Are You Struggling to Find Out – What Do We Lease?
Since the publication of the new lease accounting rules, one of the most common questions we have gotten from Fortune 500 companies is – How do I find out what do we lease? The real estate team knows what buildings we lease, but what about all the other things – photocopiers, office furniture, laptops, servers, forklifts, trucks, cars or even aircraft?
It might sound surprising that big companies would not know what they are leasing, but it is understandable when you consider that most large organizations have highly decentralized leasing processes.
Of course, it is inaccurate to say that any company doesn’t know what they lease. Various people within the organization know exactly what is leased and what is owned. But the leasing data is not centralized into a single database. And in fact, until the recently announced lease accounting changes, there was little accounting motivation to track all leases in a single enterprise-wide application.
To Find Out – What Do We Lease?
Ask Who Touches Leases Throughout their Lifecycle
So creating a master list of your leases, is simply a matter of tracking down the individual people within the organization that know what buildings, vehicles, furniture, laptops and other equipment is being leased. To find the people simply follow the lifecycle of a lease as it moves through your organization. Below are five questions to help you get started:
- Who negotiates the leases? Every lease has a contract that is likely negotiated by procurement, legal counsel and perhaps your treasury organization. These groups should have a good idea what is being leased, and where the contracts reside.
- Who sells the leases? There is a leasing company on the other end of every contract. These might include commercial banks, captive finance organizations or independent leasing companies. These lessors definitely know what you are leasing, because they bill you for each lease on a periodic basis.
- Who manages the leased assets? Someone in the organization is accountable for managing the things you lease (assets). For example, IT probably manages your leased laptops and data center gear. The corporate real estate group probably manages the leases for your buildings, warehouses, stores and manufacturing plants. The logistics teams probably manage the leased forklifts and trucks. These “asset owners” should have a handle on what is being leased.
- Who reports on the leases? Various finance groups are responsible for ensuring that property taxes are paid, insurance coverage is obtained; and that the assets are properly reported for under the current accounting rules. As a result, organizations such as financial reporting, tax and treasury should have records on what you are leasing.
- Who pays for the leases? Accounts Payable is responsible for ensuring that the invoices for leases are paid monthly (quarterly or other periodic basis). As a result, the A/P department should know what purchase orders and recurring payments are being made that could be leases.
Performing an Enterprise-Wide Lease Census
The Ten Teams to Ask About Your Real Estate and Equipment Leases
In our experience, the A/P team is the most reliable source for getting a comprehensive, enterprise-wide list of what you lease. Ask your A/P team for a report of all invoices that are paid on a regular basis. Don’t just use last month’s data, because some leases are only invoiced on a quarterly, semi-annual or annual basis. The list of recurring payments will include not only what historically have been considered “leases,” but also FASB’s expanded definition of a lease, which includes some outsourcing and service contracts. You can search through the Payables report to identify payees and payments that might be leases. Most A/P departments have access to lease PO data, such as total, allocated and unallocated funds along with A/P information. Also, if you have multiple A/P systems in different regions or entities, be sure you are analyzing all of them.
Under the current lease accounting standards, there is a need to report capital leases on the balance sheet and operating leases in the notes disclosure. Drill down from the note disclosure to the individual leases making up those totals, and find out who in your organization is responsible for collecting the lease data today and how it is being tracked. Don’t be surprised if you end up following a daisy-chain of spreadsheets across various groups in the organization. The Excel files may not tell you exactly what assets are being leased, but they may provide important clues as to who to ask (or where to go) for additional information. If the note disclosure has survived previous audits, then there has to be support for the figures disclosed. If necessary, reach out to internal audit for their assistance.
Most mid-size and large organizations have a corporate real estate group. And if you are leasing 50+ buildings then you may also have a Lease Administration (or Integrated Workplace Management System) application with a detailed accounting of landlords, termination dates, expansion clauses and contractual terms. Many companies outsource their real estate administration to a specialized provider such as Jones Lang LaSalle or CBRE. These organizations typically have their own software used to track the leases of their clients. Ask your real estate group (or broker) for a list of the leased properties they are managing. This will probably be the easiest category of leases to account for given that a centralized organization and system exists.
If you are leasing a fleet of 1000+ automobiles (trucks or vans) then your logistics team probably has a Fleet Management application with a database of all the Vehicle Identification Numbers; service histories; driver assignments and leasing details. Ask the fleet management group for a list of the trucks, vans, automobiles and other vehicles they are leasing.
Most large IT organizations have an IT asset management system that tracks the serial numbers, hardware configurations, software applications and vendor contract data for each piece of technology you own. IT asset management systems also track leased equipment. If you are leasing laptops, desktops, printers, servers, routers, switches, software, storage devices or other data center equipment; ask your IT organization for a current inventory of leased assets.
Other Asset Owners
The other asset owners in your business will vary by industry. If you are operate in the supply chain, you may lease forklifts, conveyors, pallet jacks or other warehouse equipment. Ask your logistics team for a list of leased assets. If you are in the retail industry, you may lease Point of Sale systems, refrigeration units or display shelves. Ask your Store Operations team for a list of the equipment you are leasing. If you are in the health care industry, you might lease MRI machines, hospital beds or medicine carts. Ask your Hospital Administration team to provide a list of leased assets.
The lessors themselves have a vested interest in maintaining accurate data about each individual lease and underlying asset. Equipment lessors such as commercial banks, vendor captives and independent lessors each use sophisticated leasing software for pricing and credit analysis, servicing and billing. As a result, most reputable lessors can easily pull the details of all leases for any particular customer. Use your Accounts Payable application to identify the leasing companies you are paying regularly. Then contact the lessors directly for a list of your current leases. Even if you are able to obtain all required data independent of your lessor, it is good practice to periodically reconcile your internal data against a third party.
Procurement and Legal
Although requests for leases may originate from various departments (real estate, IT, logistics, store operations), all leases ultimately need to flow through the Procurement and Legal organizations. These two groups negotiate the pricing and contractual terms for most leases. Ask the procurement and legal organizations to provide a list of relevant contracts. Don’t just ask for contracts that have the word “lease” in the title; you will need to examine outsourcing and service contracts as well for possible embedded leases.
At some companies, the treasury organization has taken ownership of the leasing process. As a result, treasury may be integrally involved with procurement in negotiating and renewing leases. Ask your treasury group if they maintain a list of known real estate and equipment leases.