The processes for equipment leasing in many organizations can be characterized as fragmented and decentralized, especially for small value assets. Some high-volume, higher value assets such as fleet vehicles might be leased under master agreements, but for others, there may not be a centralized, formal process in place. Unlike real estate, leasing for equipment assets tends to be performed by many different functions, leading to an increased risk of unrecorded obligations and missed opportunities for savings. Today we are looking at 5 things you need to Know. Right. Now. about why you shouldn’t ignore equipment leases in your organization.
1. You Don’t Know What You Don’t Know
Leases can be found everywhere in an organization. From the office coffee maker, to forklift batteries, to the computer you use, everything has the potential to be a leased asset. Identifying and locating non-real estate leases can be challenging, and the search for them crosses many functions in an organization. Leases can originate from operations, procurement, marketing, IT, human resources and other functions at the corporate or local level. Service contracts, too, can contain leases of assets and these should also be evaluated for embedded lease potential. Until you look for them, you cannot be sure that you have a complete picture of the entire lease population.
2. Gaps Likely Exist in Your Lease Management Processes
Unless all lease contracts are subject to a centralized procurement or approval process, it is likely that your organization has leases that it is unaware of, indicating gaps in lease procurement and management processes. For example, we worked with a client who had a field manager lease a copy machine and present the lease payments on their expense report for reimbursement. Even though the expense report went through an approval process and the lease payments were being made, the lease was never captured or managed as a lease. Not only could this situation lead to a potential internal control issue, but it could also result in unknown and unrecorded assets and liabilities when complying with the lease accounting standard. For a single copy machine, the discrepancy is likely financially immaterial. However, if this was a common occurrence, the financial impact could rise to a concerning level. This is only one example of many that reveal a gap in leasing and lease accounting processes that ultimately can affect the financial statements.
3. Equipment Populations are Dynamic
Leased equipment populations often experience additions and deletions of specific assets. New leases and expiring leases are not the only transactions that should be recorded. Lease administrators also keep records of when assets are removed from service, replaced due to breakdown or accidental loss, moved from place to place, and returned to the lessor for a variety of reasons including lease expiration. Some of the population changes can have lease accounting implications, leading to work that must be performed prior to reporting financial results. The frequency and volume of these changes varies from lease to lease and from company to company. Recording the changes as they occur is an important activity that prevents repeated catch-up or clean-up projects, which can be both inefficient and costly.
4. Lease Accounting Rules Include Equipment Leases
Current financial reporting standards require accounting calculations that include all leases, including real estate, equipment, and the leases of assets which are embedded into other agreements. In most cases, asset by asset accounting is required which necessitates associating leased assets with their contracts at a higher administrative level. Small asset leases might not be financially material at the individual asset level but excluding multiple small asset leases could raise questions during a financial or internal control audit. Always consult your outside accountant or auditor when evaluating the acceptable level of materiality in calculating right of use assets and lease liabilities, for both the initial adoption of and ongoing compliance with lease accounting standards.
5. Savings Can Be Achieved
Intentional focus on identifying, tracking, and analyzing equipment leases can have positive effects on every organization. Improved processes can allow your organization to make use of lease versus buy analyses to decide whether leasing or buying an asset is financially beneficial and allow for comparing options if more than one offer is being considered. Some sophisticated software solutions also automate the sourcing and financing process, which can result in significant savings across the entire lease portfolio by taking advantage of volume discounts and competitive bids. For existing leases, tracking and reporting on critical dates can decrease or eliminate automatic renewals and evergreen leases and the payments associated with them. This also reduces lease payments made for assets that are out of date, obsolete, out of service, or missing, supporting efficient operations as well as controlling financial obligations.
Has your organization hesitated to focus on equipment lease processes and obligations? Equipment leases are contracts that should be monitored because they have the potential to be a significant part of a company’s operations and financial obligations. Evaluating processes can reveal gaps and areas where savings and efficiencies can be found. Lease accounting standards also require that all leases be tracked at an asset level, a contract level, or in total. Want to learn more about how Scribcor solves equipment lease administration challenges? Contact us today to have a conversation!