Business

Lease Accounting Readiness: A Report

An exclusive interview with a lease management strategy executive on 2023 lease accounting standards.
By Rachel E. Pelovitz
November 7, 2022
Topics
Business

Visual Lease, has released a report titled, “The 2022 Lease Market Analysis: Lease Accounting Readiness.” The main finding in the report is that a whopping percentage of companies are not fully aware how their leased assets can be impacted and/or reap cash optimizing benefits. In fact, the report found that 100% of surveyed senior finance and accounting professionals acknowledged that lease accounting compliance comes with real business benefits—including construction leased assets.

In order to prepare for lease accounting standards in 2023, Construction Executive has spoken with Joe Fitzgerald, senior vice president of lease management strategy at Visual Lease, in an exclusive interview.

1. What are the new lease accounting standards and how are they different now than previously?

For the first time ever, public and private companies, as well as government entities, are required to disclose asset and liability details for anything they pay for the right to use—including real estate, equipment, fleet and land leases—on the balance sheet under the new lease accounting standards.

This is easier said than done as leases are complex agreements that change all the time, and they’re managed by siloed stakeholders, processes and systems. Not to mention, lease transactions can have hundreds of permutations and calculations to capture in reports and throughout the year in order for a company to successfully achieve and sustain lease accounting compliance.

2. How will the new standards affect the construction industry?

The introduction of the new lease accounting standards affects all organizations that lease property and equipment assets to run their businesses across industries including retail, manufacturing, construction, transportation, business, healthcare, governments and higher education institutions.

3. Why is following these standards important?

The new lease accounting standards are a requirement and if an impacted organization fails to successfully meet and maintain compliance, they risk inaccurate financial reporting, which can translate to increased audit fees and damaged credibility.

Proper lease accounting and lease administration enabled through the right technology introduce many benefits, such as increased cost-savings opportunities, streamlined processes and greater visibility across all leases. If companies do not prioritize compliance, they can miss out on this added value.

4. What is the deadline to comply with the standards?

U.S.-based public companies must have implemented ASC 842 for reporting periods beginning after Dec. 15, 2018. Private companies must have implemented ASC 842 for reporting periods beginning after Dec. 15, 2021. Now, government entities—state and local—must have implemented GASB 87 for reporting periods beginning after June 15, 2021. Non-US companies were required to implement IFRS 16 for reporting periods on or after Jan. 1, 2019.

As you can see, each standard has its own effective dates and details to abide by, but it’s the same takeaway: each requires a much more detailed reporting process than organizations have been accustomed to. And trust me when I say that you cannot successfully transition to the new lease accounting standards without understanding where your leases are and what is in them.

5. Do the new standards make it easier or harder to lease? Is buying preferable?

Leasing is central to any business—and while the new standards are complex, complying with these standards shouldn’t hold any bearing on whether or not a company decides to lease or purchase an asset. In fact, by requiring businesses to keep better track of their leases and implement proper internal controls, lease accounting actually makes it much easier for them to understand the details and performance of their leases. With this information handy, companies can make better-informed operational decisions.

6. What is the purpose of Visual Lease’s 2022 Lease Market Analysis? Were there any unexpected findings? Or conclusions contractors should be aware of?

Our 2022 Lease Market Analysis was released under The Visual Lease Data Institute, a collection of market-leading data, trends and insights on lease accounting, management and optimization created and curated by our team. The Institute was founded on VL’s 35 years of experience managing lease data and financials and was created to arm businesses with the knowledge required to achieve and maintain lease accounting compliance and leverage their leases as strategic business assets.

To compile the findings in this particular report, we surveyed senior finance and accounting in privately held companies, as well as financial management professionals at local and state and government entities. Within the research, industry leaders break down common challenges and roadblocks experienced by the private company and gov’t markets, as well as the many benefits from strong strong lease controls and how organizations can leverage lease accounting to make faster, smarter decisions.

The study found that despite leases typically making up a large portion of an organization’s budget, nearly three-quarters (71%) of private companies are not entirely confident they know how much their leases cost their business. A third (33%) of private companies are still not fully prepared to transition to ASC 842, which is effective for all 2022 and 2023 financial statements and beyond. And despite the GASB 87 effective date being six months earlier (June 15, 2021), an even larger portion of the government market (44%) is not fully prepared to transition to GASB 87 and only 18% are at a point where they’re considering the maintenance required beyond initial compliance.

7. What is anticipated for lease accounting standards going forward?

Given how complex the process is and also, how critical it is to get it right, impacted companies will continue to prioritize their lease administration and lease accounting processes—and this is because it’s not just about achieving initial compliance. The name of the game is ensuring continued compliance, which requires ongoing effort.

Companies can achieve easy, maintained compliance by implementing a centralized system of record, providing them with the ability to quickly access crucial terms and clauses, such as the ability to exit, extend or change a lease. Dedicated software can also replace and streamline essential and manual tasks, keep employees up to date on rules and regulations and reduce the risk of misreporting company information. In fact, because of these many advantages, private companies were able to save an average of 600 hours and government entities were able to save an average of 765 hours by using third-party lease accounting software.

Organizations across all sectors will continue to invest in lease accounting processes and, as a result, will reap the many rewards that come along with doing so.

by Rachel E. Pelovitz

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