Business Automation Solutions: Streamlining Lease Accounting.

Introduction

Leasing is an important funding source in industries like transportation, logistics, and construction. Leasing is used to procure required assets without a large capital expense. With the growth of leasing, compliance requirements have progressively increased making management of leases complex. IFRS 16 and ASSC 842 require leases to be stated on balance sheets for both lessors and lessees.

As lessors build larger portfolios, managing them manually is not feasible. The volume of work to track lease payments, calculate asset depreciation, and comply with regulations is time-consuming and error-prone. These factors drive lessors to adopt business automation solutions that streamline lease accounting. 

Business process automation enables lessors to perform their activities with more confidence. The guardrails built into these solutions guide users to transact as per company policies, routing exceptions for approval. Applying inbuilt rules accounting and compliance is available for transactions like lease tracking and payment processing generating financial and compliance reports. 

Key Benefits of Business Automation Solutions for Lease Accounting

1. Automating Lease Lifecycle Management

Business automation will help the lessor’s users perform their actions leaving the solution to manage the complexity. Some examples are:

• The user enters a prior dated lease, the solution automatically generates the amounts due, tracks outstanding payments, calculates income and depreciation till the current period, and accounts for these transactions in the relevant accounting period.
• The user replaces an asset with a closed lease. The solution automatically prompts the user to find the correct lease as this transaction is invalid on a closed lease.
• Automated feed is received from GPS installed in leased vehicles. This information can be linked to maintenance schedules to generate a service request to maintain the leased vehicle in optimal condition.

2. Compliance with ASC 842 and IFRS 16

Accounting standards have been updated across to IFRS 16 and ASC 842. Though this primarily impacts the lessee’s accounting of leases by stating them on the balance sheet, there are some impacts on lessors.

Lessors rely on the right software solutions to maintain, calculate, and account for these leases in their income statement and balance sheet.

A study by PwC found that 60% of organizations reported challenges in complying with the new lease accounting standards due to the complexity of lease contracts. Operating lease software addresses this issue by automating compliance, reducing the burden on finance teams, and ensuring accurate reporting.

3. Streamlining Financial Reporting

Accurate data and timely financial information are essential for managing your leasing business. Business automation solutions help lessors track lease and asset performance, monitor payments, and optimize end-of-lease operations maximizing profitability and providing customers the experience they expect and deserve. 

4. Reducing Errors with Automated Payments and Billing

Accurate billing and payments are the core expectations from your customers. Manual generation of bills for large portfolios and late or incorrect application of payments could result in delays in collection and customer churn. By automating the generation of payment schedules, bills, rent escalations, recording and application of payments these errors can be eliminated. 

Impact of Technology on Lease Accounting Automation

1. The Role of AI and Machine Learning

Analyze trends and generate predictions using artificial intelligence (AI) models and machine learning on lease accounting solutions. Track asset usage and payment patterns to predict maintenance requirements or potential delinquencies. Asset resale values can be recomputed based on asset usage patterns.

Vehicle lessors can use AI to schedule proactive maintenance to maintain optimal performance. Similar trends apply to aircraft engines, turbines, and other movable equipment. Lessors can proactively replace or upgrade nonperforming equipment to increase customer satisfaction and reduce disputes.

2. Cloud-Based Solutions for Scalability and Flexibility

There are many advantages of a cloud-based solution over on-premise systems. Cloud systems can be accessed from anywhere, display real-time data, and lower costs. Large portfolios of leases are not constrained by system scalability as most cloud systems can scale up on demand. 

Cloud solutions are easier to update automatically ensuring lessors are compliant. 

3. Automation of Lease Modifications and Amendments

Customers constantly request modifications to their leases, for example, term extensions or early terminations that change future payment schedules and income recognition. Automated solutions streamline this process ensuring lessors remain compliant. 

Examples of Automation in Lease Accounting

1. Fleet Leasing

A large commercial fleet lessor managing over 3,000 vehicles of different configurations finds it difficult to track lease payments, vehicle depreciation, maintenance, and profitability. A robust business automation solution can help them overcome these challenges reducing administrative burden by 70%.

2. Agricultural Equipment Leasing

An agricultural equipment lessor faces challenges in managing lease modifications as many of their customers want to replace their add-ons. To avoid manual effort, implementing a lease accounting automation solution can reduce the time spent on manual calculations by 70%.

Challenges and Future Trends in Lease Accounting Automation

1. Cost of Implementation

The typical cost of implementing business automation solutions is very high due to charges payable for implementation services, cost of internal resources, and time taken to implement the solution. Highly customized solutions cost a lot to maintain and upgrade. 

Cloud-based solutions with subscription-based pricing reduce upfront costs. Solutions that align with your business needs, may be implemented with little or no customization and quicker making it suitable for small and mid-sized lessors.

2. The Future of AI in Lease Accounting

AI and machine learning are expected to enhance lease accounting in the future. Proactive prediction capabilities could help manage equipment on lease better. AI can better predict options to optimize profitability at not only the lease level but even at the asset level.

Conclusion

Business automation solutions are helping lessors transform their complex processes into streamlined workflows. Automated solutions transform work across the lease lifecycle, from contract initiation to termination, accounting, and compliance.

The impact of technology, particularly AI and cloud-based solutions, enables lessors to scale their operations, enhance decision-making, and optimize asset utilization. As the leasing industry evolves, automation will become an essential tool for lessors looking to stay competitive in a rapidly changing market.

The global market for lease accounting software is projected to reach $7.2 billion by 2028, driven by the increasing adoption of automation technologies in the leasing industry (Allied Market Research).

Citations

1. EY. “Global Lease Accounting Survey: Automation Trends in 2022.” EY Global, 2022.
2. Allied Market Research. “Lease Accounting Software Market Outlook to 2028.” Allied Market Research, 2021.