As-a-service companies are the future. There’s Mobility as a Service (MaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS)…and the list goes on. Software as a Service (SaaS) has literally changed the game when it comes to how the world connects, communicates and creates today.
Gone are the days where organizations needed products they didn’t fully use, or software bundles that were paid for upfront. Today, thanks to SaaS, companies can have access to the software they need, when they want it, and generally pay only for their specific needs.
SaaS companies have special requirements when it comes to lease accounting. We’ll take a closer look at their needs, and how these can best be met to ensure smooth and efficient lease accounting.
SaaS companies have unique lease requirements
To start with, SaaS companies have a distinctive structure. Product and R&D are big parts of any SaaS company, as are server usage and other technical tools required to provide the service.
- Flowing from this, SaaS companies are generally going to have very specific leases in place: Given large product and R&D teams that in most circumstances will sit together, there are usually office leases in place
- More senior employees in these teams are likely to have leased company vehicles
- Server usage is often going to be leased – and in some cases, the server hardware itself will be leased
- Other software and product tools are often subject to lease agreements
These are just a few of the leases that are frequently found in SaaS companies; of course each SaaS company will have other leases in place depending on its individual business and structure.
Moreover, many SaaS companies will have embedded leases in place. In a nutshell, embedded leases are leases according to accounting standards, even though they may not be called “leases” in the contracts themselves.
Lease accounting for SaaS companies
With SaaS companies having so many potential leases, ensuring that all leases are dealt with correctly under the relevant standard – particularly ASC 842 – can be a challenge.
Under ASC 840, the old lease accounting standard, leases (particularly operating leases) were a lot more straightforward. They could be expensed through the income statement with a minimum of fuss. Given the new ASC 842 requirements, dealing with leases is now a lot more complex, starting with identifying all leases and potential leases, and going through to creating lease-related assets and liabilities on the balance sheet, and of course more comprehensive disclosure requirements.
Leases are also likely to be a focus area for auditors of SaaS companies, especially given the major changes within the lease accounting framework. The lease accounting standard ASC 842 is becoming mandatory for all private companies, and so leases will get much attention from auditors in the coming years.
Managing all a SaaS company’s leases – and staying compliant with ASC 842 – can be challenging, especially for accounting professionals who are used to managing leases with manual tools such as Microsoft Excel.
Excel is a great tool, but when it comes to the multiple moving parts of leases as introduced by ASC 842, relying on Excel exclusively can end up costing a lot – in terms of time, money and stress. Consider, for example, leases for a fleet of cars. If the lease is changed in even a small way, this has implications for journal entries, financial statement numbers, disclosures, and so on.
SaaS companies understand the language of technology and efficiency. The good news is that there is a lease accounting solution for SaaS companies that provides exactly what they need.
Optimizing lease accounting for SaaS companies
The answer to SaaS companies’ lease accounting requirements lies in – no surprises here – technology. Trullion’s automated lease accounting solution uses AI to power a seamless ASC 842-compliant solution, that will do all the heavy lifting to ensure leases are one less thing to worry about.
Contracts can be scanned and Trullion’s magic goes to work, identifying critical inputs such as dates and amounts, creating audit-ready journal entries, minimizing errors and ensuring compliance.
If your SaaS company is interested in streamlining its lease accounting using the latest technology and best practice, get in touch with the Trullion team.