For many businesses, the process of managing a lease portfolio can feel overwhelming. Leases are complex documents that contain detailed financial information, a fair amount of legalese and business terminology that can border on the arcane.
Fortunately, there are plenty of effective tools to manage your leases. A lease abstract is one of the best, largely because of way it simplifies and summarizes your leases.
But it’s important to know how lease abstraction works, what information lease abstracts provide and how you can bets use it, so let’s do a deeper dive into the world of lease abstraction.
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What is Lease Abstraction?
We’ll start with the basics. Lease abstraction is a process that condenses and simplifies the most important and frequently used information in a commercial lease.
That process produces a lease abstract, which is a concise summary of a lease agreement that’s easy to read and understand.
It captures key concepts and puts the essential information up front in an accessible format so that you can put it to work to use your leases as assets, operation more efficiently and make good business decisions.
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Lease Abstracts and the Lease Abstraction Process
The lease abstraction process starts with analyzing the lease. While the overall process is complex, it can be broken down into two basic steps:
- Identify all of the cash flow transactions associated with lease payments.
- Calculate the current net value of the lease by using a discount rate and a spreadsheet program or financial calculation program like Excel.
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Who Does Lease Abstraction and What Lease-Related Skills Are Involved?
Not surprisingly, lease abstraction is a specialty that’s generally performed by experts, although there are software packages available from companies like iLeasePro that simplify the process.
It takes years of training and an impressive combination of skills that can be summarized as follows:
- Financial analysis
- Information analysis
- Coding skills
- Training in GAAP (Generally Accepted Accounting Principles)
- Legal training to understand legal principles and the language used in documentation
- Understanding and experience with commercial leases
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How Lease Accounting Fits into Lease Abstraction
The accounting-specific information gathered during the lease abstraction process is critical. It needs to be accurate, relevant, and summarized in a way that makes it easier to understand.
Moreover, it has to be compliant with any number of important standards. These start with basic principles associated with GAAP practices, but they can also include a number of other standards:
- ASC 842 (Accounting Standards Codification)
- IFRS 16 (International Financial Reporting Standards)
- GASB (General Accounting Standards Board)
What Software is Used in Lease Abstraction?
Several types of software are used in the lease abstraction process, and they all play an important role.
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Data collection
- Many complex business leases contain dozens or even hundreds of pages. That’s a serious amount of data, and all need to be accessible in one place, often a database, so that personnel from multiple departments can access it.
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Lease accounting software
- Much of the data contained in a lease is numerical, and extracting it and performing the necessary calculations is a critical part of the data collection process.
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Beyond that, though, any number of calculations are required to track lease transactions
- Lease accounting software performs these calculations, then presents them in a format that makes them easy to understand and analyze.
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AI-Based Lease Software
- As the lease analysis process becomes more sophisticated and complex, AI is playing an important role in how lease data can be used effectively throughout an organization.
- Lease software that implements AI capabilities can make accurate predictions about the effectiveness of individual leases, based on both the terms of the lease and changing economic conditions.
- Those predictions provide a model for managers and executives to make effective decisions to improve business procedures and increase both profit and revenue.
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Reporting Software
- To understand and use leasing information, it has to be presented effectively in a variety of different reports.
- Part of the leasing abstraction process is deciding what information needs to be presented in these reports, and the software used to generate these reports is an important part of that process.
How Abstraction Helps Lease Administration
One of the primary focuses of lease administration is data. To be effective, data has to be captured accurately, then simplified so that key data points can be easily understood by managers and executives.
This helps them make good business and financial decisions that can increase the effectiveness of the lease profile as a whole.
Here are some of the things involved in lease administration that need to be presented by the lease abstraction process:
- Tracking critical dates
- Contracts and the significant clauses they contain
- Data mapping to understand how the lease is structured
- Updates and reminders to make sure information is current and accurate and payments are made on time.
How to Use the Abstraction Process for More Effective Lease Management
One of the primary focuses of lease administration is data. To be effective, data has to be captured accurately, then simplified so that key data points can be easily understood by managers and executives.
This helps them make good business and financial decisions that can increase the effectiveness of the lease profile as a whole.
Here are some of the things involved in lease administration that need to be presented by the lease abstraction process:
- As a predictive tool based on past performance. If you’re updating or taking on a new lease, abstracts based on the data you already have can be an excellent predictor of future lease performance.
- Snapshot management. By generating an abstract at any point during the life of a lease, you can get an idea of how the lease is performing.
- Post-lease analysis. Abstracts provide an excellent tool to analyze lease performance once the terms of the lease have been fulfilled and the lease has been terminated or updated.
This can be difficult to do while estate leases, for example, are in progress, so doing it more extensively after the fact can provide invaluable information and insights.
Get the Best Lease Accounting Solution from iLeasePro
At iLeasePro, we understand every aspect of leasing, especially lease abstraction. We know what information you need, how to get it, and how to present it in the simplest and most effective format. We also know all the standards that are involved in producing superb lease abstracts, especially when it comes to ASC 842.
We’ve provided lease accounting software for small businesses, and for larger companies as well. Our lease accounting software pricing is among the best in the industry, and when you call us we can set you up with a lease accounting software free demo.
To do this, call us at 888-351-4606, or send us an email at info@ileasepro.com. We also have plenty of great information about lease accounting software on our website, which is ileasepro.com, and you can chat with a live representative there as well.