Tracking Lease Changes on Day Two and Beyond
As the deadlines for the new standards grow closer most companies are focused on getting to Day One compliance. Project teams are busy abstracting the necessary data from lease contracts and uploading it into a lease accounting application. However, few companies have given significant consideration to how they will manage the process of keeping their lease accounting data accurate on Day Two and beyond. The volume, velocity and variety of leasing data changes will present an administrative challenge for many large companies.
Eleven Events You Will Need to Monitor to Track Lease Changes
You will need a process for tracking lease changes throughout the term of the contract. Assets can come on or off lease schedules. Variable rents might change. Have you considered:
1) Variable Rent
Many leases have planned changes to the rent at selected milestones based upon performance, usage, or economic factors. How will you track updates to variable rents linked to the Consumer Price Index, sales performance, mileage driven or hours of usage?
2) Real Estate Expansions
Many long term real estate leases offer options to expand or contract the amount of floor space being leased. How will you become notified with the corporate real estate team exercises lease clauses that could trigger a modification or reassessment?
3) Equipment Swaps and Upgrades
Equipment assets leased might be swapped out or upgraded during the term of a lease due to failures, performance or technology issues. How will you be notified of these events by the operations teams managing the equipment?
4) Equipment Location Changes
Leased equipment many move between locations during the term of a lease impacting property tax payments and insurance policies. How will you track thousands of computers, forklifts, vehicles, rail cars and other equipment assets moving around the world?
5) Cost Center Changes
The cost centers associated with leased real estate and equipment may change during the term of a lease. How will you track the relationships between cost centers and ROU assets as you go through reorganizations, mergers, acquisitions and divestitures?
6) Employee Changes
Knowing who to ask about reasonably certain end of term plans, current physical location and assigned cost center for leased assets is important to ensure the accuracy of your accounting. How will you track which employees own which assets through reorganizations, promotions and reassignments?
7) External Vendor Changes
Some of your leased assets may be managed on a day-to-day basis by external property managers, IT outsourcing organizations or 3rd party logistics providers. How will you track which vendors are managing which assets as you sign new outsourcing agreements or switch providers.
8) Changes to Subleases
Just as you might expand or contract the amount of square footage you are occupying, your subtenants may require changes to their subleases as well. What process will you use to track lease changes such as expansions, contractions, renewals or terminations by subtenants?
Not only do the parameters of lease contracts sometimes change during the term, but there is additional data about the lease being generated periodically. For example, invoice and payment data related to each lease is created through each billing cycle such as:
9) Invoiced Expenses
For each lease you will receive an invoice periodically – once per month, once per quarter, or once per year. How will you track the actual line item expenses being invoiced by lessors during each billing cycle?
10) Actual Disbursements
As invoices are paid, you will need to capture the details of the actual payment to the lessor. How will you gain visibility into the relevant disbursements being made by your accounts payable team?
11) Sublease Collections
For subleases you will need to bill tenants periodically then book the collections. How will you capture the line item details for base and variable rents, property insurance, local taxes and operating expenses collected from subtenants?