Lease accounting is a set of accounting standards and guidelines that govern the treatment of leases in financial statements. Essentially, it provides a framework for how businesses record and report leased assets and liabilities. If you are familiar with lease accounting, let’s take a look at some of the benefits that lease accounting can bring to your business.
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1. Minimize management and operational costs
When companies lease assets, they typically incur ongoing lease payments that must be accounted for in their financial statements. Lease accounting requires these lease payments to be recognized on the balance sheet as both a right-of-use asset and a lease liability. This means businesses can accurately track lease agreements and predict future lease costs.
With a better understanding of future lease costs, businesses can incorporate them into their budgeting and forecasting processes. This allows you to plan ahead and avoid unexpected expenses that can jeopardize your financial stability. For example, if you know that your lease expiry will result in a significant increase in lease costs in the coming year, you have plenty of time to plan accordingly and adjust your budget to accommodate the additional costs.
Lease accounting can also reduce costs by streamlining processes and reducing the amount of manual work. for example, EZLease Software, businesses can automate many tasks that would otherwise have to be done manually. As a result, companies can save a lot of time and resources and focus their staff on other areas of their business.
2. Increase investor confidence
One of the significant benefits of lease accounting is that it increases investor confidence in your business. This is because lease accounting provides a clearer and more accurate picture of a company’s financial situation. Prior to the introduction of new lease accounting standards, companies were able to hide certain lease obligations from their balance sheets. This could mislead investors about the company’s true financial obligations. However, the new standard requires companies to report all lease obligations on their balance sheets.
For example, if a company leases a large warehouse to store inventory, this lease obligation is reported on the company’s balance sheet. This allows investors to see the true extent of a company’s financial obligations, including long-term commitments that may affect future financial performance.
3. Make informed decisions
As the complexity of business operations increases, the need for informed decision making is more important than ever. Business owners need to make data-driven decisions that align with the company’s long-term vision. This is where lease accounting comes into play.
By providing businesses with a clear view of their leased assets and related expenses, lease accounting enables businesses to make more informed decisions. Businesses can use this information to determine whether leasing or purchasing an asset is the best option. Negotiate better lease termsand lease portfolios to maximize efficiency and cost effectiveness.
4. Optimal tracking and management of leased assets
Businesses often struggle to track and manage leased assets. This is especially true for companies with extensive lease portfolios. However, lease accounting allows businesses to better monitor and manage their leased assets.
First and foremost, lease accounting helps businesses maintain one authoritative source for all lease-related information, including lease terms, payments, and more. This allows businesses to easily track the status of their leased assets, such as when leases expire, when lease payments are due, and when maintenance is required.
In addition, the information gathered from lease accounting allows companies to optimize the management of their leased assets. By monitoring key performance indicators, companies can maximize operating lease efficiency and increase their return on investment.
5. Improved audit trail
An audit trail is a record of all events and transactions related to a particular business process or activity. It presents a chronological sequence of events so that auditors can track and verify the accuracy of a company’s financial statements.
A comprehensive audit trail can help businesses identify and correct errors and discrepancies in lease-related transactions, improving the overall accuracy and reliability of financial reporting. By establishing an organizational and well-defined structure for recording and reporting transactions, the Lease Accounting Standards help businesses maintain a reliable audit trail and promote the clarity, accuracy, and accuracy of financial reporting. Improve reliability.
6. Improve borrowing capacity and credit rating
Imagine this: As a business owner, you want to grow your business and secure funding from a moneylender. But lenders are hesitant to approve loans. This is because your business has high levels of lease obligations that are not currently reflected on your balance sheet. Lenders are concerned that your company may not have the financial capacity to assume additional debt. In lease accounting, you are unlikely to face this scenario.
The reason for this is that, by performing lease accounting and accurately reflecting lease obligations on the balance sheet, companies understand the lease obligations and how they affect their financial statements. because it can show Lenders will then be happy with the company’s financial position and willing to lend money.
Lease accounting also helps with a company’s creditworthiness. Credit rating agencies consider a variety of factors, including financial statements and debt, when determining a company’s credit rating. By accurately reflecting lease obligations on the balance sheet, companies can increase financial transparency and provide credit rating agencies with a more complete picture of their financial position. This paves the way for higher credit ratings and helps secure funding on more favorable terms.
Conclusion
Lease accounting is becoming an increasingly important tool for businesses of all sizes and industries, providing the insight and tools needed to succeed in today’s competitive marketplace. With the help of lease accounting, businesses can develop new opportunities, improve their financial position, and achieve their long-term goals.