To ensure the accuracy of your accounting and the completeness of your lease population you will need to have a process for identifying any new leases signed across the enterprise. The scope of the process should include not only traditional leases, but embedded leases, subleases, and sale-leaseback transactions. The challenge of identifying new leases should not be underestimated. An organization with 1000 leases that average a three year term will have 300 or more new leases per year.
Tracking Changes to the Lease Portfolio
To ensure the accuracy of your accounting throughout the term of a lease you will need to monitor for a wide variety of expected and unexpected changes. Periodic events such as monthly, quarterly, or semiannual rent payments will be easy to identify and track. However, less common events such as variable rent adjustments, leasehold improvements, sublease extensions, floor space expansions, early renewals, and middle of term buyouts will be more challenging. Many of these could result in a potential modification, reassessment, or re-measurement scenario that could impact your lease accounting.
Tracking Lease Renewals and End of Term Decisions
To ensure the accuracy of your accounting you will need to promptly record any end of term decisions associated with leases reaching maturity. Equipment leases may be renewed or automatically transition into a month-to-month evergreen scenario. In other cases, the equipment assets may be bought out or returned. Real estate leases may be renewed with the more, less, or the same amount of floor space as well with changes to rent. Success will require establishing processes to capture decisions from asset owners as soon as they are made.
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Accounts Payable and Lease Accounting
Many companies will want to synchronize their accounts payable (AP) applications and their lease accounting system. To perform accurate accounting for your leasing portfolio, you will need to capture precise details of periodic rent payments as well as other fees incurred at the start and end of the lease.
Read more about how your Accounts Payable and Lease Accounting applications interact.
Fixed Asset Management and Lease Accounting
Many companies will want to synchronize their lease accounting application with one or more fixed asset management systems. Ideally, the fixed asset systems should be tracking all plant, property, and equipment, including leased right of use assets. Maintaining an accurate inventory of leased real estate and equipment in the fixed asset system is critical for calculating the depreciation used in financial reporting and property tax calculations. Additionally, an accurate inventory of all assets is required to secure proper insurance coverage for leased real estate and equipment.
Read more about how your Fixed Asset Management and Lease Accounting applications should work together.
Real Estate Administration and Lease Accounting
Many companies have an integrated workplace management system or a real estate administration application that serves as the system of record for all property leases. Much of the leasing data needed to perform real estate administration is also needed to perform proper lease accounting. Rather than manually entering data into both systems, the best approach is to establish integration between the real estate administration application and your lease accounting system. During the term of a 10-year, 20-year, or 30-year property lease, a number of changes can occur that might impact the accounting.
Read more about how your Real Estate Administration and Lease Accounting systems should interact.