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These 10 best practices, supported by advanced lease accounting automation, can save accounting teams hundreds of hours. Functional automation, automated accounting controls, and integrations let accounting focus on important matters, save time, and avoid audit headaches.
- Implement one seamless solution for lease accounting and lease administration – Lease Accounting requirements drove real estate and accounting together around shared data and processes. Leases change frequently. Lease Administration and Lease Accounting both need rent amounts, payment timing, and lease term dates. According to the lease contract, the lease admin team needs this data to ensure lessors are paid. Accounting teams need the same data to calculate each contract’s ROU asset and lease liability to create the amortization schedule and meet requirements for ASC 842. Accountants and lease administrators need to know immediately when the rent or lease term changes, not weeks or more later. A comprehensive lease administration and lease accounting software solution alleviates the need for both departments to input duplicate data and avoids unnecessary system integrations.
- Automate lease remeasurements – Remeasurements can be a bigger headache than initial compliance, with lease changes triggering compliance-mandated remeasurements. Without fully automated remeasurements at the lease and portfolio (batch) level, accounting must create manual calculations for common lease events like renewals, terminations, and impairments. When performed within a spreadsheet, each type of remeasurement requires its own calculations, takes at least 30 minutes, and must be saved for auditors. There may be hundreds throughout the year.
- Systematically control policy compliance and data quality – Data errors are a nightmare for accounting. Systems should test individual application entries and bulk uploads for errors before they become big reporting problems. For example, ASC 842 says leases with a transfer of ownership clause should be classified as a finance lease, but accountants sometimes inadvertently tag them as operating leases. Other errors are made by incorrectly typing or importing data such as numbers or text details. Systematic controls should be in place to prevent and detect errors. Errors that surface can contribute to audit headaches and the loss of hours for accounting.
- Customize reporting with company-specific fields – Most companies need to track information unique to the business or industry. Still, many lease accounting systems don’t accommodate information outside their standard lease agreement fields. Examples include livestock clauses for a tower company, appliance mezzanine square footage for a home improvement retailer, and outdoor seating for a restaurant company. An ideal system provides the ability for users to easily create custom data fields alongside standard lease data for ease of access and a single source of reliable information. Reporting on these and other fields should also be easy with ad hoc tools.
- Automate retrospective true-ups – Errors or omissions discovered after month-end close require manual corrections in spreadsheets when software lacks functionality to fix these issues automatically. Accountants must show the amount that should have originally been booked, the amount that was booked, and the difference between the two. This tedious process is time-consuming and introduces risk with accounting records maintained outside of the software. The best practice is to use software to automatically calculate and track retrospective true-ups since these scenarios are inevitable for accounting teams.
- Match the incremental borrowing rate to leases automatically – Large companies have hundreds of rates to choose from as they’re based on geography, currency, lease term, and type of lease. Without software that includes automatic matching to company rate tables, accountants must research rates and insert them manually. This is a time-consuming and error-prone process and can result in the misclassification of leases. Leading software solutions will automatically match the discount rate with each lease.
- Maintain separate schedules for book-tax differences and other areas of accounting – ASC 842 created new intersections between tax and lease accounting. Companies often must break out lease details such as TIA amortization for tax, purchase accounting adjustments and cease use adjustments. Without the ability to easily split amortization schedules, accountants are forced to create supplemental schedules in spreadsheets. Each instance requires additional work hours and introduces additional risk due to schedules housed outside of the software. The best practice is to implement software with the flexibility to track these components together for lease accounting while simultaneously keeping them separate for tax and other areas of accounting.
- Automate reports needed for disclosures and auditors – All lease accounting solutions produce a basic lease accounting disclosure report. Still, the best solutions go way beyond the basics and provide auditable support with every report. The best practice is implementing a solution with standard reports to automate disclosures, roll forwards, balance sheet reconciliations, and forecasts. These should automatically include lease level audit details and foreign currency conversions from local to functional to reporting currency.
- Integrate the lease accounting system with the ERP and other systems – Almost every lease requires multiple journal entry lines every period to amortize the ROU asset and lease liability balances and record proper expenses. The lack of integrations with an ERP system forces accountants to download data from their leasing software and spend hours in spreadsheets manipulating columns into the prescribed format, removing unnecessary data, adding the right cost centers and GL strings, and then uploading the journal entries through an ERP integration. The best practice is implementing a lease accounting solution that does the heavy lifting of GL posting automatically and provides release controls on the GL output file.
- Use market data to estimate the fair market value of real estate easily – The fair market value (FMV) of real estate is often needed for lease accounting calculations. FMV comes into play for finance vs. operating classification testing and impairment testing and is used to determine purchase accounting adjustments in business combinations. To obtain the support for FMV of their properties, companies typically go through a time-consuming process like this: The accounting department requests the FMV from the real estate department, which requests it from a real estate broker, who then uses researched data in CoStar to derive the FMV and sends it to the real estate department, which forwards the information to the accounting department. Significant time can be saved if accounting has access to the same researched data brokers use. Commercial real estate market data for FMVs from CoStar is readily available to accounting teams in CoStar’s lease accounting solution.
All of these 10 best practices are easily supported by advanced lease accounting automation found in CoStar that will save accountants time, ensure controls, and some the audit journey.
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