(And How to Solve Them)
Equipment lease management is a subset of lease administration that focuses exclusively on leased equipment. It’s how organizations monitor and handle legal agreements to rent vehicles, machinery, and other equipment they need to operate. Due to lease classification changes brought on by ASC 842, the depreciation of these assets over time, the scale of enterprise operations, and other factors that are unique to this category of leases, it can be especially difficult to manage them in your portfolio.
Here are three of the main challenges with equipment lease management and what you can do to address them in your portfolio.
The more assets you have, the more complex it becomes to identify equipment leases (particularly embedded ones), classify them, and ensure that the right people have visibility into them.
ASC 842 uses a broader definition of “lease” than previous lease accounting standards. In an effort to make organizations’ financial situations more transparent, you now have to comb through contracts for “identified assets” you’re already technically paying for the right to use.
Unfortunately, this means not every equipment lease is a clear, distinct document. They’re often embedded in real estate leases and other contracts, sometimes worded in ways that make it difficult to recognize them as leases. The key is to identify clauses that give you the sole right to use or benefit from a specific asset and require you to pay the supplier for this right in some form. For example, if your facility lease includes a clause that gives you the exclusive right to use a forklift, but requires paying the facility owner directly for fuel and maintenance, you’re now managing an equipment lease. Or perhaps your office comes with a copier, but you have to pay the supplier for ink and paper.
Identifying equipment leases is one of the many reasons enterprises turn to equipment lease management software. Tango Lease is a specialized solution that uses artificial intelligence and machine learning to analyze every contract for embedded leases, flagging verbiage that technically qualifies as a lease.
Lease classifications can be tricky for equipment leases, too. ASC 842 requires you to classify every lease as either a finance lease (formerly known as a capital lease) or an operating lease, and which one you need to use depends on three things:
- Whether the lease transfers ownership to the lessee at the end of the lease term
- The leased asset’s remaining economic life
- The leased asset’s net present value (NPV)
The remaining economic life is how much longer the asset is expected to last. The NPV is the value of your total lease payments.
If you own the asset at the end of the lease, then the lease is a finance lease. If the lessor retains ownership, it’s an operating lease, unless the lease term lasts for 75% of the asset’s remaining economic life, or your total lease payments exceed 90% of the asset’s fair market value. In all such scenarios, the lessor is transferring most of the benefits and most of the risk to the lessee, which increases the liability of the lease and makes it a finance lease.
These classifications can change over time as the asset’s fair market value decreases and leases get renewed or modified. When you have hundreds or thousands of equipment leases embedded in enterprise contracts and real estate leases, staying on top of lease classifications can become extremely difficult.
Tango Lease helps you manage lease classification by automatically creating lease schedules and alerting you of important dates and upcoming changes. You’ll always be able to see key lease details and how changes impact classifications.
In large organizations with multiple facilities, it can be difficult for the leasing department to keep track of all the company’s equipment leases, let alone communicate the necessary information to the facility maintenance teams who work on and make decisions about that equipment.
Without access to contractual information about an asset, your maintenance team may defer, or be unaware of required maintenance, or they may make repair or replace decisions you weren’t responsible for. It’s all too easy to fall out of compliance or wind up with unnecessary expenses.
Tango Lease integrates equipment lease data with your computer-aided facilities maintenance (CAFM) software, ensuring your facility managers know how to handle each asset responsibly.
The larger your business, the more unwieldy equipment lease management becomes. But Tango Lease identifies, monitors, and manages your assets in less time, while giving you greater peace of mind by creating less potential for human error. Your team has all the tools they need to keep you in compliance with ASC 842 and the future of lease accounting.
Want to see what Tango Lease can do for your business?