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June 7, 2021 10:00AM

Lease Accounting Best Practices: How to Get Started

Digital technologies are transforming the real estate space at astonishing speed. Regulations, too, are changing all the time. This means that keeping up to date with requirements and how you can meet them is essential. Fortunately, the right technologies can help you navigate the complex regulations and shifting standards.

In today’s post, we will consider the issue of lease accounting in the corporate real estate sector. Read on to learn more about the practicalities of lease accounting for private companies and how you can streamline your processes for greater accuracy, time efficiency, and profitability.

Lease Accounting Data, Systems, and Regulations

If you are new to lease accounting or trying to improve your processes, the requirements can seem daunting. In this section, we’ve broken down three crucial elements you need to understand and put in place. Taking the time to get to grips with these now will save you time, work, and potentially costly mistakes in the future.

Making Sense of Your Data

Creating and adding leases to your system for the first time can be a tedious process. You’ll need to know and standardize many different pieces of information to ensure you are accounting for transactions correctly.

For example, how is lease, unit, or floor information stored in your current system? What kinds of square footage measurement labels do you use? For example, you might record the net rentable space (the square footage on which rent can be charged) or gross space (total square footage), or you might perform a BOMA remeasurement survey. Consider whether you are using the most optimal measurements and recording measures. If not, it’s best to adjust sooner rather than later.

You’ll also need to consider the kinds of leases that you have, such as commercial, industrial, residential, retail, office, ancillary, and antenna. Each of these categories will have slightly different recording and reporting requirements. What coding convention will you use for tenants? Set up your coding in a standard format so it is easy to understand and sort through in the future—you’re going to want access to that past data.

Understanding the New Regulations

In 2016, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) unveiled new standards requiring all lessee transactions to appear on balance sheets (prior to this change, only purchase agreements had to appear as liabilities). These changes took effect between 2018 and 2020, staggered for different types of businesses.

The new regulations were designed to bring to light financial commitments that were not previously recognized for companies that lease assets (“lessees”).

According to the FASB, these organizations “will now be required to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.” In other words, you will need to make two entries: a liability entry for your lease obligation, and an asset entry recognizing the right to use that asset.

Both finance and operating leases must now be recorded (previously only finance leases needed to appear on the balance sheet). A finance lease occurs when the lessee will own the property at the end of the lease period—essentially the leasing company buys the asset and rents it to the lessee until they have recouped their investment and any interest—and an operating lease occurs when ownership (and associated benefits and liabilities) is not transferred to the lessee at the end of the term. Ensure you understand what category your leases fall into.

Under these new regulations, all leases must be treated consistently with the FASB approach to finance leases, including international leases.

This change in regulatory requirements primarily affects corporate real estate lessees and has precipitated a significant shift in the way that real estate firms and investors manage their lease accounting.

Employing the Right Systems

As you can see, there is a lot to consider. Storing, updating, and maintaining lease data, obligations, and provisions on spreadsheets is laborious, time-consuming, and inefficient. That’s why you need the right lease management and accounting software and support to help you. It allows you to centralize all your data and allows anyone in your team to access it from anywhere.

Using the right software enables you to track your leases easily, analyze spending and return on investment, and make better deals as a result. It also ensures compliance with the latest regulatory standards.

Yardi Corporate Lease Manager

Yardi is a real estate software giant trusted by over 5,000 major firms, including many REdirect Consulting clients. Yardi’s Corporate Lease Manager is FASB and IFRS compliant and offers a single, powerful platform from which to manage workflows, transactions, accounting, and reporting. That’s why it is one of our recommended software solutions for lease accounting.

Reporting

Good lease accounting will likely include several reports, from Rent Roll to Tenant Charge and Lease Abstract. You’ll need to build a robust understanding of what you need to report on, when, and how often you’ll need to do so.

Yardi Corporate Lease Manager makes it easy to build custom reports to your exact specifications and includes a robust set of pre-built reporting options. You can even add your own company branding. You can create graphs and individualized dashboards with a few quick clicks, and make use of Excel features such as macros, pivots, and filters.

When it comes to getting the most out of your reporting, it’s all about the details. While top-line and big-picture information can be useful, drilling down into the smaller details is what will enable you to make the best decisions. Take the time to understand the full capabilities of your reporting software so that you can audit your assets’ performance and access all the information you need to boost that performance and increase revenue.

User-Defined Fields

User-defined fields are very useful. Your System Administrator can add user-defined fields to be used for either property or lease detail information. We recommend you use these new fields to catch additional data points, instead of modifying the use of an existing field.

User-defined fields might help to add detail that is not readily available in your base system. Examples might be future commission due dates and subtenants. User-defined fields have also been used to aggregate key operating statistics by tenant such as rent per square foot, base recovery billings, and recovery base years in one concise screen that can be accessed from the lease record or used as a source for further customized reports.

However, as discussed in a recent post, dirty data is one of the biggest challenges to effective reporting. User-defined fields are uniquely vulnerable to human error. A simple mistake such as entering a special character (like a $ sign) in a field where one isn’t supposed to be can undermine the quality of your data and ruin your reports.

To mitigate risk when using user-defined fields, the most important solution is to ensure proper training for everyone who will enter data into these fields. This can prevent mistakes before they happen. You could also create a simple report that will highlight any anomalies in your data—our team can help you with this. Another option is to modify your reporting parameters to work around these possible errors, such as by instructing the parameters to ignore special characters.

There are pros and cons to all these strategies, but by far our biggest tip is to implement good data hygiene right from the beginning and ensure everyone on your team understands its importance. If you haven’t done so yet? It is never too late to start!

Where to Find Additional Support

If you need some extra help in getting to grips with lease accounting best practices or navigating the new regulations, get in touch with us. Our friendly team will be pleased to discuss the different ways we can work together to support you!

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Larry Hoffer
About the Author

Larry Hoffer

Larry has specialized in the real estate industry for over 30 years, initially with Arthur Andersen’s Real Estate Services Group. Subsequently, he gained experience in real estate operations and accounting systems (Yardi, MRI and Timberline) as a Controller and CFO for real estate operating, development and investment companies. Larry has …