Joe Fitzgerald is Senior Vice President of Lease Management Strategy at Visual Lease.
New lease accounting standards coupled with the many pressures brought on by the pandemic have changed how organizations prioritize their leases.
Companies are currently reevaluating their lease portfolios to ensure these costly agreements still make sense in light of their new business goals and operations. As a result, many of these same organizations are making modifications to existing leases or are considering different options and/or terms for new agreements.
With this behavior in mind, there are several trends that finance and accounting professionals should prioritize in the year ahead.
Regularly Reassessing Needs
Today, companies are embracing new business models, which drives them to regularly reassess their real estate needs.
A recent study led by Visual Lease, “Commercial Real Estate in 2022: Outlook for an Industry in Recovery,” found that while companies are planning ahead, the senior accounting and finance professionals that manage their leases are proceeding with caution. When negotiating future leases, the 200-plus professionals surveyed report prioritizing flexible scaling plans for space (57%), flexible lease termination (49%), shorter lease duration (36%) and an ability to sublease (35%).
While we can expect to see an increase in demand for commercial real estate in 2022, we also know that businesses will continue to reassess their real estate portfolios in response to the ripple effects of the pandemic. This practice is to ensure the maximum return on their investments.
Prioritizing And Tracking Lease Modifications
Lease modifications, some of which are mentioned above, are changes made to existing lease agreements, which can include the extension of a lease, early termination and a change in the timing or amount of lease payments.
Since the onset of Covid-19, many organizations have revisited the terms of their leases to accommodate changing work conditions and circumstances. Unfortunately, what many of these same companies do not realize is that these modifications need to be tracked and accounted for in order to achieve and sustain compliance with the new lease accounting standards.
Among the top reasons lease management cost companies money this past year is the inability to respond to changing circumstances due to the pandemic, missing an option to extend a deadline, miscalculating lease costs and forgetting to update unfavorable or unwanted lease terms.
Given the negative impact that historically poor lease management had on companies in 2020-21, many are now prioritizing and closely tracking lease activity. We can expect to see this level of attention continue well into 2022 and beyond.
Playing Compliance Catch-Up
On November 10, 2021, The Financial Accounting Standards Board (FASB) decided not to issue a third delay to the ASC 842 effective date for private companies. In late July, it was reported that 75% of private companies surveyed were not yet compliant with the standard, indicating that many were, in fact, banking on another extension.
Now that it’s clear there will be no additional time granted for private companies to transition to ASC 842, we can prepare to see laggards heading into 2022; their unpreparedness will put a drain on internal resources and lead many organizations to consider outsourcing the process.
Continued Investment In Tech Tools
Historically, many organizations relied on manual processes — such as the use of Excel spreadsheets — to track and manage their lease accounting data.
However, as more companies transition to the new lease accounting standards, they’ll also likely recognize the role that dedicated technology can play in easing new regulatory burdens by plugging the gaps between their current state lease process and what will be required in the future. We can expect to see companies that initially adopted ASC 842 (public and private) come into the technology market after recognizing that Excel doesn’t always cut it.
As more companies move further along in their compliance journey, many will find themselves looking for technology that provides lease management and lease accounting capabilities. They’ll also look for the ability to integrate with its existing and new business intelligence (BI) tools and data sources, for more accurate lease data.
Organizations that effectively adopt this technology can automate much of their lease accounting process and also focus on other areas of their business. Because leases are dynamic, and the rules around them are forever changing, the importance of following industry trends and best practices will only continue to grow.
In 2022, I believe we’ll see more organizations willingly adopt innovative, technology-enabled approaches to help navigate their lease accounting process, ultimately making lease optimization a key pillar of their business strategy.