Lease accounting can be a large part of the finances in respect of many different types of businesses. There will be companies that manage a whole portfolio of real estate, for instance. This requires much coordination when there are many dates to keep a track of and accounting standards that have changed recently.
When businesses have lease software they can better manage the financial processes associated with leases such as compiling year-end accounts, auditing, and reporting.
Keeping a Track of Leasing Dates
Leasing dates must be kept a track of. This is in respect of lease payments and leases expiring. Timely payments will ensure the cash flow of companies collecting for leases. The longer-term contracts, more than 12 months, not only need to be included with greater transparency on the balance sheet but will need to be identified when these are coming to an end in respect of renewing them. No asset should be left outside of a contract for any length of time to earn its money. This is whether it is real estate or a piece of equipment.
Recording Leases in the Accounts
A lessee is required to report a lease as an asset and liability on the balance sheet. This is due to them having a stake in being the potential owner of the asset and the money they pay out to rent or hire.
Businesses leasing real estate or equipment for use in their business will report lease payments as expenses when it comes to their cash flow statements. Budgeting will need to take account of what is being paid for assets that are being leased rather than owned by a business. Buying an asset outright would instead be a capital purchase rather than an expense.
Accounting standards are nothing to fear when you have accounting software to keep track of them and help guide your figures to the right places. This is particularly true when we think about leases and the way that they are accounted for. Extra knowledge is required by an accounts department in respect of lease accounting.
The beauty of using accounting software is that training will be provided that teaches staff not just how to use the software but in the context of accounting for leases correctly. This can save much training cost that a company would otherwise have to stand when the supplier of the software provides a telephone helpline or online help with software accounting processes.
The Advantage of Leasing
The main advantage of businesses leasing is that they do not have to invest heavily in an asset that only ends up depreciating year on year. It can be a cost-effective way of running a business that relies on industrial equipment to continue to operate.
Other advantages of leasing include:
- Cash flow – it will tie up a business’s cash if they invest it all in an asset by buying it outright.
- Cost-effective – it is likely to cost more buying an asset when payments are spread, with the interest included, and so more cost-effective to lease a piece of equipment.
- When a loan is refused and there is a poor credit history – a company may only have the option to lease.
- Maintenance – will mostly be taken care of by the leasing company. This is can represent a significant added expense for a business when they own an asset. This is whether it be real estate or a piece of equipment. Both can be heavily reliant on maintenance to maintain safety and continue to be useful for a business.
- Flexibility – is greater when a lease only needs to run for as long as a business wants it to. It is good to have the security of knowing that you have the asset for so long, but that need not be longer than a business might plan to run for before it changes its activities to meet market demands.
There is no doubt that lease accounting does impact finances. Special consideration has to be given to leases because of accounting standards in place such as ASC 842, IFRS 16, and GASB 87. This is where dedicated software can help.