The Role of Lease Accounting in the Lease Life Cycle
Last Updated on May 5, 2022 by Andrew Flint
Whether you’re at a small or a large firm with a solid portfolio of commercial real estate, you’ve probably heard your fair share about lease accounting. The lease life cycle can be a long and involved process, entailing a number of fairly detailed steps and requiring a disciplined approach to ensure proper management, execution, and compliance.
But what exactly does the lease accounting life cycle involve? For the most part, you’ll find yourself navigating your way through five distinct stages:
1. Site selection, lease negotiation, and contract execution.
One of the most involved steps will be the very first in the lease life cycle. From location and budget to people and aesthetics, several factors will come into play when you’re seeking out a property to lease. Of course, the goal is to narrow down the selection of buildings for consideration. At this time, companies are often best served by contacting a tenant representation broker to not only aid in the site selection process, but also conduct a needs assessment to ensure a space will adequately suit the intended purpose. This type of professional can also be valuable during lease negotiations.
During site selection, a time will come when you’ll also need to involve stakeholders outside the real estate team. Finance teams, for one, need to understand the impact of new lease acquisitions in relation to the new standards for lease accounting. Additionally, legal teams will need to review letters of intent and work with your tenant rep broker on legal negotiations with the landlord before contracts execute.
2. Location buildout.
Location buildout is just as it sounds: planning and making improvements to the leased space before the official move-in. This step of the lease life cycle, however, entails more than contractors and design teams. It’s important to also involve both finance and IT teams, as they’ll need to be aware of any buildout costs and technology specifications associated with the buildout.
3. Move-in.
It’s at this stage when the finance, IT, and real estate teams will go into hyperdrive to coordinate the procurement of furniture, fixtures, and equipment (as well as anything else needed to get the space up and running before people show up). You’ll need to account for any capital expenditures in relation to the leasehold, along with any non-real estate leases for equipment such as printers, copiers, and the like.
4. Ongoing lease management.
Ongoing lease management is the day-to-day coordination, administration, and reporting of the agreed-upon lease terms within a real estate portfolio. It involves everything from rent obligations and occupancy cost projections to details on important dates associated with terminations, renewals, rights of first refusal, and so on.
5. Accounting for leases.
Much like lease management, lease accounting is an ongoing process in which financial teams record the financial activities involved with lease agreements. With the changes brought about by ASC 842’s lease accounting standards, however, financial teams must now account for operating leases on balance sheets. This is the stage of the lease life cycle that many finance teams are becoming proficient at with the new lease accounting standards.
Lease Accounting Software Streamlines Financial Processes in Real Estate and Ensures Digital Transformation
With leases containing copious information and having near-constant updates and amendments, outdated lease accounting processes can quickly become inefficient and pose monetary risk. Finance teams require a single, centralized source of truth with real-time data on leasing portfolios at everyone’s fingertips.
Lease accounting software does just that, allowing financial departments to harness the power of digital transformation. It eliminates the need to dig through spreadsheet after spreadsheet for information. Instead, you can draw leasing details and export a report from one data set, automating many manual processes, reducing the chances of errors, and adding greater speed to lease accounting activities.
In fact, data readiness is often the most difficult phase of ensuring ASC 842 compliance. Many companies have signed numerous lease agreements. And, they save these contracts in decentralized locations or storing lease data on disparate systems or spreadsheets. Even when lease agreements contain all the required details (which they often don’t), collecting and abstracting said information is a time-consuming and resource-intensive task without the help of lease accounting software.
Beyond that, lease accounting software brings the three branches of corporate real estate portfolios together. Transaction management, lease administration, and lease accounting begin to work in tandem, setting the stage for a unified real estate strategy.
For example, think about a real estate team that’s trying to determine the long-term flexibility of a real estate portfolio by analyzing the success around negotiations surrounding termination options. The business might start reexamining its real estate expense liability. In turn, this would have a significant material impact on its second-largest expense.
COVID-19 and the ever-shifting nature of work have required — if not forced — finance departments to adopt digital-forward solutions at breakneck speed. Thankfully, you can largely improve the efficiency and accuracy of both lease accounting and lease life cycle management with savvy lease accounting software. This highly transformative solution provides the proper controls to meet the new standards for lease accounting, enables greater collaboration between departments, and allows for faster, more strategic decision-making. Why not explore your options?
Check out our Lease Accounting Compliance Hub for all things ASC 842.
