How Fintech Is Helping Companies Comply with the New Lease Accounting Changes
From the first credit cards to ATM machines, to contactless payments the evolution of Fintech has helped make the use of and transfer of money in our personal lives ever more smooth and efficient.
But away from speeding up paying for groceries or meals in restaurants, commercial Fintech services are transforming the way businesses operate, all over the globe.
The Growth Of Fintech
The term financial technology, also recognised as Fintech, refers to any form of new technological innovation used to support, improve or enable banking and financial services.
During the mid-1900s, early examples of Fintech included the first credit cards and ATM machines. Since then, however, and following the invention of Cyberspace and the Internet, Fintech has accelerated at a remarkable pace with new technologies emerging that improve the efficiencies of a multitude of financial services, disciplines and processes.
Behind any run-of-the-mill financial task such as, for example, ordering and paying for products from the other side of the world without doing little more than unlocking your smartphone and opening your eBay app, is a myriad of complex Fintech infrastructure.
Inventories are managed, invoices are raised and processed and accounted for, all at the touch of a button. This is due to developments in Artificial Intelligence and an increasingly connected world. Two things which have seen the Fintech industry soar.
Behind the ability, for us to be able to check our bank statements on our phones or order whatever we want online, is a whole world of Fintech research and development.
And investment. Peer-to-Peer lending for small businesses, the lowering of the cost of international money transfers and social apps to help investors buy and sell with greater ease are just three examples of how, behind the scenes, the Fintech sector is changing the world.
The rapid acceleration in smart technology and internet connectivity (and reach) mean that tech companies have been able to grow exponentially. And Fintech within the leasing industry has seen its own developments and growth alongside that.
This Is Also Due To The Growth Of The Leasing Industry
Those developments in technology have coincided with a growth in the leasing industry too.
Due to economic circumstances and evolving business models, the leasing industry has also grown over the years. More and more companies now rely on leasing assets as a means of operating as a business.
Almost any asset whatsoever can be leased. In people’s personal lives, for context, it’s become more and more popular for people to lease cars because the arrangement allows people to access the latest high-spec vehicles which they would otherwise be unable to afford.
But a lease has the added bonus of being less of a financial commitment or risk than saving up and buying the car outright or taking out a form of loan for the purchase amount. If one’s circumstances change, you’re only committed until the end of the lease agreement.
And this principle has been used to the great benefit of many, many businesses. Across all sectors and industries, businesses of all sizes lease many of their operational assets.
Absolutely anything can be leased - from phones and photocopiers to warehouses and aeroplanes - and this is how many businesses are able to offer such affordable services whilst still having access to the latest and best equipment which give their users the best possible service.
The Role Of Fintech With The Leasing Industry
But the bigger the lease portfolio a company has, the bigger the task of managing it becomes.
Without due care and attention, the initially attractive lease agreements can descend into a costly way of operating the business. Lessors haven’t gotten into providing lease agreements because they were feeling charitable; they look to capitalise on the lessee’s risks of taking out any form of lease, as we’re sure you’re aware.
Penalty charges, auto-renewals and termination fees are just some of the risks of not managing a lease portfolio efficiently.
The added spanner in the works is the upcoming changes to the lease accounting standards, e.g. IFRS 16, which companies now need to be planning to become compliant with.
A more in-depth explanation of lease accounting changes, of which IFRS 16 is just one, can be read elsewhere on this blog, here: An Overive of the new standard - IFRS 16 At a Glance or by reading this 7 Step Guide To Compliance.
But, in short, the ways in which FASB and IASB prescribe leases should be accounted for is changing. No longer will certain leases be allowed to be accounted for off balance sheet. This will have an enormous impact on how companies with large lease portfolios are represented in their financial reports.
Also, rudimentary changes are afoot, such as a change in the definition of what constitutes a lease. Where exactly lease accounting data needs to be shown is also changing, as is what type of leases are exempt from the changes.
It’s generally regarded as the single biggest change to the lease accounting industry in many decades, if not ever. And this comes at a time when the leasing industry is bigger than ever and company lease portfolios are widespread.
It all means that companies need to conduct thorough and ongoing analysis, management and reporting of their lease portfolio and lease accounting, because the changes under IFRS 16 and FASB 842 will impact no just asset turnover but interest cover, EBIT, operating profit, net income, cash flows, financial ratios… and more.
But, luckily, the Fintech sector is helping to facilitate this change.
The Use Of Fintech Lease Accounting Software
The aforementioned developments in computer technology and AI form the heart of Fintech lease accounting software. Automation is particularly suited to what will be the black and white world of lease accounting.
In essence, lease accounting software works as the application has been meticulously coded and programmed to apply the rules and regulations of the new lease accounting standards. So, when key lease portfolio information is inputted into the system, the application can interpret this data and run the necessary financial calculations and reports required for compliance. It is these advanced analytics and algorithms that help simplify the compliance process as the solution takes a lot of the legwork out of the accounting process.
The best lease accounting applications have also been programmed to interface with other Fintech ERP Systems including SAP, Oracle and other General Ledger applications making the process even simpler.
It is the flexibility and practicality that Fintech solutions offer that has resulted in many of the world’s leading brands turning towards lease accounting software as a resolution to simplifying the burdens associated with compliance.
Fintech lease accounting solutions, such as Innervision’s own lease accounting software, LOIS, helps enhance the compliance process as companies can use it to produce all the accounting information required to accurately complete the financial statements obligatory for compliance; including income statement, cash flow and balance sheet. LOIS will also generate the critical amortisation schedules, journal entries and disclosure summaries.
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If you’d like to read more about how intelligent software can help your business manage its lease portfolio and stay compliant, check out one of our free downloads below.