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The Fix For Lease Accounting Errors

The Fix for Lease Accounting Errors

Lease accounting software can save companies time and money, but one wrong key entry can cost a company plenty. That’s why leasing software must have an internal mechanism for spotting possible errors and warning users of them immediately.

Errors occur when users accidentally enter wrong information or misapply accounting guidance or company policies. Lease accounting software should be able to catch errors that misalign with company rules. For example, if a company’s policy is to create amortization schedules only for leases than last one year or longer, but someone creates one for a nine-month lease, the software should be able to detect the error and alert the user immediately. So, too, if a user classifies a lease as operational but the other data for that record seems to match that of a finance lease, the user should automatically be alerted to double-check the classification.

If the warning is ignored, the software should note it on the record so a manager can run a report highlighting potential issues that could impact the balance of journal entries. The report should explain the problem and provide easy steps to fix it. If needed, the manager should be able to unapprove the record and alert the appropriate accountant to correct and reprocess it. Once issues have been fixed, the manager should be able to run another report on filtered criteria to ensure the affected record no longer shows any errors and approve the record.  

Common Errors

  • A user classifies a lease as operating when one of the five tests run indicates it should have been classified as a finance lease.
  • A user enters an end-date for a lease that is before the last day of the scheduled lease payments,
  • A user enters a lease expense but fails to include it in an accounting amortization schedule
  • A user changes lease expenses, lease dates, or frequency of lease payments and does not modify the amortization schedule
  • A user flags a lease as short term when the start and end dates are greater than 12 months apart.
  • A user enters different local and functional currency types but sets the functional exchange rate to 1.0. When the functional currency is different than the local currency, the exchange rate should most likely not be equal to 1. This usually indicates a data input mistake but there are rare scenarios where the exchange rate could be 1.

This report should be run at least once a month, perhaps during month-end close. However, running it weekly would be best so companies can resolve issues before they become critical and harder to tackle, especially during crunch time when companies are trying to close the books.

To learn about CoStar Real Estate Manager’s processes for fixing errors, visit the Accounting Calculation Exceptions Report webinar.

Matt Waters, CPA

Lease Accounting Subject Matter Expert with over 15 years of Management Experience in Accounting and Finance