Why Automating Lease Accounting Is Needed
With the increasing use of leasing, the need has become apparent to ensure that a company’s lease portfolio is properly managed and maintained. To not do so is to run the risk of wasting extra spend on less than favourable agreements being automatically renewed or penalty charges being incurred due to mistreatment or mismanagement of the leased assets.
But the benefits of leasing far outweigh the potential negatives for many businesses. The ability to only make short term commitments, being able to upscale and downscale the size of the portfolio as and when demand and work dictates, immediate access to the latest and best equipment and resources without incurring any heavy purchase costs or needing to offload any existing outdated equipment for a loss; these are just some of the benefits to leasing.
It’s no wonder the industry has grown massively in the recent past.
But with more and more lease agreements comes more and more management time in order to minimise the risks and potential pitfalls. So, this is where the need for a purpose-built software solution - well beyond an Excel spreadsheet - derives from. But, before we discuss the benefits and options of lease accounting software further, a quick reminder of why getting your lease portfolio management organised is even more pressing.
Impending Reporting Changes Due To IFRS 16
Following years of consultations and drafting, the lease accounting changes which are stipulated in IFRS 16 will come into effect on 1st January 2019.
The change states that all lease agreements, except for a couple of exceptions mentioned in the immediate paragraph, will have to be reported on balance sheet. This is in order to give a truer representation of the financial state of a business, as under the existing standard, IAS 17, operating lease commitments do not have to be reported on balance sheets. Instead, they can be declared in the footnotes of financial statements. Particularly when comparing one company’s performance against another of similar size in the same sector this has the potential to mislead or give a misrepresentation to those assessing the financial viability of a company, such as stakeholders, potential lenders, potential investors or prospective buyers. IFRS 16 however, will specify how lessees will recognise, measure, present and disclose leases, the asset and any lease liability arising from the agreements on balance sheet.
The only exceptions to the new standard will be leased assets which have a short-term duration of less than 12 months or those of “small value”, which equates to a purchase price, when new, of approximately $5,000.
Once these changes come into force, the need to closely manage a company’s lease portfolio will not just be pressing in terms of the overall bottom line impact, but close and constant management will be needed to keep it fully optimised so that thorough evaluation and impact assessment/What-If scenario modelling can be conducted.
The need is growing and progressively becoming more pressing for companies to make sure they have some centralised control of their lease portfolio. With $2.8tn of leased commitments coming onto balance sheets globally, the impact on the financial reporting, profit performance, financial ratios, and other financial metrics of a business can be huge.
How Software Can Help
The simplest way of managing a centralised lease portfolio and is to invest in purpose designed software. This will help businesses to make sure they manage and account for all of their lease agreements in full compliance with internal and external accountancy standards and regulations.
Lease accounting software will also help with the vital early stages of any lease accounting implementation process, as the system allows you to centralise all of the critical lease Information on one unified platform. From here, validating lease information and forecasting the initial balance sheet implications is simplified. What’s more, a purpose designed solution such as LOIS will provide you with all the necessary reporting tools required for compliance, such as, automated amortisation schedules, journal entries and disclosure summaries. The best solutions will allow you to do this for both IFRS 16 or ASC 842.
Furthermore, some solutions, such as LOIS, will also offer additional benefits, outside of lease accounting. These solutions will additionally help the business to achieve the best possible financial performance of their lease portfolio through lease management optimisation by mitigating the potential downfalls of lease agreements, which were mentioned earlier, such as automatic renewals, end of lease charges and so on.
Using dedicated lease accounting software will ensure that all of the relevant data is safe and secure, both in terms of ensuring good housekeeping and organisation, but also in terms of a cyber security breach event.
But there are simpler and more obvious benefits too, such as the simple aspect that data and “paperwork” will be stored entirely electronically, as opposed to taking up files and folders in the office or archive store. But beyond scanning them in and storing them on a desktop, dedicated software will keep the data prevalent, secure and centralised in order to make analysis and use as smooth as possible.
This reduces the amount of time it takes to assess the lease portfolio and tailor how you review your agreements effortlessly. For example, a dedicated software solution can interpret your lease data to highlight overdue, soon to expire and overly expensive agreements, and produce tailored reports for you.
The right solution will also ensure that you have 100% compliance with new lease accounting standards thanks to in-built tests, logic checks and automated reports and algorithms. Furthermore, using dedicated lease accounting software will create a full and proper audit trail. And this is something which should be a prime concern, as IFRS 16 dictates that some businesses will be required to submit retrospective reports.
“This reduces the amount of time it takes to assess the lease portfolio and tailor how you review your agreements effortlessly.””
LOIS, Lease Accounting Software by Innervision
Innervision’s lease accounting solution, LOIS – Lease Accounting (“LOIS”) is an advanced SaaS application that supports both lease accounting standards, IFRS 16 & FASB ASC 842, as well as existing IAS 17. The system allows users to account for and manage all lease asset types, ranging from IT, plant & machinery to material handling equipment, vehicles and property.
The solution is designed to make the management of large numbers of leases as easy as possible. It will remove the risk of operator error when managing them the traditional way, such as a combination of an HP 12c calculator and an Excel spreadsheet that relies on manual input or, worse, complex formulae.
Companies that use LOIS will more easily comply with the new standards as the application allows them to produce all the accounting information required to accurately complete the financial statements obligatory for compliance; including income statement, cash flow and balance sheet.
With LOIS, users are easily able to run critical amortisation schedules, journal entries and disclosure summaries, as well as centralise lease information on one unified platform, validate lease information and forecast initial balance sheet implications. What's more, users can account for all lease categories or lease type at an asset level.
Using a simple though sophisticated software solution such as LOIS helps remove the risk of non-compliance, by providing users with all the necessary tools to consolidate, validate and report on their company’s entire portfolio of leases.
But one of the strongest benefits of LOIS is that as well as helping ensure IFRS compliance it provides a full and thorough audit trail.
Need To Get Familiar With Lease Accounting - IFRS 16?
Now is the time to start becoming compliant with the new lease accounting standards. The deadline for reporting lease agreements on balance sheets is 1st January 2019 (IFRS 16), but there are possible exceptions and opportunities that you do not want to waste. To make sure you approach the accounting change from the strongest possible position, take a look at our free “How to Comply With Changes to Lease Accounting” e-book.