For three years, the new lease accounting standard has been a dark cloud on the horizon for every company that follows U.S. Generally Accepted Accounting Principles. But as we approach December 15, 2019, the effective date for nonpublic companies, keep in mind that there is a silver lining. When companies look beyond compliance and take a strategic approach to managing their lease portfolio, they can reap operational benefits that support business goals while fulfilling compliance responsibilities.
Compliance with the lease accounting standard requires a revamp of procedures surrounding lease procurement, administration, and reporting. Compliance means moving from a decentralized model of lease activity to a centralized one, so that all lease data is contained and maintained together.
With lease data collected in a central repository, company leaders have an opportunity to gain deeper insights and make better-informed decisions regarding future lease activity. For example:
- Which lease terms are common across the company?
- Which vendors and contracts have proven most reliable?
- What types of terms are commonly negotiated, and could those terms be standardized for common asset types?
A centralized approach to lease management offers the chance to eliminate redundancies in lease negotiation, record-keeping, and administration. New leases can take a consistent form, spread across fewer vendors and using standard terms that deliver the most value to the organization.
As companies grow, leases may be negotiated by different people in different departments and offices — so that one hand often doesn’t know what the other is doing. This decentralized approach can mean cost inefficiencies. With an unclouded view of the bigger leasing picture, it’s easier to analyze lease spending data to answer questions such as:
- Are leases being managed in accordance with company policies?
- Are lease spending limits observed consistently across the company?
- Is leasing rather than buying a cost-efficient choice?
- Is the business allocating lease expenses across company divisions in the most cost-effective manner?
- Would consolidating leases with a few preferred vendors reduce costs?
Increased visibility also helps businesses catch exceptions and enforce spending controls or create new controls where appropriate. For example, a new policy that requires leases to be initiated by a central office might keep offices from “going rogue,” especially if they know that their leasing activities are being centrally tracked.
Implementing the new standard requires identifying the entire population of leases (including those embedded in other contracts), extracting the relevant data from lease agreements, and then tracking and maintaining changes at the end of each term (or, in some cases, mid-term). This process will require collaboration between departments, from accounting to procurement to IT.
While it demands time and thoughtful effort, the necessary communication across teams can offer benefits beyond compliance. Collaboration among company divisions and departments lets the business identify best practices, preferred technologies, and superior processes to adopt companywide as it makes changes to meet the new standard.
The challenges of implementing the lease accounting standard — right on top of the new revenue recognition standard — should not be underestimated. But if you approach compliance as a fresh chance to optimize your company’s leasing process from beginning to end, you might just discover some silver linings. Be sure to reach out to your CRI professional to help you better understand the lease accounting process for your business.