Lease accounting is a set of accounting standards and guidelines that govern the treatment of leases in financial statements. In essence, it provides a framework for how businesses should record and report their leased assets and liabilities. If you are familiar with lease accounting, let’s look at some of the advantages it can offer to businesses.
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1. Minimizing Administrative And Operational Costs
When businesses lease assets, they typically have ongoing lease payments that need to be accounted for in their financial statements. Lease accounting requires that these lease payments are recognized on the balance sheet as both a right-of-use asset and a lease liability. It means that the business can accurately track its lease commitments and forecast its future lease expenses.
By having a better understanding of their future lease expenses, businesses can incorporate them into their budgeting and forecasting processes. It allows them to plan ahead and avoid unexpected expenses that could disrupt their financial stability. For example, if a business knows that it will have a significant increase in lease expenses in the upcoming year due to the expiration of a lease agreement, it will have sufficient time to plan accordingly and adjust its budget to accommodate the additional costs.
Lease accounting can also reduce costs by streamlining processes and reducing the amount of manual work. For example, with EZLease software, businesses can automate many of the tasks that would otherwise need to be done manually. As a result, businesses save a significant amount of time and resources, freeing up staff to focus on other areas of the business.
2. Boosting Investor Confidence
One of the stand-out benefits of lease accounting is that it elevates investor confidence in a business. It is because lease accounting results in a clearer and more accurate picture of a company’s financial health. Before the introduction of the new lease accounting standards, businesses could hide certain lease obligations from balance sheets, which could potentially mislead investors about the company’s true financial obligations. However, with the new standards, companies are required to report all lease obligations on their balance sheets.
For example, if a business leases a large warehouse to store inventory, this lease obligation would now be reported on the company’s balance sheet. It would allow investors to see the true extent of the company’s financial obligations, including any long-term commitments that could affect its future financial performance.
3. Informed Decision-Making
With the increasing complexity of business operations, the need for informed decision-making has become more important than ever. As a business owner, you have to make decisions that are data-driven and in line with your company’s long-term vision. This is where lease accounting comes in.
By providing businesses with a clear view of their leased assets and related expenses, lease accounting enables them to make more informed decisions. Businesses can use this information to determine whether leasing or buying assets is the best option, negotiate better lease terms, and optimize their lease portfolio for maximum efficiency and cost-effectiveness.
4. Optimal Tracking And Management Of Leased Assets
Businesses often have a hard time keeping track of and managing their leased assets. It particularly stands true for companies with extensive lease portfolios. However, lease accounting empowers businesses to better monitor and control their leased assets.
For starters, lease accounting helps businesses maintain one reliable source for all lease-related information including lease terms, payments, and more. This makes it easier for businesses to track the status of their leased assets, such as when leases expire, when lease payments are due, and when maintenance is required.
Moreover, the information gleaned from lease accounting enables businesses to optimize the management of their leased assets. Companies can maximize the efficiency of their operating leases and increase return on investment by monitoring key performance indicators.
5. Improved Audit Trail
An audit trail is a record of all the events and transactions related to a particular business process or activity. It lays down a chronological sequence of events, enabling auditors to track and review the accuracy of a company’s financial statements.
A comprehensive audit trail helps businesses to identify and correct errors or discrepancies in lease-related transactions, which can improve the overall accuracy and reliability of financial reporting. By establishing an organized and well-defined structure for recording and reporting transactions, lease accounting standards help businesses keep a reliable audit trail that enhances the clarity, precision, and reliability of financial reporting.
6. Better Borrowing Capacity And Credit Rating
Picture this: as a business owner, you want to expand your operations and need to secure financing from a lender. However, the lender is hesitant to approve the loan because your business has a high level of lease obligations that are not currently reflected on its balance sheet. The lender is concerned that your company may not have the financial capacity to take on additional debt. With lease accounting, you are unlikely to face this scenario.
The reason is, a business can show the lender that it understands its lease obligations and how they affect its financial statements by implementing lease accounting and accurately reflecting lease obligations on the balance sheet. That way, the lender will be more comfortable with the company’s financial situation and willing to lend money.
Lease accounting is also useful to a company’s creditworthiness. Credit rating agencies consider a variety of factors when determining a business’s credit rating, including its financial statements and debt obligations. Businesses can increase their financial transparency and give credit rating agencies a more complete picture of their financial situation by accurately reflecting lease obligations on the balance sheet. It will pave the way for a higher credit rating, which will come in handy to secure financing at more favorable terms.
Conclusion
Lease accounting is becoming an increasingly important tool for businesses of all sizes and industries, providing them with the insights and tools they need to succeed in today’s competitive marketplace. With the help of lease accounting, businesses can unlock new opportunities, improve their financial position, and achieve their long-term goals.
