If you work in real estate, you already know that lease accounting has become far more complex in recent years. The introduction of ASC 842 and IFRS 16 changed how leases are recognized, recorded, and reported — requiring businesses like yours to take a closer look at every property, equipment, and service contract. These updates go beyond compliance; they directly affect how you report assets, liabilities, and overall financial performance.
This guide from MKS&H will walk you through what the new lease accounting standards mean for your real estate operations, how to prepare for implementation, and best practices for maintaining compliance long-term.
Understanding Lease Accounting Standards
The goal of the new lease accounting standards, ASC 842 and IFRS 16, is to bring greater transparency to financial reporting. Previously, many companies kept operating leases off the balance sheet — a practice that masked long-term liabilities. Now, nearly all leases must appear on the balance sheet as a right-of-use (ROU) asset and a lease liability, giving a clearer picture of your financial obligations.
For real estate professionals, this means every lease you manage — from office buildings and retail spaces to vehicles or equipment — must be accounted for in a standardized way. The standards are designed to provide investors, lenders, and stakeholders with a more accurate understanding of your financial position.
However, implementation can be tricky. You need to identify every lease, analyze its terms, and determine how to classify it. Still, understanding these rules is the first step toward creating accurate, compliant financial statements that support informed business decisions.
How ASC 842 and IFRS 16 Affect Your Real Estate Operations
The shift from off-balance-sheet to on-balance-sheet lease reporting has had a major impact on real estate accounting and operations. You’ve probably noticed how the new rules affect everything from loan covenants to key financial ratios like EBITDA and return on assets (ROA).
If your company manages multiple leases across various locations, each one now requires detailed review and documentation. This process often involves close coordination between accounting, legal, and operations teams to ensure that each lease is classified and measured correctly.
The change also affects how you approach lease negotiations. Understanding the accounting impact of lease terms before you sign a contract helps you structure agreements more strategically — for example, by balancing fixed and variable payments to improve financial ratios.
These standards push you to integrate accounting insight into operational planning. While that may feel like an additional burden at first, it ultimately leads to better visibility and stronger financial management for your real estate portfolio.
How to Prepare for Lease Accounting Implementation
Before implementing the new lease accounting standards, it’s important to establish a strong foundation. Follow these key steps to set your organization up for success:
1. Build a complete lease inventory
- Identify all active leases — not just real estate, but also contracts with embedded lease components (e.g., equipment, vehicles, property use agreements).
- Gather relevant documents and ensure nothing is overlooked, including smaller or short-term arrangements.
2. Extract and organize key data
- Capture critical details such as:
- Payment terms
- Renewal and termination options
- Variable costs or escalation clauses
- Store this data in a centralized system or lease management database to improve accuracy and streamline future analysis.
3. Evaluate your accounting systems
- Assess whether your current systems can meet ASC 842 or IFRS 16 requirements.
- If not, consider implementing specialized lease accounting software to automate calculations, generate disclosures, and reduce manual errors.
4. Engage cross-functional stakeholders
- Involve key departments early — including Accounting, Operations, IT, and Legal.
- Collaboration ensures consistent data, reduces implementation risks, and builds shared understanding of new workflows.
5. Plan ahead to minimize disruptions
- Develop a clear timeline and assign responsibilities.
- Conduct trial runs or pilot testing before going live.
A bit of upfront preparation will save significant time later and prevent costly disruptions once the new standards take effect.
Common Challenges in Lease Accounting Compliance
Transitioning to the new lease accounting standards can be complex — especially for organizations managing large or decentralized lease portfolios. Below are some of the most common challenges and how to address them effectively:
1. Ensuring data accuracy
Lease information is often spread across multiple sources — such as ERP systems, spreadsheets, shared drives, or even filing cabinets. This fragmentation makes it difficult to consolidate, validate, and standardize data. A centralized data management process (or dedicated lease accounting platform) helps ensure accuracy and consistency.
2. Managing lease classification
Determining whether a contract qualifies as a lease, or whether it should be treated as a service or embedded lease, can be tricky. Complexities also arise when dealing with renewals, terminations, or modifications. Even one misclassification can impact your balance sheet and lead to audit or compliance issues.
3. Integrating systems effectively
Implementing new lease accounting software or upgrading your ERP system requires careful coordination between accounting, IT, and operations. Without proper planning and testing, data inconsistencies can emerge between financial and operational systems. Clear integration workflows and user training are key to preventing errors.
4. Maintaining ongoing compliance
Compliance doesn’t end once the new standards are in place — lease data evolves over time with additions, renewals, or amendments. Establishing strong internal controls and conducting regular reviews of lease records ensures continued compliance and accuracy. Automated alerts and reporting tools can make monitoring easier and more reliable.
Proactively addressing these challenges not only smooths your transition but also reduces risk, saves time, and builds confidence in your lease reporting process.
Using Technology to Streamline Lease Accounting
Technology can transform how you manage lease accounting and compliance. Implementing dedicated lease management software can automate calculations and generate accurate reports, helping you meet ASC 842 and IFRS 16 requirements efficiently.
Centralizing lease information in one platform ensures consistency across departments. You can easily track terms, renewal dates, and payment obligations while minimizing manual data entry. Many modern solutions also integrate with ERP systems, improving accuracy and saving significant time during monthly closings and audits.
Analytics and dashboards give you real-time visibility into your lease portfolio. By identifying trends and cost-saving opportunities, you can make more strategic decisions about renewals and renegotiations.
Digital tools also make audits easier. Automated recordkeeping provides clear audit trails, ensuring you can produce documentation quickly and confidently when requested.
For real estate organizations with multiple locations or complex lease structures, leveraging technology isn’t optional — it’s essential. The right systems reduce risk and allow your team to focus on strategic decision-making rather than manual data entry.
Best Practices for a Smooth Implementation
A successful lease accounting transition depends on careful planning and collaboration. Start by forming a cross-functional project team that includes professionals from accounting, finance, legal, and operations. Each department contributes unique insights into contract terms, data accuracy, and compliance requirements.
Standardizing your lease documentation process is another key step. Establish consistent templates, naming conventions, and storage practices for all leases. This makes it easier to track updates, prepare reports, and support audits.
Training your team is equally important. Make sure employees understand not only how to use new software but also why these accounting changes matter. Continuous education helps everyone stay current as standards evolve.
Implementing strong internal controls will further protect your compliance efforts. Regular data reviews, reconciliations, and quality checks ensure the information in your systems remains accurate and complete.
Finally, seek professional guidance when needed. Working with experienced advisors can help you navigate the technical nuances of lease accounting, avoid common mistakes, and ensure your implementation aligns with best practices.
Mistakes to Avoid When Adopting Lease Accounting Standards
Even well-prepared organizations can stumble when adopting the new standards. One of the most common mistakes is underestimating the project’s complexity. Lease portfolios are often larger and more varied than expected, leading to delays or data gaps.
Another error is depending too heavily on manual spreadsheets. While they may seem manageable for a small number of leases, spreadsheets quickly become inefficient and error-prone as your business grows.
Misclassifying leases is another costly pitfall. Failing to identify embedded leases or incorrectly categorizing terms can distort your financial statements and lead to compliance issues.
Communication breakdowns also cause problems. Every department involved — from finance to legal to operations — should clearly understand how the new standards affect their responsibilities.
Finally, some businesses treat implementation as a one-time project rather than an ongoing process. Lease accounting requires continuous updates to reflect modifications, renewals, and expirations. Establishing ongoing review processes ensures your records remain current and compliant.
Avoiding these missteps can help you reduce stress and strengthen financial transparency across your organization.
Why MKS&H Is the Right Partner for Your Lease Accounting Needs
Implementing lease accounting standards is an opportunity to gain clearer insight into your organization’s financial health. When managed effectively, lease accounting gives you a stronger understanding of your assets, liabilities, and cash flow, helping you make smarter investment and management decisions.
MKS&H has extensive experience guiding real estate businesses through ASC 842 and IFRS 16 implementation. Our team provides tailored support, including business consulting, accounting services, process improvement, and ongoing compliance assistance. With expert guidance, you can ensure every lease is properly accounted for and every report accurately reflects your financial position.
Partnering with MKS&H means you don’t just achieve compliance — you build a stronger, more transparent accounting foundation for the future. Contact us today to get started.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into a truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture, and your business goals. This approach enables our clients to achieve their greatest potential.
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