Lease accounting is the process of understanding the impact of your companies leasing activities on its finances and cash flow. Though this sounds simple, it is a much more complicated process in reality and has put many companies under the FASB and SEC radar quite easily. If you do the lease accounting work in a hurry just to somehow close your books at the year-end, you are bound to set up your business for much bigger problems with the federal bodies. Once that happens, your whole portfolio and all your assets, finances and business process overview will be questioned and looked into. It is better you do not let this become a roadblock sooner rather than later.
Read this detailed article to learn all about the regular nightmares of lease accounting and how you can solve them by replanning your management strategy and leadership.
Why is lease accounting a nightmare?
Transitioning to and keeping up with ASC 842, IFRS 16, or GASB 87 standards is a humongous task, one that can not happen without a professional lease expert. If you are a real estate business owner or property manager, you probably already have nightmares about working with these new lease accounting standards. From understanding the complicated terms to implementing them on time, the journey is tedious. To make the journey more pleasing, closing all your balance sheets on time and not letting compliance be such a scary word, you need to hire a professional lease expert. This is why Deloitte research data says that compiling lease data and analysing them will be the most crucial part of lease accounting, and as real estate business owners, you need to take that into account.
8 biggest problems in lease accounting
Though there might be many problems in lease accounting that are particular to your business alone. But there are many lease accounting problems that become a nightmare for most real estate businesses; here is a closer look at the biggest and most common ones to give you a head start.
1. Misinterpreting the lease standards
Due to the new lease standards, there is a lot of chance of interpretations and space for judgement calls which can be open to human errors. This makes compliances harder than before, and lease audits can land you in many problems. You need to be well researched and well-read about the leasing accounting standards not to keep things open to interpretation. You can also use updated lease accounting software to help in the process, along with lease accountants.
2. Decentralized leasing data
According to theForbes news report, more than 39% of companies use decentralized data systems to store and manage their lease data. This means that during compliance and accounting work, they need to gather information and data from multiple locations and stakeholders, which can be available in various forms like PDFs, Excel sheets, docs and even physical paperwork. Finetuning these, getting a hold of them on time and getting them organized into a centralized system at the year-end when deadlines are hanging over your head can be a crushing task for the team.
3. Inappropriate technology usage in lease accounting
Spreadsheets might be your accountant's best friend, but most companies still use spreadsheets to do all their lease accounting work. Survey saysthat companies have come to realise that they spend 25% more time on lease accounting due to their extensive use of spreadsheets. The new standards are so complex that a simple spreadsheet data collection can not be a long-term solution to this complication. You need to make a major shift to a new age lease accounting software and integrate it into your system to streamline the process and speed it up.
4. Being unaware of the risk of non-compliance
All real estate business owners are aware that non-compliance can lead to penalties and fines, but these are the two most basic side effects. There is much more to think about, as non-compliance can lead to bad audit reports, additional audit fees, and investors and shareholders pulling out of your company due to a lack of credibility in business standards. The effects of these can grill you for a long time if you do not take a closer look at its implications.
5. Hurrying through the process
If you are a real estate owner, you are sure to have many leases that you need to look into; if you start the data collection and accounting process before the deadlines, then it is sure to become a nightmare. Not checking data for authenticity and not categorizing the leases can all be fatal; you need to start way ahead of time to avoid this.
6. Having no game plan for lease accounting
You will set yourself up for failure if you do not have a long-term plan for your compliance work. It is not a one-time thing; it recurs every year, so you need to have a basic structure for your lease accounting process. Get the right tools, software, and expert help in place before you start out on this journey to avoid losing sleep over compliance work.
7. Leadership not taking software usage seriously
Even if property managers and accountants understand the need for the latest tools and lease accounting software, your strategy and leadership might not agree, and that can be a big cause of concern. You need to reason this out with them that almost 90% of spreadsheets have errors, and that can be a cause for serious non-compliance; you can also make them understand that a new age software will help you stay updated with standards in the long term.
8. Non-compliance to standards
If you are facing any of the problems above mentioned then you are sure to go down the road of non-compliance and that is the worst nightmare of all. That will shake up your business, affect your financial health and cash flow and hamper your business image.
How do you solve these lease accounting nightmares?
At KriyaGo, our team of lease accounts and tech experts are always up to date about the new compliances and standards. From doing your lease abstraction work to doing your lease audit work, our outsourced accounting services have a solution for all your back office work. We can even help youintegrate the latest lease accounting software along with your existing ERP system.
Get in touch with us today to start the journey!
