Bridging The Accounting Gap For Lessors And Lessees

The International Accounting Standards Board introduced a significant overhaul to lease accounting standards, and while the changes went into effect at the start of 2019, corporates continue to face challenges to adhere to the standards and remain compliant.

In response, corporate accounting FinTechs and financial consultants have introduced a range of new services and technologies in an effort to help organizations with lease agreements adapt. But these tools typically focus on the lessee of assets like equipment and real estate, said Nakisa Head of Global Solutions Engineering Imran Mia.

Today, Nakisa announced the launch of its lease management and accounting portal, a solution that Mia told PYMNTS has one important focus to address a gap in the market: the platform targets the lessor, an entity that is just as impacted by the IASB’s and FASB’s (Financial Accounting Standards Board) lease accounting standard changes, yet is underserved by FinTech solutions to ease the transition.

While the new solution aims to fill the void of servicing the lessor side of leasing arrangements, Mia explained that promoting accounting compliance is a complex task thanks to the multitude of leasing models, particularly in the commercial and government real estate market. With the global pandemic introducing unfamiliar disruption to lessor cash flows, promoting accounting agility — for both the lessor and lessee sides — is more important than ever, he said.

The Lessor-Lessee Connection

There are several unique situations in the commercial real estate leasing market in particular that introduce a host of complexity for lessors when it comes to accounting, as Mia explained.

In the U.S., state- and local-level government entities face their own lease accounting standard requirements, for instance. In other cases, subleasing arrangements introduce an additional level of complexity for organizations that ultimately find themselves in the situation of acting as both a lessor and lessee.

“A primary example would be Walmart,” explained Mia. “When you go into Walmart, there is a McDonald’s or other shops, different units to sublet to these businesses. Walmart receives periodic income, and you could say they are the intermediate lessor, and the organization subleasing from Walmart becomes the sub-lessee.”

Despite this arrangement, Walmart itself retains the main leasing contract, and is therefore both paying rent on commercial real estate, and receiving rent payments from sub-lessees.

According to Mia, while FinTech solutions have stepped in to support lessees and sub-lessees in need of compliance accounting tools, technology hadn’t yet introduced solutions for the lessor side of these arrangements that address the compliance challenge resulting from standards changes. What’s more, he added, FinTech had so far lagged in addressing entities that must account for both lessor and lessee arrangements.

For Nakisa, filling the void meant enabling an accounting solution that integrated both ends of these contract arrangements. In the same way that a B2B supplier is also a corporate customer, thus in need of both accounts payable (AP) and accounts receivable (AR) solutions, Mia noted that there was an opportunity to “connect the dots,” meaning to integrate the accounting and financial management operations for organizations to manage both cash in-flows and out-flows as part of their leasing arrangements for greater cash flow and financial clarity.

Cash Flow (Un)Certainty

Entities as both lessors and lessees have historically had a financial advantage over other verticals and business models in the market: cash flow is relatively predictable as a result of the subscription-like business model of rent payments.

Enabling companies to manage their leasing agreements and finances on a more holistic level can further expand cash flow predictability, while Mia pointed to value-added capabilities in financial analytics that also support the financial health of firms in this business model.

Yet today, the industry’s cash flow certainty is no longer as solid.

“In terms of [cash flow] forecasting, it’s fairly straightforward under normal circumstances,” he said. “The lessor is expecting you to pay rent on a regular basis, but it has become a little challenging recently because of COVID-19.

He added that the industry has seen an increase in concessions made to support leasing agreements, whether through rent forgiveness, payment deferrals or other agreements. And while there have been relief initiatives for the lessee, little has been given to support lessors, he noted.

As a result, accounting technologies must not only ensure compliance to shifting standards, and bridge the gap between lessor and lessee financials, but also remain agile enough to support a new demand for lease agreement adjustments without falling out of that compliance.

“It’s not going to be an easy thing to do in an Excel spreadsheet,” said Mia. “These firms will need a solution to help them with these modifications.”