Lease accounting is complex and ever-changing. And because of its complexity, it is not surprising that companies often make mistakes in this area. In fact, the Financial Accounting Standards Board (FASB) has identified lease accounting as an area where errors are particularly high.
Lease accounting is the process of recognizing, measuring, and communicating information about leases. Its goal is to provide financial statement users with information about an entity’s leasing activities. Accounting for leases has been a complex topic for many years, and with the new lease standard (ASC 842), the rules have become even more complex.
In this article, we will discuss the most common mistakes made in accounting for leases and how to avoid them. We will also provide some helpful tips on staying compliant with the new lease accounting standards.
Not knowing the lease accounting requirements
When it comes to lease accounting, certain requirements must be met to ensure compliance. Not knowing these requirements can result in significant fines and penalties, so it’s important to be aware of them.
The requirements are outlined in the Financial Accounting Standards Board’s Accounting Standards Codification. To comply with these requirements, companies must maintain accurate and up-to-date records of all their leases. They must also disclose any material information about their leases in their financial statements.
If you’re unsure whether your company is compliant, it’s time to get educated on the new standards. Recently the Financial Accounting Standards Board released a new update. Take a look at ASC 842 for dummies to understand the changes.
Underestimating the Costs Involved
Leasing is a popular option for companies looking for office or retail space. But what many companies don’t realize is that leasing comes with a lot of hidden costs. In addition to the monthly rent, security deposits, cleaning fees, and other expenses can add up quickly.
Additionally, several factors can make the process more complicated. For example, many companies underestimate the resources needed when leasing. They may not factor in the cost of renovations or the need for additional furniture and equipment. As a result, they can end up overspending on their lease and putting themselves in a difficult financial position.
Before you sign a lease, be sure to do your research and budget for all of the potential costs. It’s easy to underestimate the amount of money you’ll need to lease a space, so it’s important to be prepared. By being aware of all the potential costs, you can avoid unpleasant surprises down the road.
Lacking transparency in financial reporting
Leasing has become a popular form of financing for many businesses in recent years. However, there is a lack of transparency in the financial reporting of leasing transactions. This can lead to errors and misreporting of financial statements.
The lack of transparency in leasing financial reporting is primarily due to a lack of clear guidelines on how to report leases on financial statements. As a result, businesses often use different methods to report their leasing transactions, which makes it difficult to compare financial statements across businesses.
However, being honest and upfront with your investors and shareholders about the true cost of leasing is important. Otherwise, you may find yourself in hot water down the road. Here are a few tips on maintaining transparency:
- Keep track of all expenses associated with your leases, including rent, repairs, and maintenance.
- Include all lease expenses in your financial reports.
- Ensure your investors and shareholders know the true cost of your leases.
By following these tips, you can ensure that your financial reports are transparent.
Overlooking early termination options
When lessees overlook early termination options in their lease agreements, they may miss out on potential savings. Early termination options allow lessees to cancel their leases early, but they come with a fee. This fee is typically a percentage of the remaining lease payments.
While the fee may seem high, canceling a lease early is often worth it. This is because the fee is often lower than the cost of continuing the lease. Lessees should carefully consider their options before signing a lease agreement to ensure they get the best deal possible.
Forgetting the Tax Deductions
When it comes to tax implications, leasing can be a minefield for companies. Various tax implications can come into play when leasing property, and companies need to be aware of them before they sign any leases.
These tax implications depend on the type of lease and the property’s location. For example, in some regions, leasing may be considered a “financial lease” for tax purposes, while in others, it may be considered an “operating lease”. These different classifications can have a big impact on the amount of tax a company has to pay.
It’s important to consult with a tax professional before entering into any lease agreement so that you can be sure of the tax implications. Otherwise, you may have an unpleasant surprise when tax time comes around.
Not Choosing the Right Software
When managing a leasing operation, the right software must be chosen to ensure efficiency and compliance. However, many companies make the mistake of choosing the wrong software for their needs. As a result, they end up with a system that is difficult to use and does not meet their specific needs.
A few factors can contribute to a company making this mistake. First, they may not have a clear understanding of their own needs. Second, they may not be aware of all the options on the market. Third, they may not have the time or resources to evaluate all available options properly.
If your company is considering a new leasing software, you must take the time to evaluate all of your options. Make sure you understand your needs and that you choose a system that is right for your company.
In conclusion, there are several common mistakes that businesses make when accounting for leases. To avoid them, businesses should use the correct accounting method, account for all leases, and properly disclose lease information. By following these simple guidelines, businesses can ensure that their financial statements are accurate and compliant with accounting standards.