In March 2020, there were just 100,000 ventilators in the United States. 

However, healthcare providers needed 750,000 to treat those affected by the most extreme cases of COVID-19. 

Manufacturers put boots to the ground and began production on ventilators as well as masks. GE and Ford, for example, built 80,000 ventilators for the U.S. government by Sept. 2020. 

As manufacturers built these machines — which were often outside their regular product lines — their real estate and accounting teams were figuring out new ASC 842 and IFRS 16 accounting compliance standards. 

To meet these standards, manufacturers adopted lease accounting software for the first time.

But, since then, many struggled to find solutions that could handle copious amounts of equipment and embedded leases. The best lease accounting software should at the very least handle these unique manufacturing challenges. 

Manufacturing challenges  

Volume and classification

Volume is the most obvious of the challenges. Manufacturers have incredibly diverse and extensive portfolios, making it harder than average to track and manage each lease accurately.  

The first step to compliance is identifying all the lease agreements in an organization. And one of the biggest struggles for a lease accountant in the manufacturing or distribution business is the sheer volume of leases.  

After the leases are identified, they must be classified. Under ASC 842 compliance, leases are classified as either finance leases or operating leases.  

Terminology Break

Terminology Break

Finance leases transfer substantially all the risks and rewards of ownership to the lessee. They are accounted for similarly to asset purchases.   

Operating leases do not transfer substantial risks and rewards of ownership and are accounted for differently from finance leases.  

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Equipment & embedded leases  

If you zoom in on just one industrial space, you’ll find hundreds of lifts, trucks, dollies, security equipment and more. Equipment leases have different considerations than real estate leases and exist in quantities that would make Scrooge McDuck’s eyes pop out of his head.  

ASC 842 and IFRS 16 include the concept of an embedded lease – another thing for the lease accounting team to carefully identify. Within an existing lease, there may be specifically identifiable assets that are attached to the lease either for a specified period or for the life of the lease.  

How to Address Embedded Leases Under ASC 842

A deep dive with CoStar Director of Lease Accounting

How to Address Embedded Leases Under ASC 842

Professional services provider Citrin Cooperman sites IT services are a prime example of an embedded lease, especially in shared distribution fulfillment or manufacturing facilities.  

“Basically, if an asset is obtained for company use outside of the fixed asset procurement process, the accounting team should evaluate the contact for potential lease treatment,” says Matt Waters, CPA, Director of Lease Accounting and Sustainability at CoStar Real Estate Manager.   

“It’s important for companies to set accounting policies around identifying and accounting for leased assets and the best practice is to discuss those policies with company auditors well in advance of the audit cycle.”  

“It’s important for companies to set accounting policies ... well in advance of the audit cycle”

Matt Waters, CPA

Director of Lease Accounting & Sustainability

Reassessing and modifying leases  

Lease management is an ongoing effort that requires regular check-ins on existing leases. No set it and forget it exists for lease accounting teams.  

Manufacturers especially must regularly reassess and adjust the lease liability and ROU asset for any lease modifications or changes in lease terms. This includes changes in the lease term, lease payments, critical dates and/or exercising renewal or termination options.  

Portfolio complexity

Managing these complex calculations for your lease portfolio with Excel spreadsheets and optimism is a quick route to failing your audit.  

Data consistency

Without a reliable, secure home for data, a manufacturer would be up a creek without a paddle. Gathering and maintaining accurate data for all those leases can be cumbersome at least. At most, it can lead to errors and real regulatory problems for the company.  

Financial statements

Lastly, lease accounting standards can have a substantial impact on financial statements, affecting key metrics such as debt-to-equity ratios and EBITDA. Manufacturers must carefully manage these impacts to maintain financial stability.  

Best practices for lease accounting   

Implement lease accounting software  

Utilizing specialized ASC 842 software can automate and streamline the process, ensuring accuracy and compliance.   

CoStar Real Estate Manager has more automation and is more recommended by services providers than any other platform. Accounting teams can rely on lease alerts and reminders for data and date accuracy. CoStar automation greatly minimizes manual calculations, errors and restatements.   

Centralize lease data  

Centralizing lease data in a single source of truth can improve data accuracy and accessibility. Especially when teams across the globe need to access the same intel. Data accuracy is crucial for a company’s operations and for regulatory and compliance reporting.  

Regular training and updates  

Providing regular training for accounting and finance teams on lease accounting standards and software ensures that the team stays updated with the latest requirements and best practices.   

CoStar customers can rely on the Lease Accounting Center of Excellence and the Knowledge Base for up-to-date education.  

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How CoStar Real Estate Manager helps manufacturers

Lease accounting for manufacturers involves navigating complex standards and managing a diverse portfolio of leases. By understanding the requirements of ASC 842 and IFRS 16, implementing best practices and leveraging advanced lease accounting software, manufacturers can achieve accurate financial reporting and maintain compliance. Adopting these practices not only ensures transparency but also enhances overall financial management and decision-making within the organization.