Lease Accounting Software: A Complete Guide
Lease accounting software helps you follow regulations and keep track of your spending and the value of leased assets. You won't have to worry as much about missing important transactions during the lease term.
If leasing is a prominent part of your business, you definitely need lease accounting software. iLeasePro simplifies ASC 842 compliance and lease portfolio management. New to the standard? Start with our ASC 842 Complete Guide to understand all requirements before implementing your solution. It gives you a written and numerical trail to track your leasing transactions, and that trail is a vital part of your business data, how efficiently you're able to operate, and your profit and revenue formula.
There's a lot that goes into it, so let's review. What follows is a breakdown of everything you need to know about lease accounting software, from the basics to some of the more advanced concepts and capabilities.
What ASC 842 Puts on the Balance Sheet
ASC 842 ended the distinction that kept operating leases in the footnotes. At the commencement date, a lessee recognizes two things for substantially every lease (ASC 842-20-25-1). A right-of-use asset, for what it may use. A lease liability, for what it still owes.
One exception survives. A lease of 12 months or less may stay off the balance sheet, provided it carries no purchase option the lessee is reasonably certain to exercise (the Topic 842 glossary's short-term lease definition). The election is made by class of underlying asset, not lease by lease (ASC 842-20-25-2).
For private companies the standard took effect for fiscal years beginning after December 15, 2021. A company that has never counted its leases usually finds more of them than it expected, because service contracts can contain embedded leases.
How the Two Amounts Are Measured
The lease liability comes first. It is the present value of the lease payments not yet paid (ASC 842-20-30-1) — a present value, not a fair value, and not the sum of the payments.
The right-of-use asset starts from that liability and takes three adjustments (ASC 842-20-30-5). Add any lease payments made to the lessor at or before commencement. Add initial direct costs, and subtract any lease incentives received. The two numbers start close together and diverge over the lease term.
Everything turns on the discount rate. ASC 842-20-30-3 requires the rate implicit in the lease when it is readily determinable, which it rarely is, because the lessee usually cannot see the lessor's residual assumptions. Most lessees fall back on the incremental borrowing rate.
Private companies have a third option, and so do not-for-profits and employee benefit plans — anything that is not a public business entity under GAAP. ASU 2021-09 lets them elect a risk-free rate by class of underlying asset. It is simpler to support, but a risk-free rate is lower than a borrowing rate, and a lower rate produces a larger liability — so the accommodation is not free.
What Happens After Commencement
Classification decides the expense pattern, not whether the lease appears on the balance sheet. ASC 842-10-25-2 sets five criteria; meeting any one of them makes the lease a finance lease.
An operating lease produces a single straight-line lease cost over the term (ASC 842-20-25-6). A finance lease splits into interest on the lease liability and amortization of the right-of-use asset (ASC 842-20-25-5). Neither needs its own income statement line: you report each where you already report other interest expense and the depreciation of similar assets (ASC 842-20-45-4(a)). The cash paid is identical either way. What changes is where it lands on the income statement and how it reads in your ratios.
The schedule then runs differently by classification. A finance lease's liability increases by interest and reduces by the payment made each period (ASC 842-20-35-1). An operating lease's liability stays at the present value of what is left to pay, at the rate set at commencement — unless a remeasurement resets that rate (ASC 842-20-35-3; 842-20-35-5).
A lessee remeasures the lease payments when any of the events in ASC 842-10-35-4 occurs. Three of them are the ones a controller meets most (842-10-35-4(c)):
- a change in the lease term
- a change in the assessment of a purchase option
- a change in the amount probable of being owed under a residual value guarantee
When one of those happens, the adjustment hits the right-of-use asset first. Once that asset reaches zero, the rest goes to profit or loss (ASC 842-20-35-4).
This is the part spreadsheets lose. A portfolio of thirty leases is a manageable number of contracts and an unmanageable number of period-by-period calculations, each of which an auditor can ask you to support.
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What is Lease Accounting Software?
Simply put, lease accounting software is a program or a series of software modules that gives you the necessary calculations and reports to track your leases and the expenses associated with them.
It tells you what types of leases you have, and what transactions have transpired for each lease, and it provides a data and financial trail for auditing and reporting purposes.
As a result, this lease accounting software helps you see exactly how your leases are operating from a financial perspective, and it helps you use your leases as a tool to increase both revenue and profit. -
How Software Helps You Manage Lease Data and Record Transactions
In some ways, lease transactions are recorded in a way that’s similar to other accounting transactions, especially for companies that are already using double-entry accounting.
Journal entries allow you to track assets and liabilities as they are related to both the specifics of the lease itself and the term of the lease.
Record those entries from the commencement date through the end of the lease term. What lands on the balance sheet is not a fair value. ASC 842-20-30-1 measures the lease liability at the present value of the lease payments not yet paid. ASC 840 called these minimum lease payments; ASC 842 calls them lease payments, and the definition changed along with the name.
Lease Accounting Software and Real Estate
There are many examples of how this works in different industries, but real estate is one of the most common applications.
For companies involved in buying, selling, or managing properties, houses, office buildings, etc., effective lease accounting software is an incredibly important part of their business.
It helps property managers, landlords, and lessors track and automate their payments, collections, and financial records, but there are other benefits that lease accounting software provides.
Lease Accounting Software Benefits
- Reduce the cost of both equipment and real estate transactions.
- Ensure compliance with both accounting standards and business-specific best practices and standards.
- Allows collaborative decisions for multi-department transactions
- Make better business decisions about important purchases and investments
Using Lease Accounting Software as a Lease Management Tool
Now let’s talk a little about lease management software and how it ties into lease management.
When it comes to management functions, one of the biggest benefits of lease accounting software is that it helps organizations consolidate and access all their leasing information in one place.
That means the information from multiple departments can be accessed in a single place, regardless of which manager needs it. This leasing information can also be correlated with data from other leases that are already in a company’s database.
Lease Accounting Software and Lease Management Software
Lease management software helps managers and executives track and analyze key lease data. This information can also be used to improve overall business operations.
Lease accounting software is an important part of this tracking, analysis, and improvement. It automates lease-related calculations to provide accurate numbers instantaneously, and those numbers can be used for reporting purposes across the company.
What Accounting Standards Apply to Leasing?
Several accounting standards govern how leases are recorded, depending on the type of entity and the nature of the lease. iLeasePro supports ASC 842; the others are listed for context.
These standards must be followed explicitly in the calculations and data collection that pertain to both individual leases and your lease portfolio as a whole, so let's do a snapshot breakdown of what they are and how they work:
- FASB standards (US GAAP): Issued by the Financial Accounting Standards Board. They apply to public companies, private companies and not-for-profit organizations reporting under US GAAP — private companies included, which is who most lease accounting software serves.
- GASB Standards: As their name implies, standards created by the Governmental Accounting Standards Board (GASB) are typically applied to both state and local governments.
- ASC 842: Issued by the FASB in ASU 2016-02 to replace ASC 840. It's designed to record lease transactions for different types of leases so that they accurately reflect a company's performance on a balance sheet and in cash flow statements.
Some of the calculations involved in these are performed and recorded differently, so it's important to have lease accounting software that can make the proper calculations to provide accurate lease data and information.
Where iLeasePro Fits
At iLeasePro, we understand every aspect of leasing, including lease accounting. That means we know what lease features are involved, how calculations need to be performed and recorded, and how you can best use your leases and lease data as a business asset.
We also know the ASC 842 standard inside out, and as such we know how lease accounting software has to work to be compliant with that standard.
We've provided lease accounting software for small businesses, and for larger companies as well. Our pricing is published on the site rather than quoted on request, and you can book a demo without going through sales first.
To do this, call us at 888-351-4606, or you can email us at info@ileasepro.com. We also have plenty of great information about lease accounting software on our website at iLeasePro, and you can chat with a live representative there as well.