The new ASC 842 and IFRS 16 lease accounting standards are inspiring organizations across the country to ask this compelling question: Where are our leases?
The new lease accounting standards require virtually all leases to be recorded on the balance sheet. While it may seem easy enough, locating all of the relevant lease data needed for compliance is a significant part of the overall scope of work. Here are some guidelines on where to look for real estate, equipment and other asset lease agreements in preparation for lease accounting compliance:
Leases can exist in many formats
First, it’s important to note that leases may exist in many different formats. For example, lease agreements may be physically stashed away in paper format only or housed in a sophisticated lease management software system managed by you company’s vendor. Here are some examples of potential sources of lease data to use as a starting point:
- P&L/Financial statements can show lease expenses, which can be traced back to the source
- Disclosure work and lease footnotes from previous years
- Fixed asset records
- Legacy real estate system
- Lessor vendors software
- File cabinets and desk drawers, for leases in paper form
- SharePoint sites or other centralized repositories of scanned and shared documents
While doing due diligence on lease data research, consider send a survey to the field, asking them to identify leases under their control.
Leases can exist in many departments
The new standards apply to both real estate and non-real estate leases, including vehicles, equipment and other assets. Until now, many organizations have taken a very decentralized approach to overall lease management, as lease agreements specific to each department have been negotiated and stored in silos across the organization without standardization. Here are helpful guidelines on the types of leases that may be managed by various functional groups within your organization:
Real estate leases
Real estate leases are typically very high in value, and therefore are more apt to be tracked and found easily than agreements of significantly lesser value. Real estate leases can include, but aren’t limited to, retail, office, buildings and land. Leases can be found by working directly with the real estate department, commercial real estate brokerage firm and mining the existing software system. Learn more about the differences between real estate and equipment leases.
The logistics department can be a valuable source for lease data associated with vehicle fleets, including cars, trucks, trailers, aircraft and railcars. Dependent on the volume, the lease data may be formalized in a system or recorded on an ad hoc basis.
The IT department can potentially be a rich source of lease data, as companies tend to lease technology equipment that is quick to depreciate including laptops, tablets and smart phones necessary for employees to conduct day-to-day business operations. IT departments may also lease the equipment and software necessary to run overall business operations, such as servers. Shared resources, such as copiers, printers and audio-visual equipment is also likely to be leased assets.
Leases originating and managed by the warehouse management or maintenance department may include conveyer belts, scissor lifts, forklifts and maintenance equipment such as floor buffers and polishers.
Alarm systems, telephone systems and other agreement that may be initially viewed as service contracts can contain embedded leases. Currently, service contracts with embedded leases aren’t treated any differently than those without. New lease guidelines require companies to divide the contract into the lease and non-lease components, and the embedded leases must be recorded to circumvent material misstatements.
While these guidelines serve as a starting point, there are variations for each industry. For example, the restaurant industry needs to be mindful of the leases that may encompass commercial ovens, cash registers and furniture. The medical industry will yield lease data for medical technology and equipment, such as x-ray machines. It’s not unusual for entities in the retail industry to lease retail racks and shelving. The construction industry leases heavy-duty construction equipment, and the list goes on. No matter what your specialization, it’s important to create a cross-functional team that can collaborate on the potential sources of lease data originating in various places throughout the business. Learn more about how CoStar lease accounting software can help with lease data management and lease accounting compliance.