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Q&A: How lease accounting is aiding many property managers

With leases now being represented on the balance sheet, these agreements are a priority to the Office of Finance – this critical shift has provided businesses with an opportunity to get a handle on their leases.

London, BBC building. — Image: © Tim Sandle
London, BBC building. — Image: © Tim Sandle

Leases are contracts in which the property owner allows another party to use the property or asset in exchange for some consideration, usually for money or other assets. This is an area that many firms become involved with. What is the importance of lease accounting for businesses? How is the weaking economy playing a role? Robert Michlewicz is the CEO of Visual Lease explains how and why.

Digital Journal: Why is lease accounting more important than ever?

Robert Michlewicz: Most people are stunned to find out that after headcount-related expenses, leases (real estate, fleet, equipment, land and more) are typically the second largest expense for organizations. To further complicate matters, leases are very dynamic agreements; they are often subject to changes that need to be documented, tracked and reported over time to ensure proper, ongoing compliance with the lease accounting standards (ASC 842, GASB 87 and IFRS 16). When you think about it from that perspective, you’d assume that companies are keeping close tabs on their leases.

However, before the introduction of the new lease accounting standards, public and private companies, as well as government entities, tended to neglect their lease agreements. Many assumed that after the negotiation process was complete and they had agreed to the terms within, their work was done – but that’s a highly consequential mistake that lends itself to poor lease administration practices, which could translate into material adverse effects to an entity’s financial status.

With leases now being represented on the balance sheet, these agreements are a priority to the Office of Finance – this critical shift has provided businesses with an opportunity to get a handle on their leases. In fact, when prioritized and properly managed, an organization’s lease portfolio has the ability to not only reduce substantial risk, but also, introduce real business benefits, including cost savings opportunities, stronger internal controls, access to capital via more transparent valuation criteria, easier audit prep and the ability to make more strategic operational decisions in the future.

DJ: How does Visual Lease help organizations when it comes to lease accounting?

Michlewicz: We provide software and services that companies of all industries and sizes need to properly manage, track and report on their leases. We accomplish this by aligning our clients’ portfolios to their internal controls, thus empowering them to effectively monitor and account for critical lease data over time, which is essential for sustained lease accounting compliance and to access the many business benefits I just mentioned.

By merging our market-leading lease administration and lease accounting capabilities, we uniquely offer organizations the ability to optimize their lease portfolios. When optimized, lease portfolios are integrated with their operational and financial systems to access key data, providing the ability to make more informed, strategic decisions about future investments.

DJ: You recently joined Visual Lease as CEO, what is your vision for the future of the company?

Michlewicz: When I think about the future, I see Visual Lease continuing to help companies leverage their lease portfolio as a strategic asset – not just an expense.

As the Office of Finance continues to evolve as a more strategic partner to the overall business, it must balance strategic business initiatives in relation to its statutory reporting requirements for internal and external stakeholders, which in many cases, includes regulatory bodies. This is primarily managed through an organization’s Internal Controls over Financial Reporting (ICFR) framework, which encompasses the people, processes and technology that are relied upon for accurate financial reporting. This ecosystem can include areas like Tax and Treasury, Asset Management, FP&A, Financial Close, Audit and increasing Environmental, Social and Governance (ESG) initiatives, just to name a few. Considering this in relation to a company’s lease strategy and portfolio management is where Visual Lease comes into the picture.

We work with our customers to manage sustained lease accounting compliance by aligning their lease controls to their internal systems. This focus on controls provides our customers with better confidence in their data, as well as visibility into the insights they need to make more strategic decisions to drive greater efficiency and effectiveness while also reducing costs and risk.

DJ: What is the number one thing you would advise companies to do to better optimize their lease process?

Michlewicz: Relying on Excel spreadsheets to manage and report on your leases presents a high risk of error.  Spreadsheets are excellent tools to address many different business needs, but they cannot accommodate how complex and dynamic leases are, and as a result, can lead to detrimental reporting errors. Instead, consider investing in software that will help you organize and maintain your leases and create important efficiencies along the way. In fact, both private companies and government entities have reported that third-party lease accounting software has helped them replace and streamline essential, manual tasks. This software also improves accuracy through automation, keeps employees in the know of rules and regulations and introduces a new level of customer service and support available to their internal teams, while simultaneously reducing the risk of misreporting company lease information.

Once you have your leases in a centralized system of record, focus on setting up the proper internal controls – this is critical given how many teams are typically involved in these processes. Many times, this is inclusive of groups like Real Estate, Finance, Legal, Procurement, etc. By taking these steps, a company can ensure the right people have the right access to the right information at the right time. Otherwise, you’ll expose your organization to risks including the inability to respond to changing circumstances, missing deadlines and options, miscalculating lease costs, missing an incentive or reimbursement and even overpaying and assuming responsibilities that belonged with your lessor.

DJ: Has the weakening economy impacted how businesses consider leases?

Michlewicz: Even though leases represent a very significant expense line item in most organizations, the shocking reality is that 71% of private companies report that they aren’t entirely sure how much their leases cost! The realities of today’s economic climate coupled with the ongoing demands of the new lease accounting standards have made businesses pay even closer attention to their leases. By utilizing the right technology that focuses on proper alignment with lease controls, reporting and streamlined audit preparation, finance and operational teams can focus on more strategic work, allowing for higher value creation from these important legal agreements.

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Written By

Dr. Tim Sandle is Digital Journal's Editor-at-Large for science news. Tim specializes in science, technology, environmental, business, and health journalism. He is additionally a practising microbiologist; and an author. He is also interested in history, politics and current affairs.

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