December 7, 2022

Q&A: New standards are reshaping lease accounting


Samson, a Yorkshire Terrier spends part of the day on the lap of owner Trevor Watts, a project controls manager at the office of Chandos Bird joint venture. — © AFP

The introduction of lease accounting standards has forever altered how public, private and government entities manage, track and report on their leases.

To understand more about the leasing sector and the impact that new standards are having, Digital Journal spoke with Joe Fitzgerald, SVP of Lease Market Strategy at Visual Lease. Fitzgerald considers the importance of lease accounting and the new standards that impact public, private and soon governmental entities.

Digital Journal: How are companies responding to these new standards and associated changes?

Joe Fitzgerald: Great question! During the second half of 2021, we surveyed private companies to gauge where they were in their lease accounting journey. And despite being just months away from the deadline to transition to ASC 842, we found that a vast majority of respondents were not yet fully compliant with the new lease accounting standard. Most indicated that their companies had at least started the process of adopting ASC 842 – but two in five respondents (40 percent) were only somewhat confident (or less) about being ready to adopt it in time for their company’s scheduled reporting period after December 15, 2021. And, a surprising 45 percent of respondents said they would give their industry a C or lower grade for its ability to comply with lease accounting standards—including nearly 1 in 5 (19 percent) who would give their industry a D or F.

What this boils down to is that companies are still largely unprepared and less than confident when it comes to lease accounting. They don’t just underestimate how complex the process is, but also, they’re unaware of the associated risks and benefits that can impact their businesses’ bottom line. We’re observing this behavior across the public, private and government markets.

DJ: Are you seeing Government entities, which are the newest sector to have to apply with these new standards, taking steps to become compliant?

Fitzgerald: There are some government entities who heed the warnings they’ve received from public and private companies about how complicated the lease accounting process is. Those who have a baseline knowledge around the prep work and maintenance that is required to adopt the lease accounting standards are either evaluating or implementing dedicated software. However, it seems that the majority are underestimating what it takes to achieve compliance, just as many private companies did before them.

I’m pleased to say there is more to come on this topic – we’re working on a new survey report under The Visual Lease Data Institute. It will include data on just how much the private market has progressed in its path toward compliance, and confirm where the government market is, as well.

DJ: How does Visual Lease help companies ensure they are meeting these new standards?

Fitzgerald: International corporations subject to IFRS 16, public and private companies and nonprofits that are subject to US-GAAP (ASC 842), and state and local governments, as well as other publicly financed organizations subject to GASB 87 would all greatly benefit from lease accounting software. Essentially, organizations that lease property and equipment assets to run their businesses across industries including retail, manufacturing, construction, transportation, business, healthcare, governments and higher education are ideal candidates for a dedicated system.

New accounting requirements require organizations to account for their leases with a much higher level of scrutiny and disclose asset and liability details for anything they pay for the right to use. That’s easier said than done – leases are complex agreements that change all the time, and they’re managed by siloed stakeholders, processes and systems, and lease transactions can have hundreds of permutations and calculations to capture in reports and throughout the year.

Software like Visual Lease solves both sides of the compliance challenge. Our accounting tools are purpose-built for lease financials, acting as a single system of record for lease financials with powerful compliance tools to automate US-GAAP, IFRS, and GASB lease accounting compliance, reduce risk and maintain auditability.

DJ: Can you explain how these new standards can actually lead to smarter leasing decisions and savings to the bottom line?

Fitzgerald: Yes, companies have the opportunity to leverage all the work they’re already doing to sustain lease accounting compliance to uncover opportunities within their lease portfolio.

For example, when a company implements lease accounting and management software, they can more easily manage changing terms within their leases, which translates to accurate records and therefore, accurate calculations. These same companies also gain the benefits of having one centralized location for all their leases, which provides them with a full view of their portfolio. This visibility not only facilitates faster and easier lease accounting compliance, but also enables companies to see exactly where and how they’re spending money. With a streamlined and up-to-date view of their portfolios, they’ll have the ability to exercise options that could reduce spending.

DJ: What does someone need to do to move all the reporting from manual spreadsheet tracking in-house to a digital platform such as Visual Lease?

Fitzgerald: Gathering data is the most complex and time-consuming part of the lease accounting compliance journey – this is especially true for companies with large and diverse lease portfolios, as data can be scattered across any number of separate sources. For context, there can be as many as 70 pieces of data, that need to be identified and reported for a company to be compliant with the FASB lease accounting standards. So, you can imagine how much must be captured for organizations with more than just a handful of leases!

Not only is it tedious to gather this data, it’s also easy to overlook required information to achieve compliance with the new standards, and failure to properly capture all the relevant data elements can have an adverse impact on a company’s financial reporting. Needless to say, this is an integral part of the process.

When migrating lease data from a spreadsheet to a dedicated software system, companies should first focus on increasing collaboration across all involved parties – remember, lease accounting is an all-hands-on-deck situation, typically between an organization’s accounting, FP&A, real estate, IT, legal and procurement teams. By getting these different teams to work more closely and communicate with one another, they will greatly decrease the chances of important information getting lost.