The new lease accounting standard might provide cost savings opportunities you weren’t expecting.
Moving to the new lease accounting standard under FASB ASC 842 has been confusing for many companies. In some cases, they’ve spent more time and money on it than they anticipated. What’s more, while organizations have correctly focused on compliance with the standard, they’ve also overlooked opportunities for optimization.
We’ve worked with several clients on moving to the new standard, and we’ve found it presents a chance for organizations to review their current lineup of leases and determine how to restructure those for their financial benefit.
Here are four steps organizations can undertake in lease accounting that can also help provide insight into better lease management.
1. Compile all your lease information
Is information on all your leases currently housed in a single, centralized repository? If not, that’s the first action to take. But it’s more than just loading data it into a spreadsheet. As you perform a comprehensive, organizationwide examination of your current and in-process leases, you should upload information for each lease into a system that allows you to easily review and compare – and make more informed business decisions in the long run.
2. Get out of or renegotiate leases for obsolete and redundant equipment and facilities
In many cases, companies might not realize that they have multiple providers for the same type of equipment and could reduce their costs by moving to just one or two suppliers. Or they might be paying a lot of money for machinery or physical space that’s hardly used. In reviewing leases, you can determine where you’re investing substantial amounts of money for things you aren’t using that much – or at all. Then, you can figure out if you can end those leases, refinance them, or possibly institute buybacks for cash flow.
3. Evaluate cost of ownership versus continued leasing
Another aspect of this process is evaluating whether it’s more cost-effective over time to purchase certain equipment or property rather than lease. You might find that financial advantages to ownership outweigh what you’re getting from a lease. However, in comparing the two, consider if opportunities exist to renegotiate lease terms. You might be able to bring down costs and bargain for improvements on maintenance and service by working with your vendors .
4. Explore outsourcing or managed service arrangements for lease accounting compliance
You can potentially save a great deal of money and staff time by bringing in an outside team to execute all the three steps described above. Ideally, this team will have experience helping organizations like yours to successfully transition to the new lease accounting standard – and to help you reduce expenses.