channels like email, making them highly vulnerable to breaches and unauthorized access.

Lease accounting software offers security features that protect sensitive information from potential threats. These platforms typically employ data encryption, ensuring that all information is secure both at rest and in transit. Multi-factor authentication (MFA) is another common feature, adding an extra layer of security by requiring users to verify their identity before accessing the system.

Audit trails are another critical security component offered by lease software. These tools track every change made within the system, recording who made it and when. This transparency not only strengthens data integrity but also simplifies audits by providing a clear record of all modifications.

Cost Savings of Transitioning to Lease Accounting Software

Although lease accounting software requires an upfront investment, the long-term cost savings can be substantial compared to relying on Excel. One of the most immediate savings comes from reduced audit costs. With clean, centralized data and automated compliance features, companies can minimize the back-and-forth with auditors, saving both time and money.

Lease accounting software is also more efficient than Excel and reduces the time finance teams spend on manual data entry and error correction. With automated workflows and real-time updates, teams can focus on strategic tasks rather than combing through spreadsheets to reconcile discrepancies.

Software can also help businesses identify areas where they’re overspending. For example, lease management tools often include analytics dashboards that highlight high-cost leases or inefficiencies in portfolio management. By identifying these opportunities, organizations can renegotiate leases, consolidate spaces, or make other adjustments to reduce expenses

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 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.

Want to see how Visual Lease’s platform works? Request a demo today.

There are many elements that make up the real estate market. This blog is focused on commercial markets as opposed to residential markets. Specifically, our market definition includes office, industrial, retail, and hospitality markets. Also the markets are further differentiated into urban and suburban markets, building class (A,B,C) and locale (city and regional markets).

The 4 Phases of the Commercial Real Estate Market Cycle

Commercial real estate markets follow a predictable 4 phase cycle. A Harvard blog post labeled the four real estate market cycle phases as:

1. Phase 1: Recovery
2. Phase 2: Expansion
3. Phase 3: Hyper Supply
4. Phase 4: Recession.

Phase 1: Recovery

Here the markets are on an upward trend; essentially coming out of the last down turn. In many urban and suburban markets, buildings are suffering from high vacancies, declining rentals, and some cases of bankruptcies and foreclosures. Unemployment is relatively high, and demand has diminished. Economic growth resumes, and property transactions increase, particularly in distressed properties.

Phase 2: Expansion

The markets are showing signs of recovery. Tenant demand is rising, along with rental rates. Real estate developers are beginning to buy and build new properties. Space absorption is increasing, and the general commercial markets are steadily improving. These trends vary by city and sub-markets, but in general this is a period of recovery. Vacancy rates decrease significantly due to strong demand and investor confidence is high, driving investment into the market.

Phase 3: Hyper Supply

This is the period in the cycle when markets boom, and become overheated. Most recently, this phase occurred during the COVID pandemic with many markets becoming over built, and supply exceeding demand. This was caused for various reasons, including businesses no longer needing offices after switching to remote work, decreased traffic because of lockdowns, and more. The result is declining rents and growing vacancies.

Phase 4: Recession

This is the bottoming of the market. (Remember the recession of 2008?) Foreclosures abound, bankruptcies depress the property markets, tenancy contracts, and many properties stand vacant for months. But the markets finally bottom out, and the general economic scene shows signs of recovery. The cycle repeats itself, with tenant demand increasing, rents rising, and occupancy improving with improved employment trends.

External Factors in the Commercial Real Estate Market

Several external factors can influence the commercial real estate market cycle. Economic policies, such as interest rate changes, can significantly impact the market. Technological shifts, like increased remote work, can alter demand for different property types. Global events, like the 2020 pandemic or geopolitical tensions, can disrupt the market and accelerate or delay the cycle as well.

Urban vs. Suburban Markets

Urban and suburban markets often experience different cycles. Urban markets tend to be more volatile, with more dramatic swings in vacancy rates and rental rates. Suburban markets, on the other hand, often experience more stable growth. The COVID-19 pandemic accelerated the shift towards remote work, leading to increased demand for suburban office and industrial space. Class A properties in urban centers may be more susceptible to market downturns than Class B and C properties in suburban areas.

What Stage is the Commercial Real Estate Market Currently in?

The current commercial real estate market is primarily in a hyper supply phase. This is evident in the office sector, where overbuilding and increased vacancy rates are significant challenges. While other sectors like industrial are performing relatively well, the overall market is impacted by the excess supply in these certain segments.

Many believe that the market may be heading towards a recession very soon, but the Federal Reserve did just cut interest rates for the first time in four years, which is a good sign for the commercial real estate market.

The commercial real estate market is currently very complex. While some sectors, like industrial, continue to thrive, others, like office, are facing significant challenges. As the market evolves, it’s crucial for businesses to adapt to these changes and optimize their real estate portfolios.

To effectively manage commercial leases and ensure compliance with complex accounting standards, leveraging a premium real estate lease accounting software is important. By automating lease accounting processes, businesses can gain valuable insights, reduce risk, and improve financial reporting accuracy. Contact us with any questions or request a demo today to see how Visual Lease’s software works.

Technology is transforming everything today and this is true for commercial real estate technology as well.

When I look back to the early 1970s when I started as a CRE manager, we were very limited in information technology. I remember slaving over primitive spreadsheets to analyze a lease. Email was just beginning, and relational databases were in their early stages of development. Various processes like gaining approvals, finalizing a lease, or completing a build-out project, would take weeks. Today, it seems we’ve entered a new world. The IT tools of today super- charge CRE’s productivity, efficiency, and understanding of markets, transactions, and data.

So, what are the major commercial real estate technology drivers enhancing the profession?

Commercial real estate technology that’s making a big impact

Virtual reality (VR)

In no particular order, I would begin with virtual reality. Usually the stuff of science fiction, VR is particularly suited for use in commercial real estate technology:

• It facilitates virtual tours of prospective buildings and interiors.
• It allows project managers to visit and inspect construction projects virtually, minimizing the time and cost of travel.
• It allows CRE managers to review different layouts and furniture schemes.
• It enables virtual collaboration between CRE managers, service providers, and other stakeholders in the leasing lifecycle.

Internet of Things (IOT)

Another technology that is having a major impact on the CRE process is IOT.

Essentially a network of objects such as the myriad of building components and systems, IOT provides insight to a building’s performance, possible failure rates, energy usage and costs, and how thousands of disparate components work together. IOT creates enormous data sets that can be analyzed in real time to detect maintenance and other building issues before they lead to system failures.

We’ve all seen the IBM advertisement where the elevator maintenance man shows up because “Watson” (IBM’s super computer) detected a maintenance issue days before it led to a breakdown. Now with broadband, high speed networks, IOT drastically reduces the time and expense of building operations.

Artificial intelligence (AI)

The use of Artificial Intelligence as a corporate real estate technology is evolving rapidly and will have a profound impact on operations.

Consider the drafting of a lease document. AI will complete the many stages in developing a lease document, by populating the various categories of the lease from data searches, ensuring accurate calculations, and producing rent payment schedules based on the terms in the lease.

Wireless and more

There is a myriad of other technologies that are changing the CRE world. I’ve written about many these in earlier blog posts such as blockchain, beacon technologies, and collaborative applications.

I continue to be amazed at the power contained in the latest smart phones, and how these devices have changed the way we live, work, and play. The advent of wireless technology has revolutionized how and where we work. Work is no longer a place we go to, but what we do. And the transformation of the workplace such as co-working, has created a whole new generation of entrepreneurs and professionals unconstrained by the traditional 9 to 5 work day.

Commercial real estate technology will continue to evolve rapidly and will change every aspect of the facilities and real estate domain. It’s anyone’s guess what the next big thing will be. One can only speculate how robotics, big data, and such advances as neural networks, will change how we manage leases and properties in the future. But one thing’s for sure: it will be different!

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

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

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

Configurability vs. customization

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

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

Configurable software allows you to make changes and adjustments, making it more adaptable to evolving business needs and reducing maintenance costs. On the other hand, customized solutions may provide more tailored features, but they can be costly to implement and maintain. Assess the balance between these options to ensure your software aligns with your business needs while being cost-effective and easy to update.

Customer experience

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

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

Quality customer service ensures that your team can get up and running quickly and continues to get the most out of the software as your needs change. Look for a vendor that offers in-house implementation support and ongoing customer service at no additional cost. Continuous training and comprehensive user resources show that a vendor is committed to your success. Make sure the level of support provided aligns with your expectations and the availability of helpful tools for users.

Integrations

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

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

Your lease accounting software should integrate with your existing business systems, such as ERP and financial systems. The right software supports data synchronization and offers flexible options to manage data imports and exports between third-party applications. This allows you to automate routine tasks and ensure data is consistent across all platforms. This reduces manual data entry and provides a better view of your financial information.

Ease of use

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

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

The easier it is for users to view, track, and manage updates, the more efficiently your team can stay compliant and perform audits. An ideal solution should provide a simple way to see changes made by users, with clear audit trails that record all actions taken within the system. This minimizes errors and ensures that stakeholders can quickly access the information they need.

Security

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

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

A lease accounting solution should offer tools for administering user access, roles, and permissions, to ensure that only authorized users can view or modify sensitive data. A SOC 1 Type II audit shows that the software’s security and calculation processes meet standards and proves that your data is accurate and safe. Evaluate the software’s security protocols to make sure they align with your organization’s data protection requirements.

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

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

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

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

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

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

2. Failing to Recognize Embedded Leases

One of the most commonly overlooked aspects of real estate lease accounting is identifying embedded leases. Embedded leases are hidden within broader service agreements—such as those for IT equipment, utilities, or maintenance contracts—and meet the definition of a lease under ASC 842 or IFRS 16. Failing to account for these can lead to incomplete financial reporting, compliance issues, and even penalties.

Embedded leases often require careful examination of contracts, as they aren’t always explicitly labeled as leases. For instance, a contract for office cleaning services may include the use of specialized equipment controlled by the lessee, qualifying as an embedded lease.

To avoid this mistake, conduct a review of service agreements tied to your real estate portfolio. Train your team to identify embedded leases, and use lease accounting software with analysis tools to flag potential issues. The extra step ensures that all lease obligations are captured accurately and avoids surprises during audits.

3. Underestimating the task of gathering real estate lease data

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

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

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

4. Not Planning for Lease Modifications and Terminations

Real estate leases are rarely static, often involving modifications such as renewals, early terminations, or changes to key terms like rent or square footage. These modifications must be tracked and properly accounted for to ensure accurate financial reporting. Many organizations make the mistake of not having a process in place to manage these changes, leading to compliance risks and financial discrepancies.

For example, if a company negotiates a lease extension but fails to update the accounting records, it could result in misaligned financial statements. Lease terminations can also complicate matters if the exit costs or obligations are not clearly tracked and reported.

Implement workflows and processes to track lease modifications and terminations proactively. Use technology to automate reminders for critical dates and set up alerts for when negotiations result in new terms. A good lease accounting system can ensure that these updates are reflected accurately in financial statements and compliance reports.

5. Ignoring Tax Implications of Lease Accounting

Ignoring tax implications can lead to unexpected tax liabilities and missed opportunities for deductions. For example, deferred rent liabilities or large upfront payments for leasehold improvements must be carefully tracked and reported to avoid discrepancies during tax filings.

Lease accounting decisions, such as whether to classify a lease as operating or finance, can also have tax impacts. For instance, finance leases may affect depreciation and interest expense deductions, altering a company’s tax obligations. Without clear alignment between the accounting and tax departments, businesses may face compliance risks or miss out on tax-saving opportunities.

To avoid this, collaborate with tax advisors early in the process to ensure tax strategies align with accounting. Use lease accounting software that integrates with tax planning tools and provides detailed reporting on tax-related items, such as deferred rent, leasehold improvements, and capitalized costs.

6. Misclassifying Real Estate Leases

Accurate classification of real estate leases as either operating or finance leases is crucial for compliance and financial reporting. Misclassification can lead to errors in balance sheet presentation, incorrect profit and loss impacts, and potential audit findings. Real estate leases have complex terms and conditions and are prone to misclassification when companies rely on manual processes or outdated systems.

For instance, failing to account for clauses like renewal options or purchase rights can result in an incorrect classification. Failing to apply the lease classification tests outlined in ASC 842 or IFRS 16 can lead to financial misstatements. Both of these can be costly and time-consuming to correct, especially during audits.

Avoid this by establishing a clear and detailed process for lease classification that incorporates all relevant lease terms, including renewal and termination options. Ensure cross-department collaboration between finance, legal, and real estate teams to collect all necessary details. Lease accounting software with automated classification tools can simplify this process and ensure compliance by reducing the risk of manual error.

7. Neglecting Cross-Departmental Collaboration

Effective lease accounting requires input from multiple departments, including finance, legal, real estate, and facilities management. However, many organizations fail to establish clear communication channels and workflows, which usually leads to incomplete data and lease records. This often results in reporting errors, compliance risks, and missed cost-savings.

For example, the finance team may focus solely on payment schedules, while the legal team tracks lease terms, and facilities management oversees space utilization. Without a centralized approach, important data points may be overlooked.

A way to combat this is by leveraging a lease management software that centralizes all lease data into one platform. That way, all departments have a single source of data compiled into one platform that allows for easy viewing and analyzing of all lease data.

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

Want to see how Visual Lease’s real estate accounting software works? Schedule a demo now.

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

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

Basic Steps to Platform Implementation

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

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

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

How to prepare for lease accounting implementation

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

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

1. Take a lease inventory.

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

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

2. Determine what kind of lease data to track.

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

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

3. Build a strong team.

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

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

4. Educate your team.

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

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

5. Build a realistic timeline.

The process of identifying leases and compiling lease data can take a lot longer than you think it will. So, it’s smart to create a timeline that takes the following recommendations into account.

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

6. Sharpen your communication skills.

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

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

7. Get started NOW!

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

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

Conducting a Post-Implementation Review

Once your lease accounting software implementation is complete, you may want to conduct a post-implementation review to evaluate the success of the project and identify any areas for improvement. This review should focus on whether the system is functioning as expected, meeting your business requirements, and delivering the desired results.

Start by gathering feedback from key stakeholders, including the implementation team, finance department, IT, and any other users of the platform. Ask them about their experience with the system and whether the software meets their needs. Any challenges or issues they faced during the implementation process should be noted for the future.

You also want to assess the technical performance of the platform. Are there any integration issues with other systems? Is the data flowing smoothly? Are reports being generated accurately? If you encounter any problems, now is the time to address them to avoid any disruptions later.

Use this review to measure the overall impact of the software on your business processes. Are you seeing improvements in efficiency, data management, and reporting? If not, it may be necessary to revisit configuration settings or provide additional training.

Avoiding Common Mistakes When Implementing Lease Accounting Software

Implementing lease accounting software can be a complex process with many moving parts. Avoiding these common mistakes will help ensure a smoother transition and better long-term results:

• • Failing to Plan Efficiently: One of the biggest mistakes is not setting a clear implementation plan. Without a detailed roadmap, including timelines, milestones, and team responsibilities, the process can quickly become disorganized.
  • Underestimating Data Migration Challenges: Migrating lease data is often more complicated than expected. Ensure you review your data thoroughly for accuracy, completeness, and formatting before migrating it to the new platform to avoid issues during the transition.
  • Not Allocating Enough Resources: Many businesses underestimate the time and personnel required for a successful implementation. Make sure you have a dedicated project manager and team with enough resources to focus on the implementation.
  • Skipping or Rushing the Testing Phase: Skipping or rushing the testing phase can lead to undetected issues that impact the software’s performance post-launch. Always test the system thoroughly with sample data to ensure it functions correctly.

Neglecting Training and Support: A common mistake is not investing enough time in training users on how to use the new platform. Ensure that everyone who will use the system is trained properly to maximize the benefits of the software.

Need more help?

Selecting the right lease accounting software for your business is important and implementing it can be a long, complicated process to complete with your team alone. If you’re looking for assistance with implementing Visual Lease’s platform, contact our team today. Visual Lease is not only happy to help with your lease accounting implementation — it’s an important part of our business.

​​​For the past three years, Visual Lease (VL) has hosted its Customer Advisory Board (CAB) Summit to engage directly with our most forward-thinking customers and partners.

This year’s event in Las Vegas, Nevada, gathered representatives from 20 companies across various industries, along with several key partners. The CAB Summit is a forum to explore emerging industry trends, provide an exclusive look at VL’s product roadmap, and gather valuable feedback to continuously improve our solutions and deliver even greater value.

At our annual CAB Summit, we also celebrate our Customer Excellence Award winners—a group of companies that have demonstrated remarkable innovation and leadership in their use of the VL platform.

We are proud to honor our 2024 recipients for their achievements and the successes we have achieved together:

Operational Efficiency & Scalability

Acrisure is one of the fastest-growing brokerage firms, scaling from $38 million to $4 billion in just 10 years. Their expanding, complex lease portfolio demanded a dynamic solution. After choosing VL as their system of record, they optimized their processes with VL’s Payments function and quickly expanded to API integrations, building a custom real estate dashboard in Power BI. Together with VL, Acrisure can leverage their lease data to streamline operations, enhance transparency, and manage their growing portfolio with precision.

Exceptional Collaboration

Everus Construction is the first two-time winner of ​a VL Customer ​Excellence Award. Their team consistently provides valuable feedback to VL’s product team and is dedicated to overcoming challenges through collaboration. Everus Construction exemplifies a true symbiotic relationship between technology and business, showcasing how a strong partnership drives mutual success.

Proactive Platform Optimization

RS Components is continuously seeking ways to optimize their use of the VL platform. Their team regularly engages with their VL Customer Success Manager to identify and implement improvements as they navigate significant growth through acquisitions and transition to new auditors.

Innovation & Strategic Improvement

Waste Connections is a long-standing customer of VL’s, maintaining a strong relationship with its Customer Success team for more than seven years. They actively collaborate with their VL Customer Success Manager, continuously update their platform, and take full advantage of new functionalities as they are released. Their commitment to collaboration and continuous improvement sets a high standard for customer engagement and partnership.

Want to make it on next year’s list? Connect with your Customer Success Manager to learn more.

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• 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 lease 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.

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Table of Contents

• How to Calculate the Present Value of Lease Payments in Excel
• Step 1: Organize Data
• Step 2: Use the PV Function
• Step 3: Repeat as Needed
• Cons of Using Excel: Changes in Lease Payment Schedule
• The Importance of Lease Calculations in Compliance
• Calculating the Present Value of Lease Payments with Visual Lease Accounting Software
• Improving your Lease Management Process
• Make the Switch from Excel to Visual Lease Software

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.

16 Lease Clause Ideas

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.

The Importance of Clear Lease Clauses

• Prevents misunderstandings and legal battles, Defines responsibilities, rights, and obligations
• Contributes to transparent leasing process and fosters a positive relationship between landlord and tenants

Impact of Strong Lease Clauses on Property Value

• Regular maintenance clauses and property upkeep can enhance the property’s long-term value by preventing deterioration
• Rent increases clauses and renewal terms can affect revenue potential making it more appealing to investors
• It’s important to have strong clauses but to also make sure terms are fair

What to Avoid When Making Lease Clauses

• Using vague or ambiguous language
• failing to address specific scenarios like maintenance responsibilities – leaves gaps in the agreement
• Consulting legal professionals and using a lease management software can help avoid this

How Software Can Help Track Lease Clauses

• Using lease management software for property management can improve the organization and enforcement of lease clauses
• Can automate reminders for critical dates like lease renewals or maintenance obligations
• Using a lease management system like Visual Lease ultimately leads to better organization of leases and easier enforcement of lease terms

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 applies 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.

How Nonprofits Can Ensure ASC 842 Compliance

Nonprofit organizations can ensure 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.

Accounting for 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.

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.

Benefits of Buying vs Leasing

Pros of Buying

1. Ownership and Equity: When you buy an asset, you own it, which means it becomes an asset on your balance sheet. This can build equity over time.
2. No Restrictions: As the owner, you have full control over the asset, including modifications and usage without restrictions from a lease agreement.
3. Long-term Savings: Over the long term, buying can be more cost-effective than leasing, as you avoid ongoing lease payments.

Cons of Buying

1. High Upfront Costs: Purchasing an asset requires a significant initial investment, which can disrupt cash flow and limit capital available for other investments.
2. Maintenance and Repairs: Many lease agreements include maintenance and repair services, reducing the burden and cost of upkeep on the lessee.
3. Depreciation: Assets can lose value over time, leading to depreciation, which might not be fully offset by tax deductions.

Pros of Leasing

1. Lower Initial Costs: Leasing typically requires less upfront capital than buying, maintaining cash flow and allowing for investment in other areas of the business.
2. Flexibility: Leases often include options to upgrade to newer equipment or terminate the lease early, providing greater flexibility to adapt to changing needs.
3. Maintenance and Repairs: Many lease agreements include maintenance and repair services, reducing the burden and cost of upkeep on the lessee.
4. Tax Benefits: Lease payments are often deductible as business expenses, which can lower taxable income and provide tax savings.

Cons of Leasing

1. No Ownership: Leasing does not build equity, and the lessee does not own the asset at the end of the lease term, which can be seen as a financial drawback.
2. Long-term Costs: Over the long term, leasing can be more expensive than buying due to continuous payments and potential fees.
3. Usage Restrictions: Lease agreements often come with terms and conditions that can restrict how the asset is used, limiting flexibility.

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.

Tax Benefits of Leasing vs. Buying

There are tax benefits for both leasing and buying assets. Leasing often provides the ability to deduct lease payments as business expenses, reducing taxable income. This can be especially beneficial for companies looking to minimize their tax liabilities.

On the other hand, buying assets allows companies to take advantage of depreciation deductions, spreading the cost of the asset over its useful life and providing tax relief each year. Additionally, interest payments on loans used to purchase assets may be tax-deductible. However, the upfront cost and long-term commitment of purchasing can impact cash flow and financial planning.

Using a Lease Accounting Software

A lease accounting software can play a huge role in analyzing leasing versus buying decisions. A software can help companies accurately calculate the net advantage of leasing by providing tools to model and compare financial scenarios. A lease accounting software will have tools like automated calculations, reporting, and integration with financial systems to allow for detailed analysis of lease terms, interest rates, and depreciation schedules.

A lease accounting software also ensures compliance with accounting standards like ASC 842 and IFRS 16. By leveraging software, companies can make business decisions based on data and simplify their accounting processes and financial reporting. This ultimately supports better strategic planning and resource allocation.

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.

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.

Lease Accounting Software – Simplify Lease Accounting Today!

Leveraging a lease accounting software will significantly simplify and organize a businesses lease accounting process. This software automates the recording, tracking, and management of lease agreements, ensuring compliance with accounting standards like ASC 842 and IFRS 16. It provides data insights and enhances the accuracy of financial reporting, reducing the risk of errors and manual miscalculations.

When dealing with lease purchases, the a lease accounting software has the ability to integrate lease terms and purchase options into the accounting system, providing accurate depreciation calculations and optimizing cash flow management. This not only saves time and energy, but also provides businesses with the lease data needed to make informed decisions and improve overall financial performance.

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. For more information about Visual Lease’s software, watch this short demo here.

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 financial 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 with accounting standards, and validating payments demonstrate your commitment to transparency and accuracy.

While it might seem like a complex ordeal, proper preparation simplifies the lease audit 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. Consider using a lease management system and see how a lease management system can help simplify the lease auditing process.

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.

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

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.

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.

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. 

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. 

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.

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.

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.

After the introduction of ASC 842, some private companies have struggled with the requirement to record the vast majority of their leases to the balance sheet. As a result, some organizations turned to tax basis to file statements instead of following 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.

“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.

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.

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?

• 1. 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.

• 2. 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.

• 3. 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.

• 4. 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.

• 5. 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?

The monitoring activities are audit trail and reconciliation.

• 6. 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.

• 7. 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.

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.

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.

Learn More about Lease Accounting Internal Controls

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.

With more and more organizations focusing on ESG initiatives, we’ll use this blog to demystify what ESG is, why organizations choose to focus efforts on ESG related initiatives, and how your organization can get started on ESG reporting.

What is ESG

ESG stands for Environmental, Social, and Governance. These three factors are used to evaluate the sustainability and ethical impact of a company’s operations.

• Environmental: Environmental factors refer to a company’s direct or indirect impact on the environment, and may include carbon emissions, energy consumption, climate change effects, pollution, waste disposal, renewable energy, and resource depletion.
• Social: Social factors refer to a company’s impact on society including how a company treats its employees, customers, and the communities in which it operates. Social factors include discrimination, diversity, equity and inclusion, human rights, community relations, and animal rights.
• Governance: Governance factors refer to a company’s internal management and decision-making processes that help ensure that a company’s leadership is accountable to its shareholders, investors and employees; abides by government regulations, and that the business operates with integrity. Governance factors include executive compensation, shareholder rights, takeover defense, staggered boards, independent directors, board elections, and political contributions.

For the purposes of this blog post, we’ll be focusing on the Environmental factors.

Why Focus on ESG?

There are 4 main reasons why an organization may choose to focus on ESG initiatives:

1. Financial performance: In the past decade, studies have confirmed a link between ESG policy performance and financial performance. One of the largest studies conducted by the Journal of Sustainable Finance & Investment, analyzed over 2,000 empirical datasets, with 90% of them indicating either positive or neutral correlations between ESG factors and financial performance.
2. Regulatory risks: While ESG reporting in the United States is currently largely voluntary, companies that ignore ESG factors may face regulatory and legal risks in the future. Many state and local governments are implementing ESG-related regulations, with fines and penalties for organizations that do not comply. The European Union (EU) is leading the way in requiring compliance to sustainable business practice; they currently have the world’s most advanced ESG regulations. For example, the ‘European Green New Deal’ is a comprehensive plan that aims to make Europe climate-neutral by 2050 through an array of measures to combat climate change and promote sustainable innovation.
3. Reputation: Consumers and investors are increasingly looking to do business with companies that prioritize ESG, and companies that don’t prioritize ESG may risk damaging their reputation. According to PwC, 76% of consumers say they will stop buying from companies that treat the environment, employees, or the community in which they operate poorly.
4. Environmental impact: Companies that prioritize ESG are more likely to operate sustainably, reduce their carbon footprint, and engage in ethical business practices.

It’s becoming increasingly essential for organizations to determine where the risks and opportunities lie in a company’s ESG profile and whether they will have a material impact on its strategy, messaging, risk assessment, and reporting. This is especially true as companies compete for capital and stakeholders demand more transparency around a company’s environmental impact.

Where to Get Started?

While having your organization prioritize ESG initiatives can seem like a daunting task, there are some clear steps you can take to start navigating this complex landscape.

1. Gather the right team members in the business to discuss your ESG priorities and set goals. Examples of ESG goals may include:
   1. Partnering with non-profits to identify, fund, and scale proven environmental impact solutions
   2. Reducing scope 1, 2, 3 GHG emissions
   3. Reducing energy and using renewable energy sources to become a net zero organization.
   4. You can also look towards standards (i.e. ISSB) or frameworks (CDP) for guidance on relevant goals.
2. Establish an internal task force. If your organization doesn’t have a head of sustainability or similar role, consider bring together folks from:
   1. C Suite – consider asking your CFO to serve the role as executive sponsor
   2. Reporting & Finance – like your Controller, and/or Director of Reporting
   3. Data Gathering & Execution – like Facilities Manager, Procurement lead, Real Estate executive and/or Supply Chain manager
3. Develop an understanding of scope 1 and scope 2 emissions and requirements. Keep in mind, requirements for ESG reporting may vary depending on the specific standard being used.:
   1. Scope 1 emissions are a type of greenhouse gas emissions that come directly from the sources owned or controlled by your organization. You can think of this in terms of “I burned it,” Examples include your organization’s facilities and company vehicles.
   2. Scope 2 emissions are also a type of greenhouse gas emissions, but these come from the generation of purchased electricity, steam, heating & cooling of a company. You can think of this in terms of “I paid someone else to burn it.”
4. Start taking practical steps for gathering your data so you can establish baselines. This may vary depending on where and how information is stored, but energy bills, for example, are a great source of information for gathering energy consumption.
5. Ensure your team considers best practices in reporting. You’ll likely want to track energy and water consumption, waste and biodiversity activity data, and calculate greenhouse gas emissions based on the Greenhouse Gas Emissions Protocol and EPA Energy grid emissions factors. Alternatively, leverage a tool with automatic and transparent calculations complete with audit trail.

While the ESG compliance requirements are still evolving, one thing is certain: ESG compliance isn’t a one-and done disclosure, it’s a mindset shift across an organization and an ongoing, iterative journey towards sustainability. For more information on how to begin your journey and to learn about Visual Lease’s carbon accounting tool, visit ESG Steward

Written by: Robert Michlewicz, President at Visual Lease

I was drawn to Visual Lease for several reasons, one of the biggest is how the company is leading the market in addressing big areas of exposure and risk for public, private companies and government entities.

What exactly do I mean by that?

I’m proud to say that in June, Visual Lease was the only software provider named a Leader in both Lease Accounting and Lease Administration categories by G2.

Keeping in mind that this recognition is solely based on customer feedback, it is a direct reflection of the decades of work and expertise behind our software and services.

Visual Lease has been around for 25+ years, and was first developed as a world-class lease management solution, serving the real estate departments of some of the largest U.S. corporations. Anticipating the introduction of the new lease accounting standards, the company expanded the platform in 2018 to include robust lease accounting capabilities. Today, we help 1,000+ organizations get compliant, stay audit-ready all year long, take advantage of cost-savings opportunities and make better-informed operational decisions.

A reason I was drawn to Visual Lease is the same reason it’s been recognized by G2 (and a few others like Capterra, Deloitte, Inc.). As a business, we know the risks associated with complying with the new lease accounting standards without first implementing a proper lease management strategy. Further, we’ve seen time and time again just how valuable it can be for an organization to have accurate and complete lease data. We’ve built our platform on these insights, and our efforts are backed by some of the most experienced and well-informed experts in the industry.

But please, don’t take my word for it…. check out what our customers had to say when asked what they like best about Visual Lease:

• “Visual Lease streamlines our accounting for leases and completely replaces our existing Excel solution (for both GAAP and IFRS).” – Adam B.
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• “I like being able to view the details for all of our various leases in one place. It’s nice to have a one-stop shop that everyone (who needs the details) can access.” – User in Consumer Goods
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• “The simplicity of asset management is the best part of VL. It is very scalable lease accounting and management software. You can solve major lease accounting challenges with automated calculations and full integrations.” – Internal Consultant in Information Technology & Services
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• “Visual Lease gets the job done. The thing I like the most is that it does what we need it to do. It meets all of our needs from ASC 842 implementations, to rent payments, to tracking renewals, it does it all. Multiple departments use Visual Lease, and it does a good job at meeting our collective needs.” – Administrator in Healthcare
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• “I have used Visual Lease with two different companies now, and both times they have been positive experiences. I have managed a smaller lease portfolio of 30-50 leases. While I don’t utilize all of the tools that are available within Visual Lease, the tools themselves are well thought out. I recently completed our first year-end audit after implementing the ASC 842 lease standard, and the Standard Lease Reports were simple to pull and provide to our audit team. Visual Lease is well aware that there is a learning curve with using their software, so they have a comprehensive training website called ‘VL University’ that has on-demand training videos that will walk you through the features of the website. There is also a User Guide that I can review to learn how every feature works within the website. I have also had my service tickets replied to within 24 hours of submitting them. I think Visual Lease cares about its customers and is an excellent partner for managing leases.” – Assistant Controller in Manufacturing
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• “I like the alerts that help you know in advance when the lease terms are slated to change. Also, it is easy to add people to a distro list for alerts.” – User in Retail‌

This recognition is exciting, and a testament to not only where we’ve been, but also, where we’re headed. After just one month of working with our amazing team and customers, I am even more encouraged, energized and inspired to be a part of Visual Lease.

I’ll leave with two parting thoughts:

1. First and foremost, thank you and congratulations to the entire team at VL for your relentless commitment to our customers.
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2. And to my network, if you’re interested in learning more about why lease management is so critical to your business, visit this page.

Have you ever wondered how the public can participate in the development of accounting standards? Do you have opinions you would like to share? Many accounting standards governing bodies, such as the Federal Accounting Standards Advisory Board (FASAB or the “Board”), provide some opportunities to do just that.

Why Exposure Drafts? 

Whenever an accounting governing body considers new standards, or changes to existing standards, they release exposure drafts for public comment. The FASAB’s exposure drafts, which affect hundreds of federal agencies and the associated public, are posted publicly for commentary. You can find these exposure drafts and the template to submit comments on their website. The FASAB usually offers between 45 and 90 days to submit comments. Visual Lease contributes opinions to many standards, including these recently proposed changes. 

The Board considers these comments when deciding whether to move forward with the proposed changes. If interested, you can access the FASAB’s list of active projects and drill into any associated drafts on the FASAB website.

Anyone can submit comments, and the FASAB appreciates all views but particularly looks for comments that include the reasoning behind an opinion (pdf). The Board also appreciates it when the reasoning/concerns include the expected benefits and/or perceived costs of implementing a proposal.

2022 FASAB proposed lease disclosure and reporting changes

As a lease administration and accounting platform, Visual Lease proactively tracks FASAB projects that impact lease reporting and meeting the standards. An exposure draft to provide clarification and amend SSFAS 54, Leases and SSFAS 60 Omnibus Amendments 2021, was published May 9, 2022 with a comment period that ends Jul 8, 2022. The background includes:

• In November 2021, SFFAS 60 was published
• SFFAS 60 did not address all concerns related to leases and the implementation of the SFFAS 54 and other standards
• Clarification was needed relating to the discount rate for lease liabilities and receivables
• Clarification was needed to add intragovernmental sale-leasebacks and disclosure requirements in specific paragraphs and footnotes
• This proposal would amend SFFAS 54 paragraphs 42, 47, 48 and 59, and add new paragraphs 42 A-C and 59 A-C
• The effective date for the proposed changes is for reporting periods beginning after September 30, 2023

Below is a summary of Visual Lease’s response to this FASAB exposure draft: 

Discounting lease liabilities and receivables 

For leases without a stated interest rate, originally paragraph 42 of SFFAS 54 and the issued amendment in SFFAS 60, par. 19, required lessees to use the discounted rate from the “lessee’s estimated incremental borrowing rate.” This proposal would require the lessee to use an interest rate “based on marketable Treasury securities with similar maturity to the end of the lease term.”

The added paragraphs 42B and 59B allow for rounding up or down when selecting a marketable Treasury rate term as follows:

“[…] round down to the nearest maturity term with a published rate, interpolate the rate for the period between two published rates, or round up to the nearest maturity term with a published rate. The methodology for selecting marketable Treasury rate terms and related rates, interpolating, and/or rounding up or down should be consistent from period to period.”

The added paragraphs 42C and 59C clarify what to do if the lease goes beyond the longest-published Treasury security term. In this case, the entity should select the longest-published Treasury security term rate.

Using rates based on marketable Treasury securities would help reduce complexity and inconsistencies versus using the estimated incremental borrowing rate. It may also reduce the cost of determining the incremental borrowing rate, which can be costly to ascertain per our experience with private clients adopting the ASC 842 standard. Although we believe using rates based on marketable Treasury securities would make it easier to meet compliance requirements, we also recognize that it may, in certain circumstances, overstate or understate asset values.

We also believe paragraphs 42A (lessee) and 59A (lessor) may need clarification. Under the proposed amendments, the reporting agency has two options to determine its rate. The rate can be either based on a recent Treasury rate or historical average rate if the Treasury security has a similar maturity as the lease term “on the date of initial liability recognition (or the date the liability is updated).” If it is meant that to approximate a rate if a date-specific rate is not available, we believe that in today’s internet environment, detailed historical information is easily available so there likely would not be a need for this.

Intragovernmental sale-leasebacks disclosure requirements

This proposal also amends SFFAS 54 footnote 11 to paragraph 89 and paragraph 92. The purpose of the amendment clarifies that intragovernmental sale leasebacks are included and must follow the lessee and lessor requirements. Added are references to SFFAS 7 paragraphs 314-315 (intragovernmental) in footnote 11 and the reference to SFFAS 54 paragraphs 37-38 to paragraph 92.

What are your thoughts on these changes?  

Although we think these suggested changes should add consistency and reduce the complexity of meeting compliance, while avoiding costly estimations of the incremental borrowing rate, we also believe it may overstate or understate the value of some assets. What is your opinion?

FASAB’s Questions & Visual Lease’s Responses

QFR* 1 

Do you agree or disagree with the proposed amendments to address discounting lease liabilities and receivables, as reflected in paragraphs 3-7 (amending par. 42, 47-48, and 59 of SFFAS 54), and the Board’s basis for such proposals? Please provide the rationale for your answer.

AFR* 1

Visual Lease, LLC supports the proposed amendments to address discounting lease liabilities and receivables. SFFAS 54’s requirement to use an explicit rate is unchanged; if no explicit rate is stated, an equivalent risk-free rate is expected to be utilized.  The terminology provided in the proposed amendments is “based on marketable Treasury securities with similar maturity to the end of the lease term,” in essence the definition of a risk-free rate.

Visual Lease, LLC has observed that in the current private sector implementation of ASC 842, Leases, the new lease accounting standard issued by the Financial Accounting Standards Board (FASB), the use of a risk-free rate rather than a higher incremental borrowing rate (IBR) may have resulted in higher liability values (and therefore asset values) on organizations’ financial position. Additionally, Visual Lease, LLC has observed that this effect could trigger debt service covenants and otherwise cause inconsistency in analytical comparability. However, Visual Lease, LLC believes that, while organizations may have to caveat their financing reporting requirements to lenders to highlight these factors in that QFR 1 may result in less accurate and consistent valuation of liabilities, the suggested methodology does reduce complexity and provides user prescriptiveness in ease of use and availability of input data, thereby facilitating compliance.

Additionally, Visual Lease, LLC observes two impacts regarding the valuation of the lease liabilities and assets in practice: the applicability and accuracy of a specific rate to the entity in question, and the timeliness of the application of that rate. Namely:

• The discount rate applied could result in less accurate valuations if the entity has a higher cost of borrowing than the federal government rate.
• Private-sector administration of ASC 842, Leases, has shown that reassessments of incremental borrowing costs can be costly to ascertain and therefore are not necessarily “kept current”.  In a stable interest rate environment that is not a significant matter, but in an evolving rate environment (such as 2022 is turning out to be), lack of updates can result in more frequent and severe errors that may not consider or sufficiently identify entity-specific risk.

Visual Lease, LLC notes that the original wording in SFFAS 54 authorizing entities to use rates based on their own borrowing authority is expressly deleted in this exposure draft, removing calculations from actual costs, and resulting in less accurate valuations. Given the transparency of the Treasury Securities market and rate, and its availability to those entities subject to the FASAB (Federal Accounting Standards Advisory Board) standards, Visual Lease, LLC believes that the suggested changes enhance the process of calculation and result in an” always having up to date information available” situation when creating new or remeasurement calculations for lease accounting.  Therefore, Visual Lease, LLC supports the use of risk-free rates.

Additionally, and as a practical matter regarding application of the risk-free rate, the revised guidance allows rounding up or rounding down to the nearest maturity date, or to interpolate between two dates.  Extrapolating from the longest term (30 years) would not be permitted.  Paragraph 42A references “historical average rates” and appears broad in context and may require further clarification.  If it is meant that to approximate a rate if a date-specific rate is not available, we believe that in today’s internet environment, detailed historical information is easily available so there likely would not be need for this.

QFR 2

Do you agree or disagree with the proposed amendments to clarify the applicability of paragraphs 89-92 of SFFAS 54 to intragovernmental sale-leasebacks and the disclosure requirements applicable to them, as reflected in paragraphs 8-9, and the Board’s basis for such proposals? Please provide the rationale for your answer.

AFR 2

Initially, SFFAS 54 was silent regarding sale-leaseback transactions intragovernmental in nature.   Visual Lease, LLC agrees with the proposed amendments to clarify the applicability of paragraphs 89-92 of SFFAS 54 to intragovernmental sale-leasebacks and the disclosure requirements applicable to them, as reflected in paragraphs 8-9, and the Board’s basis for such proposals as it clarifies the requirements apply both to public sale-leasebacks and intragovernmental sale-leasebacks for disclosure purpose.  Visual Lease, LLC supports this provision because, while not prescribing accounting treatment, it does add clarity and transparency to the amount of intragovernmental sale-leaseback for each reporting entity through disclosure.

As a result of our analysis, Visual Lease, LLC is supportive of both clarifications provided in this exposure draft.

* QFR = Questions for Respondents

*AFR = Answer from Respondents

Do you know where all your leases are? If you don’t, chances are you haven’t conducted a lease inventory for your business. Conducting a lease inventory is a standard practice in lease accounting and a very important step in achieving ASC 842 compliance. This process involves finding all your lease data from various departments, which is often a time-consuming cross-functional effort.  

What is considered a lease under ASC 842? FASB defines a lease as “a contract or an element of a contract that conveys the right-of-use (ROU) of a physically distinct identified asset for a specified period of time in exchange for payment.” This includes embedded leases which are typically leases that are part of larger contracts. These contracts need to be identified and accounted for on the balance sheet in order to achieve compliance.  

However, there is an exemption for short-term leases. These contracts have a lease term of 12 months or less and will not appear on the balance sheet. Additionally, they do not include options to purchase the asset from the lessor.  

When it comes time for your audit, auditors want thorough, reliable and accurate data to examine. Completeness is key here, meaning that you’ve properly captured and identified all lease arrangements to be included in your calculations (including embedded leases). This will always be one of the items auditors test, which is why it’s important to conduct a thorough lease inventory.  

In this blog, we will share three essential tips to ensure you conduct a thorough lease inventory to support accurate lease accounting. By taking these steps, you will set your business up for lease accounting success and feel confident that you have every lease represented in your lease portfolio.  

1. Engage stakeholders from cross-functional departments 

To begin the process of conducting a lease inventory, you’ll need to identify what departments have lease contracts. Under ASC 842, leases can range anywhere from property, plant, equipment and even IT assets. Typically, we’ll see Real Estate and Legal departments heavily involved in leases, but there are also departments like IT that have unique lease contracts.  

Below are 5 recommended departments you should engage with and the types of leases they most likely handle.    

• Accounting/Finance
  • This department is a great starting point for conducting a lease inventory as they are the gatekeepers of the prior year’s lease information.
• Real Estate
  • The real estate department naturally handles all real estate and property leases, which may include things like office buildings and commercial real estate.
• Procurement
  • The procurement department handles all non-real estate leases which can range from vehicles, equipment, furniture and even fixtures.
• Legal
  • The legal department reviews all lease arrangements and is a great source of detailed information for embedded leases.
• IT
  • This department handles all IT procurement and procures IT assets. This can range anywhere from computers, networks and servers.

2. Organize your leases in one location 

Once you’ve gathered all your leases, it’s important to centralize them in one location. The most effective way to do this is by utilizing lease accounting technology. This will allow your cross-functional team to work under the same system and have a comprehensive audit trail for all lease changes. It will also help your team analyze lease data more thoroughly – which can help reduce the risk of overpaying for leases and ultimately help your business save money.  

3. Thoroughly check for accuracy and completeness 

As your business prepares for ASC 842 compliance, it’s important to examine (and re-examine) your lease contracts thoroughly for accuracy and completeness. Auditors will want to make sure that all transactions have been recorded properly on the balance sheet. It never hurts to double and triple check your work.  

In fact, make sure you’ve also cross-referenced all lease contracts with the Accounts Payable department. You could be paying bills for other leases from other departments, which can lead to misreporting.  

The outlined steps above should help your business create a smooth process in conducting a lease inventory. Remember, the more accurate your lease portfolio is, the better chance you’ll have in successfully achieving ASC 842 compliance. It will also help significantly decrease the risks of misreporting lease data, which can result in fines, increased audit fees and potential legal action. That’s why conducting a thorough lease inventory is not only important but can also be highly beneficial for your business. Successful lease accounting isn’t just compliance, it’s saving money and creating opportunities to improve business operations, and that all begins with your lease inventory.   

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.

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

What is lease optimization?

Optimizing your lease portfolio means:

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

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

Identify cost-saving opportunities

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

Real customer lease optimization examples

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

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

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

Capture modifications and adjustments that impact lease accounting compliance

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

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

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

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

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

Accommodate business needs with agility

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

This article originally appeared here in Forbes.

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

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

Know What Lease Data To Gather And Where To Get It

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

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

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

Use A Centralized Data Repository

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

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

Put Dedicated Teams In Place

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

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

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

This article originally appeared here in Forbes.

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

Lease Market Considerations for 2021 

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

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

Revenue Impact of the Pandemic 

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

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

The Future of Office Space 

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

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

Important Lease Clauses In 2021 

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

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

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

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 lease accounting software.

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.

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.

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.

When companies think about purchasing lease accounting and lease administration software, many make the mistake of considering these tools as a cost of doing business. The mistake is understandable, because the decision to invest in these tools is often driven by the need to get compliant with the new lease accounting standards. Organizations are focused on this goal without understanding what else they stand to gain, and the potential for a significant return on investment. 

If you’re not actively looking for that ROI, you might miss the chance to recoup your investment, plus a lot more. By taking full advantage of the full capabilities of lease management software, you can save much more money than you spend. 

Here’s how.

PROBLEM: Paying more than you owe for leases

If you’re not tracking all the details of your carefully-negotiated leases, you’re almost certainly paying for things you shouldn’t. By properly managing leases and auditing lease payments, companies have uncovered millions of dollars in hidden waste and overpayments, such as:

• Making extra payments. Many property leases will include a free month’s rent at some point during the lease. Even though it’s clearly stated in the contract, chances are the landlord will bill you anyway. If you’re not checking payments against contract terms, you are paying more than you owe. 
• Continuing to pay for expired leases. Even worse, we see companies continuing to make automatic payments on leases that expired or were canceled. That happens when you’re not checking the lease end date before making the payment.
• Paying for things that are the lessor’s responsibility. Maintenance and repairs are often needed on leased assets. For real estate, you’ll need HVAC, plumbing, and electrical work. For vehicles, you’ll need oil changes, tires, and repair work. Computer equipment and copiers need maintenance and software updates. If you automatically pay for these services without checking the contracts, you might be paying for things that the lessor is responsible for.
• Paying an inflated share of CAM expenses.  In a leased building, shared operational charges (also known as common area maintenance or CAM expenses) get divided among the tenants of the building. For example, you pay a CAM charge covering utilities, landscaping, and cleaning based on the percentage of usable space you occupy in the building. But what happens when that percentage changes? You might think to reevaluate your CAM expense if you give up some space, but what if the landlord added a new wing or otherwise added more usable space to the building? That reduces your percentage of space and should change your CAM charges. 
• Paying for things you didn’t get. In the process of negotiating lease terms, especially for property leases, it’s common for a landlord or agent to throw in the initial cleaning, new carpet or a paint job. However, these “freebies” often don’t end up being free, because you get charged after the fact. If you’re not tracking what you are obligated to pay, no one questions the bill and you pay for something you shouldn’t.   
• Paying inflated rent increases. Real estate leases often include yearly rent increases. These escalations might be based on a percentage, a percentage of sales, or complicated formulas based on market factors. If you’re not checking rent increases to make sure the amount agrees with the lease contract and is calculated correctly, you could be paying too much for many leases in your portfolio. Even worse, the wasted expense gets compounded every year with new rent increases.

The point is, if you are not tracking all the terms of your lease contracts and regularly validating payments against those terms, you’re definitely paying more than you owe.

SOLUTION: CAM audits catch lease payment mistakes

If you’re guilty of overlooking many of these lease payment mistakes, you’re not alone. Before ASC 842 came along, few organizations were tracking the details of lease contracts and the accuracy of payments. However, now that leased assets are on the balance sheet, and making a much bigger impact on financial reporting, that’s changing quickly. Those mistakes are coming to light and getting noticed by financial leadership as well as auditors. 

Don’t wait for your CFO to question your leasing expenses and uncover payment errors. Your lease accounting and lease administration software can help you uncover lease payment errors by flagging payments that don’t match your contracts with CAM audits. Armed with that information, you can correct the situation with your lessors and recover overpayments. Plus, moving forward you can proactively validate every payment so you never pay too much again.

PROBLEM: Missing lease renewal deadlines

Many lease contracts include renewal options that allow you to renew at a favorable rate as long as you notify the lessor by a specified date. If you miss that date and fail to notify the lessor of your intention to renew, you lose the chance to get that locked-in rate. At that point, you’re forced to pay market rate to renew the lease. If you have made that mistake before, you know that one instance can cost you millions.

SOLUTION: Critical date alerts prevent costly errors

Your lease software can track all the deadlines and notification dates for exercising options (not just renewals, but options to cancel or purchase). You can set up customizable alerts to let key staff members know when deadlines are approaching so they can take action in time. 

This brings up an important point: you need to track ALL the details of your lease contracts to get these cost-cutting benefits. If you’re only tracking the minimum data needed for accounting calculations, you’re missing out on the true value of lease management software. 

PROBLEM: Poor lease vs. buy decisions

Speaking of purchase options, basing a lease vs. buy decision on incomplete and inaccurate payment data can lead to poor choices. You could decide to purchase assets that would cost less to lease, and vice versa. 

SOLUTION: Lease data analytics deliver reliable intelligence

When you’re deciding if it makes sense to exercise a purchase clause within a lease, you need accurate data about the costs associated with the lease. When ALL your lease data is centralized within a lease accounting and administration platform, you can create reports that show every payment and every cost associated with that lease. Armed with that reliable data, you can compare the cost of continuing to lease with the cost of exercising the purchase option.

PROBLEM: Scattered lease data

When lease data lives in multiple, unconnected systems throughout your organization, there’s no easy way for everyone to access complete, up-to-date information about your leases. Without that complete picture of all your lease-related expenses, it’s easy to make poor financial decisions.

SOLUTION: An integrated, single source of truth

With leases now having a much bigger impact on your company’s financial picture, your financial leaders need visibility into lease data. The various teams that work with leases, such as Real Estate, IT, and Legal, also need access to all the details associated with leases. A complete lease platform provides a single source of truth that integrates with your other enterprise systems, including your ERP, facilities and asset management systems, contract management tools, and analytics platforms.

Your lease platforms provides more value when it can help to drive better decisions related to leases across your organization.

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

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

Exposure of lease accounting auditing risks

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

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

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

Underestimating lease complexity

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

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

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

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

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

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

No audit trail for tracking change management

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

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

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

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

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

Lack of controls

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

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

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

(Read more about lease accounting data security features.) 

No one place for your data

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

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

Lack of notifications for important events

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

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