Risk Management 101 with Leasecake, Part 3: Navigating Lease Accounting Audits with Confidence

LeaseLease accounting isn’t just about ticking boxes—it’s a critical component of risk management that directly impacts your financial stability. Whether or not you’re bound by standards like ASC 842 or IFRS 16, maintaining accurate and transparent lease accounting practices is essential for safeguarding your business. Poor lease accounting can lead to costly errors, damage your financial credibility, and create significant risks during lease accounting audits.

By proactively managing your lease data and ensuring compliance, you can avoid these pitfalls, strengthen your relationships with lenders and investors, and keep your business on solid ground. In this guide, we’ll explore the key risks associated with lease accounting and how Leasecake can help you mitigate them, ensuring your business is audit-ready, no matter the circumstances.

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Understanding Lease Accounting

Lease accounting isn’t just for large enterprises or companies with complex portfolios. It’s about knowing exactly what your lease obligations are, how they impact your financials, and ensuring your records are accurate. This becomes especially important when you need to present clean financials to lenders, investors, or auditors. Even if compliance with ASC 842 or IFRS 16 isn’t mandatory for you, strong lease accounting practices are essential for:

• Financial Transparency: Accurate lease accounting helps you maintain a clear and transparent view of your financial commitments. This clarity is crucial for making informed decisions and demonstrating financial health to stakeholders.
• Risk Management: Misstating your lease obligations can lead to financial restatements, penalties, and damage to your reputation. Even small errors can compound over time, leading to significant problems down the road.
• Operational Efficiency: By accurately tracking and managing your lease data, you can streamline processes, avoid manual errors, and free up time to focus on growing your business.

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Why Compliance Matters When It Comes to Lease Accounting Audits—Even If You’re Not Required

While some businesses are required to comply with ASC 842 or IFRS 16, others choose to do so voluntarily. This decision often stems from a desire to maintain transparency and organization, which can enhance credibility with lenders and investors. Here’s what you should consider:

• Voluntary Compliance: Even if not required, adhering to ASC 842 can help you maintain transparent financials, attract better lending terms, and improve investor confidence.
• Required Compliance: For some businesses, compliance isn’t optional. It’s often driven by lender requirements. Non-compliance can negatively impact your ability to raise capital or secure favorable credit terms.
• Impact of Non-Compliance: Failure to comply—whether by choice or oversight—can lead to penalties, financial restatements, or even operational disruptions.

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Maintaining Good Lease Financials

When it comes to lease accounting audits, there are several critical areas companies need to focus on to ensure accuracy, compliance, and transparency.

Accuracy of Lease Data:

• Ensure all lease data is accurate and up-to-date, including terms, conditions, rent schedules, renewal options, and any amendments. Centralizing this data in a reliable system prevents inconsistencies and errors.

Compliance with Accounting Standards:

• If applicable, make sure you comply with the latest lease accounting standards (ASC 842/IFRS 16). This includes proper classification of leases and accurate calculations for right-of-use (ROU) assets and lease liabilities. Align your practices with the correct revenue recognition principles, particularly for variable lease payments or subleases.

Completeness and Accuracy of Financial Statements:

• Accurate calculations for lease liabilities and ROU assets are essential. Ensure amortization and depreciation schedules are correct, as errors can lead to incorrect financial statements.

Audit Trail and Documentation:

• Maintain comprehensive records of all lease agreements, amendments, and related documents. An audit trail should clearly document any changes made to lease data over time, and all modifications should be reflected in the financial statements.

Internal Controls and Segregation of Duties:

• Implement strong internal controls to ensure that only authorized personnel can make changes to lease data. Segregate duties between those who enter data and those who review or audit financial statements to reduce the risk of errors or fraud.

Disclosure Requirements:

• Properly disclose all required information related to leases in financial statement footnotes. This includes lease terms, discount rates, lease classification, and variable lease payments. Report any contingencies or commitments that could impact future financial obligations.

Impact of Lease Changes:

• Regularly assess the impact of any lease modifications, renewals, or terminations on your financial statements. Ensure that all changes are accurately accounted for in both the income statement and balance sheet.

Preparation for Audits:

• Be prepared to provide auditors with all necessary documentation, calculations, and supporting evidence. Open communication with auditors is key to addressing any questions and ensuring a smooth audit process.

Addressing these concerns is vital to ensuring your lease accounting practices are robust, compliant, and ready to withstand the scrutiny of a Lease Accounting Audit.

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How Leasecake Can Help

Leasecake offers a suite of tools specifically designed to make lease accounting simple, accurate, and compliant—even if you’re not focused on ASC 842 or IFRS 16. Here’s how we can help:

Centralizing Your Lease Data:

• Accurate lease accounting starts with centralizing all your lease data into one reliable system. Leasecake helps consolidate your information, capturing every detail so you can manage everything from rent schedules to renewal options seamlessly.

Seamless Integration and Controlled Access:

• Leasecake’s accounting module integrates with your lease administration, ensuring smooth data flow while giving your accounting team exclusive control over financial functions. This prevents unintended modifications by lease administrators.

Enhanced Control with Ledger Guard:

• Leasecake’s Ledger Guard provides real-time comparisons between administrative and accounting inputs. You can easily track changes, identify who made them, and review detailed modification descriptions, ensuring full transparency and control.

Transparent Audit Trail:

• A transparent audit trail is crucial for complex financial reporting. Leasecake allows you to demonstrate the accuracy of your financial data to auditors, making the audit process smoother and more efficient.

Versatile Application Across Lease Types:

• Whether you’re managing real estate leases or asset leases classified as operating or finance, Leasecake offers solutions tailored to meet your specific accounting needs.

Simplified ASC 842 Compliance:

• For those who choose to comply with ASC 842, Leasecake simplifies the process by providing access to accurate source data, facilitating measurement calculations, generating journal entries, and creating comprehensive amortization schedules and exportable disclosure reports.

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Key Takeaways

• Accurate lease accounting is essential for financial transparency, risk management, and operational efficiency, even if ASC 842 or IFRS 16 isn’t mandatory for your business.
• Compliance—whether voluntary or required—can enhance your financial credibility and prevent potential disruptions.
• Leasecake’s platform centralizes your lease data, integrates seamlessly with your processes, and provides the tools you need to maintain accurate, compliant financial records.

By adopting strong lease accounting practices and leveraging Leasecake’s powerful tools, you can protect your business, improve financial transparency, and maintain smooth operations—regardless of your compliance requirements.

To learn more about Leasecake’s lease management platform and how we can help you grow your business, manage multiple locations, save money by understanding exactly what’s in your lease agreements, and minimize the risk of overpaying or missing a lease renewal, schedule a demo.