This year, it is more important than ever to prepare for year-end lease administration activities. During a year where some leases were modified for pandemic related reasons, some lease assets are impaired, expenses for health and safety efforts increased, physical occupancy of buildings decreased, assets were taken out of service and more, the business of managing leases requires extra effort. Now that the end of the year is upon us, in addition to celebrating the holidays, it is also prudent to prepare for annual financial reporting activities and other lease administration tasks to come during the early part of next year. There are a few areas that we recommend reviewing now, to save you time and effort when your auditors begin their work in earnest.
The first recommendation is to test your lease data quality. The pivot of lease administration teams to working from remote locations may have prompted changes in operating processes and affected normal internal controls, which in turn could affect data consistency and accuracy. In usual circumstances, a periodic data quality test is a lease administration best practice. In a year with changes in processes combined with an increased number of lease modifications, data sampling becomes critical to ensure that reports generated from that data are reliable.
In addition to data testing, review lease accounting reports for accuracy and expected outcomes. Lease changes made for pandemic related issues such as rent relief or other concessions may affect lease accounting calculations and disclosures, depending upon their nature. Companies may also have an increased need to recognize lease impairments which may further affect right of use assets and lease liabilities. We recommend that our clients run test scenarios through their lease accounting solution and validate calculation outcomes. If there are inconsistencies or problems, examine your lease data, work through solutions with your software provider, or develop an alternative approach with your auditors before the flood of other year-end activities fills the calendar.
The last area of concentration should include forthcoming pass-through real estate tax and operating expense billings, or reconciliations. In addition to increased building expenses related to health and safety items for 2020, buildings have seen substantial changes in occupancy, which may affect tenants’ financial exposure for variable operating expenses. Most commercial leases were not written with a pandemic in mind, so this area is uncharted territory with little precedent to follow. Consider developing a tracking tool to keep track of which leases require reconciliation and when the reconciliation is received. This will allow for the request of missing reconciliations and the planning for potential unbudgeted financial exposure. In addition, consider a review of the pass-through language for your largest leases to assess where there might be risk for large reconciliation amounts due in the new year.
In summary, while the year is winding down, consider the effects that your lease administration efforts have on other areas of your organization. Know where your lease portfolio stands and understand the changes that have occurred during this past year. Confirm data accuracy and consistency and develop trust in your lease data. Be mindful of where there might be unbudgeted financial exposure resulting from your lease portfolio. And finally, let us all celebrate that we made it to the end of the year!
From our team to yours, we wish you a very happy holiday season and much success in the coming year!