1 00:00:00,000 --> 00:00:05,667 < Intro > 2 00:00:05,667 --> 00:00:06,960 - Welcome back to Count Me In. 3 00:00:06,960 --> 00:00:08,340 The podcast for accounting 4 00:00:08,340 --> 00:00:10,667 and finance professionals working in business. 5 00:00:10,800 --> 00:00:11,940 I'm Adam Larson. 6 00:00:11,940 --> 00:00:14,500 Today we'll be discussing a perennial hot topic, 7 00:00:14,500 --> 00:00:18,060 lease accounting, specifically  FASB's new standards 8 00:00:18,060 --> 00:00:22,167 for private companies and nonprofits under ASC 842. 9 00:00:22,167 --> 00:00:23,667 And just in case you're unaware, 10 00:00:23,667 --> 00:00:25,740 the deadline to transition to the new standards 11 00:00:25,740 --> 00:00:28,334 is December 31st, 2022. 12 00:00:28,440 --> 00:00:31,500 Thankfully, I'm joined, today, by a true expert 13 00:00:31,500 --> 00:00:33,660 in this, infamously, thorny topic. 14 00:00:33,660 --> 00:00:38,340 Ane Ohm, is a CPA as well as co-founder and CEO of LeaseCrunch, 15 00:00:38,340 --> 00:00:42,900 a software company that helps companies simplify their lease accounting. 16 00:00:42,900 --> 00:00:45,900 If you're looking for practical tips and best practices 17 00:00:45,900 --> 00:00:48,333 to make lease accounting a little less stressful, 18 00:00:48,333 --> 00:00:50,220 this is the conversation for you. 19 00:00:50,220 --> 00:00:51,833 Let's get started. 20 00:00:51,968 --> 00:00:58,500 < Music > 21 00:00:58,500 --> 00:00:59,640 Well, Ane, I want to thank you so much 22 00:00:59,640 --> 00:01:00,900 for coming on the podcast, today. 23 00:01:00,900 --> 00:01:03,500 We are going to be talking about lease accounting. 24 00:01:03,500 --> 00:01:06,833 And as all of us know that the standard, 25 00:01:06,833 --> 00:01:09,180 the new Lease Accounting Standard deadline 26 00:01:09,180 --> 00:01:12,780 is approaching very quickly, and people should get started. 27 00:01:12,780 --> 00:01:15,500 We've been talking about this since what, 2018. 28 00:01:15,500 --> 00:01:18,360 And if you haven't gotten started the time now is to get started. 29 00:01:18,360 --> 00:01:19,440 What do you think? 30 00:01:19,440 --> 00:01:24,333 What is your advice to people as we start talking about this? 31 00:01:24,333 --> 00:01:29,666 - I think the big thing with any accounting standard is that, 32 00:01:29,820 --> 00:01:33,000 and when I was running a different company. 33 00:01:33,000 --> 00:01:34,740 A new accounting standard would come up 34 00:01:34,740 --> 00:01:38,100 and I would ask my accountant, "What is the last moment 35 00:01:38,100 --> 00:01:39,360 I have to do anything about this?" 36 00:01:39,360 --> 00:01:41,166 And that's when I would do it. 37 00:01:41,166 --> 00:01:44,833 And the challenge with the lease accounting standard, 38 00:01:44,833 --> 00:01:46,860 if you wait there's a couple of things, 39 00:01:46,860 --> 00:01:49,833 first of all, leases can be complicated. 40 00:01:49,833 --> 00:01:53,166 And, so, that analysis of your lease, 41 00:01:53,166 --> 00:01:55,560 spending the time understanding it in the context 42 00:01:55,560 --> 00:01:58,166 of the new Lease Standard can take some time. 43 00:01:58,166 --> 00:02:01,333 And, secondly, if you need help 44 00:02:01,333 --> 00:02:04,740 and you wait the experts are going to be busy. 45 00:02:04,740 --> 00:02:06,900 So you're going to have a really difficult time 46 00:02:06,900 --> 00:02:08,000 getting a hold of someone 47 00:02:08,000 --> 00:02:10,740 who can really guide you through the right steps. 48 00:02:10,740 --> 00:02:16,500 So we're actually hearing CPA firms state that if their clients wait, 49 00:02:16,500 --> 00:02:18,420 they're going to have to charge them more 50 00:02:18,420 --> 00:02:21,300 in order to be able to offer that assistance. 51 00:02:21,300 --> 00:02:24,499 Because they're going to be so busy with other things. 52 00:02:24,499 --> 00:02:28,980 If you wait until January, February, this is going to be rough. 53 00:02:28,980 --> 00:02:31,666 So start now, get on top of it, 54 00:02:31,680 --> 00:02:34,666 it's just going to make things, life, better for you. 55 00:02:34,666 --> 00:02:36,540 - Yes, for sure, because you don't want to wait 56 00:02:36,540 --> 00:02:37,680 till the last possible second 57 00:02:37,680 --> 00:02:41,166 because it's going to fall back in your face. 58 00:02:41,166 --> 00:02:45,720 Do you think that maybe we could start, in this podcast, 59 00:02:45,720 --> 00:02:49,499 to maybe go over some practical expectations 60 00:02:49,499 --> 00:02:51,480 and how to make your adoption easier? 61 00:02:51,480 --> 00:02:53,040 Especially if you are just getting started now, 62 00:02:53,040 --> 00:02:56,166 or even if you've been aware, you've been preparing. 63 00:02:56,166 --> 00:02:58,140 But to the actual practical application, 64 00:02:58,140 --> 00:03:01,666 it's still going to be a difficult process. 65 00:03:01,666 --> 00:03:04,666 - Yes, so there's something to... 66 00:03:04,666 --> 00:03:07,380 when you think about the new Lease Standard, 67 00:03:07,380 --> 00:03:10,320 you have basically two types of leases. 68 00:03:10,320 --> 00:03:14,700 Leases that existed before the standards needed to be implemented, 69 00:03:14,700 --> 00:03:18,120 and then leases that start after the standard need to be implemented. 70 00:03:18,120 --> 00:03:21,180 So talking about those leases that started 71 00:03:21,180 --> 00:03:23,880 before your initial application date 72 00:03:23,880 --> 00:03:26,666 of the new standard. 73 00:03:26,666 --> 00:03:32,340 The FASB, Financial Accounting Standard Board 74 00:03:32,340 --> 00:03:37,166 really wanted to make sure that this was as easy as possible. 75 00:03:37,166 --> 00:03:38,832 It sounds like that might not be true, 76 00:03:38,832 --> 00:03:40,920 but it is, they have said that repeatedly. 77 00:03:40,920 --> 00:03:42,120 And, so, what they've done is 78 00:03:42,120 --> 00:03:46,165 they've actually provided some practical expedience 79 00:03:46,165 --> 00:03:47,400 and those practical expedience, 80 00:03:47,400 --> 00:03:52,140 the whole purpose of them is to simplify the new standard. 81 00:03:52,140 --> 00:03:56,832 So for those transition leases, those leases that existed before, 82 00:03:56,832 --> 00:04:01,440 if you have a nice software available to you, 83 00:04:01,440 --> 00:04:05,665 there's really only six pieces of information that you need to do. 84 00:04:05,665 --> 00:04:07,860 If you apply those practical expedience, 85 00:04:07,860 --> 00:04:11,832 make sure you're doing the things that make this as easy as possible. 86 00:04:11,880 --> 00:04:17,165 And then collect those six  basic pieces of information. 87 00:04:17,165 --> 00:04:20,700 And those are; start date, well, guess what, 88 00:04:20,700 --> 00:04:21,840 that start date is going to be 89 00:04:21,840 --> 00:04:23,520 the initial application date of the standard. 90 00:04:23,520 --> 00:04:25,498 So if you know that already, huh! 91 00:04:25,498 --> 00:04:28,200 If your end is December 31st, 92 00:04:28,200 --> 00:04:30,660 that's going to be January 1st, of 2022. 93 00:04:30,660 --> 00:04:31,998 All right, so we got one. 94 00:04:32,160 --> 00:04:35,498 Second one is, "When does the lease end?" 95 00:04:35,498 --> 00:04:37,080 It can be a little more complicated 96 00:04:37,080 --> 00:04:42,720 because you have to not just say, "When do I stop paying?" 97 00:04:42,720 --> 00:04:46,998 When is the initial end of the lease? 98 00:04:46,998 --> 00:04:49,665 I have to, also, look at it and see 99 00:04:49,740 --> 00:04:55,998 “What might I be reasonably certain to renew a term 100 00:04:55,998 --> 00:04:58,998 or might I be reasonably certain to terminate early?” 101 00:04:58,998 --> 00:05:02,665 So you really have to look at what is the total lease term, 102 00:05:02,665 --> 00:05:05,460 including renewals, if you're reasonably certain. 103 00:05:05,460 --> 00:05:08,332 It's a high bar but you do have to look at it. 104 00:05:08,332 --> 00:05:12,498 The third thing is a discount rate. 105 00:05:12,498 --> 00:05:14,331 So, and I don't think we know this 106 00:05:14,331 --> 00:05:16,860 but those first two seem, they are pretty easy. 107 00:05:16,860 --> 00:05:21,665 And the discount rate is the FASB offers 108 00:05:21,665 --> 00:05:24,331 the ability to just use the risk-free rate. 109 00:05:24,331 --> 00:05:26,880 So that's great because that's publicly available. 110 00:05:26,880 --> 00:05:29,331 You don't have to really think about it too hard. 111 00:05:29,331 --> 00:05:32,998 Or the challenge with the risk-free rate is that 112 00:05:32,998 --> 00:05:34,200 it will tend to be lower, 113 00:05:34,200 --> 00:05:37,331 which means your lease liability will be higher. 114 00:05:37,331 --> 00:05:39,831 If you don't want that for larger leases, 115 00:05:39,831 --> 00:05:43,920 the FASB also, more recently, allows us 116 00:05:43,920 --> 00:05:48,060 to decide your discount rate based on asset class. 117 00:05:48,060 --> 00:05:50,400 So you can say, "All right, for my office lease, 118 00:05:50,400 --> 00:05:53,400 which is a big lease, it's going to be big dollars, 119 00:05:53,400 --> 00:05:56,580 I'll spend the time to figure out the higher discount rate. 120 00:05:56,580 --> 00:06:00,331 And if I have vehicles or photocopiers, 121 00:06:00,360 --> 00:06:02,220 I'm just going to use the risk-free rate." 122 00:06:02,220 --> 00:06:06,164 So that's a nice thing, so that's the third piece of information. 123 00:06:06,164 --> 00:06:09,360 Fourth one, is, hey, is this an operating lease 124 00:06:09,360 --> 00:06:10,200 or a finance lease? 125 00:06:10,200 --> 00:06:13,831 Well, once again, FASB says, "You know what, 126 00:06:13,831 --> 00:06:17,831 if you had an operating lease before it's an operating lease now. 127 00:06:17,831 --> 00:06:21,331 If you had a capital lease before it's a finance lease now." 128 00:06:21,331 --> 00:06:23,331 So you can elect that practical expedient 129 00:06:23,331 --> 00:06:25,920 to just move forward, so that's the fourth one. 130 00:06:25,920 --> 00:06:27,498 Boom, you know, that one. 131 00:06:27,498 --> 00:06:31,080 Fifth thing is, what are any existing balances 132 00:06:31,080 --> 00:06:33,164 on your balance sheet as of that first date? 133 00:06:33,164 --> 00:06:36,360 All right, if you had an operating lease 134 00:06:36,360 --> 00:06:38,400 and you had some deferred rent and deferred rent balance, 135 00:06:38,400 --> 00:06:42,780 you've want to make sure to include that balance. 136 00:06:42,780 --> 00:06:44,997 Because you've got to be able to get that off the books. 137 00:06:44,997 --> 00:06:48,997 And then finally, what are your remaining lease payments? 138 00:06:48,997 --> 00:06:50,940 So those six pieces of information, 139 00:06:50,940 --> 00:06:53,580 while that it takes a little bit of analysis, 140 00:06:53,580 --> 00:06:55,080 they're not too complicated. 141 00:06:55,080 --> 00:06:56,664 So when I say get started now, 142 00:06:56,664 --> 00:07:02,160 I also mean that getting started now it's not overwhelming, 143 00:07:02,160 --> 00:07:03,780 it's not hundreds of bits of information. 144 00:07:03,780 --> 00:07:06,240 And I think that's a big thing that people do, 145 00:07:06,240 --> 00:07:08,880 is they assume it's going to be so hard, 146 00:07:08,880 --> 00:07:11,164 it's just better to push it off. 147 00:07:11,164 --> 00:07:14,760 - Yes, you get overwhelmed by whatever the task is 148 00:07:14,760 --> 00:07:16,831 and you never actually start it, 149 00:07:16,831 --> 00:07:18,720 and then it becomes even more overwhelming 150 00:07:18,720 --> 00:07:19,680 because you're behind. 151 00:07:19,680 --> 00:07:24,497 And that's practical application of just business in general, 152 00:07:24,497 --> 00:07:27,664 trying not to procrastinate, right? 153 00:07:27,664 --> 00:07:34,320 - Which I have to say, I mean, I live that every day. 154 00:07:34,320 --> 00:07:37,497 "When do I have to do this?" 155 00:07:37,497 --> 00:07:41,040 It's just for this particular one, there's another reason 156 00:07:41,040 --> 00:07:44,280 why getting on top of this can be really important. 157 00:07:44,280 --> 00:07:48,540 And that is many private companies, 158 00:07:48,540 --> 00:07:51,360 the reason they follow GAAP accounting 159 00:07:51,360 --> 00:07:53,330 is because they have a bank loan. 160 00:07:53,330 --> 00:07:58,020 And if they have a bank loan, adding lease liabilities 161 00:07:58,020 --> 00:08:02,997 could cause them to be in violation of some of their debt covenants. 162 00:08:02,997 --> 00:08:06,840 Now, those debt covenants are changeable, 163 00:08:06,840 --> 00:08:08,820 but you have to get on top of it. 164 00:08:08,820 --> 00:08:10,860 So what we hear from banks, 165 00:08:10,860 --> 00:08:14,163 is banks are waiting for you to come to me and tell me, 166 00:08:14,163 --> 00:08:17,163 if you think you're going to be in violation. 167 00:08:17,163 --> 00:08:19,800 Well, in order to know that and know what those numbers are, 168 00:08:19,800 --> 00:08:23,160 again, getting started early makes a ton of sense. 169 00:08:23,160 --> 00:08:25,020 You can have conversations with your banks. 170 00:08:25,020 --> 00:08:26,340 Make sure to make adjustments 171 00:08:26,340 --> 00:08:29,997 so that you hit your December 31st financials. 172 00:08:29,997 --> 00:08:32,940 You don't end up with a debt covenant violation 173 00:08:32,940 --> 00:08:34,663 that you really didn't need to have. 174 00:08:34,663 --> 00:08:37,200 So that is another really important reason 175 00:08:37,200 --> 00:08:41,280 to get on top of this early, and pay attention 176 00:08:41,280 --> 00:08:44,663 to those practical expedience that the FASB offers to make it easier. 177 00:08:44,663 --> 00:08:48,540 I'm also somebody who loves to make things harder. 178 00:08:48,540 --> 00:08:49,980 Like, "I'm going to do it the real way, 179 00:08:49,980 --> 00:08:51,830 I don't need the shortcut." 180 00:08:51,830 --> 00:08:57,120 No, come on, in this particular case it really makes a ton of sense 181 00:08:57,120 --> 00:09:00,330 to pay attention to those opportunities. 182 00:09:00,330 --> 00:09:01,380 - It does make a ton of sense 183 00:09:01,380 --> 00:09:03,163 and something that you spend a little bit of time on. 184 00:09:03,163 --> 00:09:04,830 And I think we might need to delve into a little bit more, 185 00:09:04,830 --> 00:09:07,663 are those discount rates made available by FASB. 186 00:09:07,663 --> 00:09:09,240 I feel like that's something 187 00:09:09,240 --> 00:09:12,960 that you're really going to have to adjust your formulas. 188 00:09:12,960 --> 00:09:14,640 Or if you're using a software, 189 00:09:14,640 --> 00:09:17,163 you're going to have to really adjust and really re-look at everything 190 00:09:17,163 --> 00:09:20,163 to make sure that you're following that properly. 191 00:09:20,163 --> 00:09:23,330 - Yes, there are a couple of things around discount rates 192 00:09:23,330 --> 00:09:25,920 that are really important to just know upfront. 193 00:09:25,920 --> 00:09:29,996 One is, again, going back to those transition leases, 194 00:09:29,996 --> 00:09:34,329 the FASB allows you to either determine, 195 00:09:34,329 --> 00:09:37,996 so because a discount rate matters, 196 00:09:37,996 --> 00:09:41,163 the term, the length of the term. 197 00:09:41,163 --> 00:09:46,829 So if you are borrowing $100 198 00:09:46,829 --> 00:09:51,663 and you borrow it for a day versus 10 years, 199 00:09:51,663 --> 00:09:53,663 you're going to pay a different rate. 200 00:09:53,663 --> 00:09:56,829 The longer it is you pay more. 201 00:09:56,829 --> 00:10:00,829 So what you want to do is look at, you can decide 202 00:10:00,829 --> 00:10:03,663 do you want to use a discount rate for the remaining term, 203 00:10:03,663 --> 00:10:05,280 or do you want to use a risk discount rate 204 00:10:05,280 --> 00:10:07,996 for the original term of the lease? 205 00:10:07,996 --> 00:10:12,840 And you have to make that election for every lease. 206 00:10:12,840 --> 00:10:13,980 So you can't pick and choose, 207 00:10:13,980 --> 00:10:15,660 that is something you have to make for every lease. 208 00:10:15,660 --> 00:10:17,663 So that's just something to keep in mind, 209 00:10:17,663 --> 00:10:19,740 looking at the rates that are available to you. 210 00:10:19,740 --> 00:10:22,260 Do you want to go back to the term? 211 00:10:22,260 --> 00:10:24,240 So if it's a 10-year lease, but they only have a year left, 212 00:10:24,240 --> 00:10:26,640 do you use a one-year term or do you use a 10-year term? 213 00:10:26,640 --> 00:10:27,780 So that's one thing. 214 00:10:27,780 --> 00:10:33,662 Second one is look at, consider materiality, 215 00:10:33,662 --> 00:10:38,496 and what's going to be the easiest approach to this? 216 00:10:38,496 --> 00:10:42,996 So what does that mean, for your more material leases, 217 00:10:42,996 --> 00:10:46,662 spend the time to figure out a discount rate 218 00:10:46,662 --> 00:10:49,662 that would be specific to. 219 00:10:49,662 --> 00:10:54,900 So the Lease Standard says you're supposed to use 220 00:10:54,900 --> 00:10:59,329 the rate implicit in the lease, if it's readily discernible. 221 00:10:59,329 --> 00:11:01,800 That is almost never readily discernible. 222 00:11:01,800 --> 00:11:06,120 So it's nice that they say it but it's just, kind of, a pipe dream. 223 00:11:06,120 --> 00:11:08,940 You just don't generally have all of the information that you need, 224 00:11:08,940 --> 00:11:13,329 in order to know the rate implicit in the lease from a lessee standpoint. 225 00:11:13,329 --> 00:11:14,760 So then you have to go look at it 226 00:11:14,760 --> 00:11:17,160 and say, "Okay, well, my discount rate needs to be, 227 00:11:17,160 --> 00:11:22,440 then, the collateralized borrowing rate that I would need, 228 00:11:22,440 --> 00:11:27,180 if I was to borrow money to buy this asset 229 00:11:27,180 --> 00:11:28,680 for this amount of time. 230 00:11:28,680 --> 00:11:30,495 What is that rate? 231 00:11:30,495 --> 00:11:32,340 Just inherently you can feel like, 232 00:11:32,340 --> 00:11:34,995 "Oh, my gosh, how the heck do I do that?" 233 00:11:34,995 --> 00:11:37,162 So it's going to take a little bit of time 234 00:11:37,162 --> 00:11:39,329 to figure out your discount rate, 235 00:11:39,329 --> 00:11:42,329 if you have to actually calculate it. 236 00:11:42,360 --> 00:11:45,240 So you only want to do that for the assets that matter. 237 00:11:45,240 --> 00:11:47,995 You only want to do that for where it's material. 238 00:11:47,995 --> 00:11:49,680 So that might be your office lease, 239 00:11:49,680 --> 00:11:52,200 if you're adding a million dollars onto the books, 240 00:11:52,200 --> 00:11:55,495 you probably want to make sure that you make that as low as possible. 241 00:11:55,495 --> 00:11:57,360 - Sure. - So using a higher discount rate 242 00:11:57,360 --> 00:11:59,495 is going to be a benefit. 243 00:11:59,495 --> 00:12:02,400 Whereas for those smaller leases, 244 00:12:02,400 --> 00:12:06,000 just take advantage of that practical expedient. 245 00:12:06,000 --> 00:12:09,180 Use the risk-free rate, the published rate out there, boom. 246 00:12:09,180 --> 00:12:12,995 Look it up, boom, you're done, it's going to be much easier to do. 247 00:12:12,995 --> 00:12:16,328 And, again, for those transition leases, 248 00:12:16,328 --> 00:12:19,200 as you are making the transition to the new standard, 249 00:12:19,200 --> 00:12:22,495 that rate would be the rate as of, 250 00:12:22,495 --> 00:12:24,420 if December is year-end, 251 00:12:24,420 --> 00:12:28,162 it's going to be the rate as of January 1st, 2022, 252 00:12:28,162 --> 00:12:33,161 so that's when you will identify that rate. 253 00:12:33,161 --> 00:12:35,760 - I just need to verify something; you keep saying 2022, 254 00:12:35,760 --> 00:12:39,180 do you mean 2023 or is it the rate of January, 2022? 255 00:12:39,180 --> 00:12:41,640 - This standard needs to be, 256 00:12:41,640 --> 00:12:44,700 so if you have a December 31st year-end, 257 00:12:44,661 --> 00:12:50,640 you need to be implementing this standard 258 00:12:50,640 --> 00:12:55,161 for your December 31st, 2022 financials. 259 00:12:55,161 --> 00:12:57,240 - Oh, okay. - So if you haven't started now, 260 00:12:57,240 --> 00:12:59,040 that means you are going back to January 261 00:12:59,040 --> 00:13:01,828 and you're figuring everything out back to January. 262 00:13:01,828 --> 00:13:06,161 The reason why so few people have started is because 263 00:13:06,161 --> 00:13:10,860 the standard says you don't have to implement 264 00:13:10,860 --> 00:13:15,960 the standard for quarterly, for interim financials, in 2022. 265 00:13:15,960 --> 00:13:17,828 You only have to do it for year-end. 266 00:13:17,828 --> 00:13:20,400 On a go-forward basis, you'll have to do it 267 00:13:20,400 --> 00:13:23,280 for all of your financials, any financial that you publish. 268 00:13:23,280 --> 00:13:30,661 So we accountants are saying, "Yay, I don't have to do anything yet, 269 00:13:30,661 --> 00:13:31,980 because it's not until year-end." 270 00:13:31,980 --> 00:13:33,828 - Yes. - Now, 271 00:13:33,900 --> 00:13:35,494 but the fact of the matter is 272 00:13:35,494 --> 00:13:37,680 you do have to go back to January 1st, 273 00:13:37,680 --> 00:13:40,661 and that is actually another practical expedient 274 00:13:40,680 --> 00:13:42,000 that is offered by the FASB. 275 00:13:42,000 --> 00:13:45,060 Which is, let's say you have comparative financial statements, 276 00:13:45,060 --> 00:13:47,828 you have two years that you publish every year. 277 00:13:47,828 --> 00:13:50,220 You do not have to restate prior years, 278 00:13:50,220 --> 00:13:51,994 so that's a good thing. 279 00:13:51,994 --> 00:13:56,040 So if you have '21 and '22 on your financial statements, 280 00:13:56,040 --> 00:13:59,994 you can just implement this, as of 2022. 281 00:13:59,994 --> 00:14:03,161 I think, I know of one situation, 282 00:14:03,161 --> 00:14:06,120 where someone went back and restated prior years. 283 00:14:06,120 --> 00:14:10,380 Almost everyone is like, "Whew, I'm not doing that. 284 00:14:10,380 --> 00:14:14,661 I don't care if they're not very comparative for one year, 285 00:14:14,661 --> 00:14:17,994 I'm not restating 2021 if I don't have to." 286 00:14:17,994 --> 00:14:20,940 - For sure, all right, so  there's another type of lease 287 00:14:20,940 --> 00:14:24,327 that I've heard about that I know that this, particular, 288 00:14:24,420 --> 00:14:27,300 implementation affects is called the Related-party Leases. 289 00:14:27,300 --> 00:14:29,040 Can we maybe talk about those a little bit, 290 00:14:29,040 --> 00:14:32,161 especially since it affects the smaller organizations? 291 00:14:32,161 --> 00:14:39,600 - Absolutely, it's actually incredibly common for an organization. 292 00:14:39,600 --> 00:14:42,827 Let's say you have a factory, 293 00:14:42,827 --> 00:14:45,160 and they're some sort of manufacturer. 294 00:14:45,160 --> 00:14:50,160 It is a common practice to have the building 295 00:14:50,160 --> 00:14:54,160 that the manufacturing company operates out of, 296 00:14:54,160 --> 00:14:58,200 to be owned by a slightly different set of owners. 297 00:14:58,200 --> 00:15:04,080 So it could be a parent sold the business to a child 298 00:15:04,080 --> 00:15:06,160 and retains ownership of the building. 299 00:15:06,160 --> 00:15:09,360 Or it could be, I've seen opportunities 300 00:15:09,360 --> 00:15:14,580 where the executive leadership has an opportunity 301 00:15:14,580 --> 00:15:15,840 to buy out the building 302 00:15:15,840 --> 00:15:19,494 and this is just another income opportunity for them, another way to... 303 00:15:19,494 --> 00:15:21,000 that's from a compensation standpoint. 304 00:15:21,000 --> 00:15:24,720 So anything like that where there are transactions 305 00:15:24,720 --> 00:15:26,660 between two separate entities, 306 00:15:26,660 --> 00:15:29,520 but there's a strong relationship between them, 307 00:15:29,520 --> 00:15:30,480 you have to disclose that. 308 00:15:30,480 --> 00:15:32,993 So that's what's important about related parties. 309 00:15:32,993 --> 00:15:35,040 The second thing from a lease standpoint, 310 00:15:35,040 --> 00:15:37,160 that's important about related parties, 311 00:15:37,160 --> 00:15:41,160 is that it may not be very well documented. 312 00:15:41,160 --> 00:15:43,493 So what do we pay it for, how long? 313 00:15:43,493 --> 00:15:47,160 How long are we going to be in this building? 314 00:15:47,160 --> 00:15:48,993 There may not be a lease. 315 00:15:48,993 --> 00:15:53,327 There may be a lease that goes on for a really long time. 316 00:15:53,327 --> 00:15:55,320 So there are so many different things 317 00:15:55,320 --> 00:15:57,300 that can happen with related party leases. 318 00:15:57,300 --> 00:15:59,460 And, so, people are asking a lot of questions, 319 00:15:59,460 --> 00:16:03,327 they're really nervous about  their Related-party Leases. 320 00:16:03,420 --> 00:16:07,660 So the thing that's really important about this 321 00:16:07,660 --> 00:16:12,540 is that Related-party Leases, for the new Lease Standard, 322 00:16:12,540 --> 00:16:19,826 you do not have to try to conjecture what might happen. 323 00:16:19,826 --> 00:16:24,493 You actually go to the legally enforceable provisions. 324 00:16:24,493 --> 00:16:27,780 If there is no lease, you might not have something legally, 325 00:16:27,780 --> 00:16:30,660 but what would be legally enforceable? 326 00:16:30,660 --> 00:16:31,680 So what does that mean? 327 00:16:31,680 --> 00:16:34,920 If you have a written lease, you just look at those terms 328 00:16:34,920 --> 00:16:41,160 and you apply the new Lease Standard according to those terms. 329 00:16:41,160 --> 00:16:43,980 You don't have to think, "Well, we're never going to move, 330 00:16:43,980 --> 00:16:46,140 so this should go on for 50 years." 331 00:16:46,140 --> 00:16:48,420 And now you have this massive lease liability 332 00:16:48,420 --> 00:16:52,860 that really isn't the intent of the new Lease Standard, 333 00:16:52,860 --> 00:16:55,326 not at all, that is not the intent. 334 00:16:55,326 --> 00:16:58,980 So the fact of the matter is, for Related-party Leases, 335 00:16:58,980 --> 00:17:02,100 you look at it and you say, "What is legally enforceable?" 336 00:17:02,100 --> 00:17:04,260 And that can change, people could decide 337 00:17:04,260 --> 00:17:11,159 to change their leases to ensure that they're not, 338 00:17:11,159 --> 00:17:14,040 and really the big thing is not overstating the lease liability, 339 00:17:14,040 --> 00:17:15,840 that's what we all care about. 340 00:17:15,840 --> 00:17:20,659 We don't want this huge liability that skews our books. 341 00:17:20,659 --> 00:17:27,480 And, so, the important  piece of that is to remember 342 00:17:27,480 --> 00:17:30,840 who is the user of your financial statements. 343 00:17:30,840 --> 00:17:35,493 So, if it is, again, to go  back to if it's the bank 344 00:17:35,493 --> 00:17:38,100 is the primary user of your financial statements, 345 00:17:38,100 --> 00:17:40,800 and they understand that  related-party relationship, 346 00:17:40,800 --> 00:17:46,159 and they understand how that's getting reflected onto the financial statements, 347 00:17:46,159 --> 00:17:48,659 that's what's most important. 348 00:17:48,659 --> 00:17:50,220 It's not just about complying with GAAP, 349 00:17:50,220 --> 00:17:52,260 it's that the users of the financial statements 350 00:17:52,260 --> 00:17:55,326 have a clear and transparent understanding of your business. 351 00:17:55,326 --> 00:17:59,220 - Mm-hmm, so I know that  when this was first enacted 352 00:17:59,220 --> 00:18:00,360 or talked about in 2018, 353 00:18:00,360 --> 00:18:03,120 it affected all of the public companies. 354 00:18:03,120 --> 00:18:05,280 So now it's affecting everybody, 355 00:18:05,280 --> 00:18:07,992 if you follow GAAP you have to do this. 356 00:18:07,992 --> 00:18:10,680 Now, let's say you're a small company, small organization, 357 00:18:10,680 --> 00:18:12,326 and you may only have one lease. 358 00:18:12,326 --> 00:18:15,326 You're like, "Oh, I don't need to do that, I just have one."  359 00:18:15,326 --> 00:18:18,159 That would be incorrect for you to think that way, correct? 360 00:18:18,159 --> 00:18:25,380 - Yes, so in 2022 if you have to follow GAAP 361 00:18:25,380 --> 00:18:29,825 and you have even a single  lease, this applies to you. 362 00:18:29,825 --> 00:18:32,580 And the thing that's important to remember about that single lease, 363 00:18:32,580 --> 00:18:34,500 is it's oftentimes your office space. 364 00:18:34,500 --> 00:18:39,825 So it's a material lease, not just a couple of hundred dollars, 365 00:18:39,825 --> 00:18:42,000 but it's usually thousands and thousands of dollars, 366 00:18:42,000 --> 00:18:44,280 and would be material to your financial statements. 367 00:18:44,280 --> 00:18:47,992 So it really is important to make sure 368 00:18:47,992 --> 00:18:50,992 that you're paying attention to this. 369 00:18:50,992 --> 00:18:55,260 I remember one of the very early days I was doing a training. 370 00:18:55,260 --> 00:18:57,325 I was talking about all of this, 371 00:18:57,420 --> 00:19:01,492 going through a whole training about everything relating to this standard. 372 00:19:01,492 --> 00:19:05,100 And the first question was a guy in the back, 373 00:19:05,100 --> 00:19:10,500 he's like, "So, wait a second, does this apply to all of my leases? 374 00:19:10,500 --> 00:19:11,992 What about my vehicles? 375 00:19:11,992 --> 00:19:13,992 Well, what about my equipment?" 376 00:19:14,040 --> 00:19:16,260 He just was sure that maybe it was just real estate. 377 00:19:16,260 --> 00:19:19,080 I'm like, "No, it is all leases. 378 00:19:19,080 --> 00:19:21,780 If it's a physical asset, it's all leases." 379 00:19:21,780 --> 00:19:25,500 So it has been, and we saw this for public companies, 380 00:19:25,500 --> 00:19:29,492 where maybe they just didn't pay as much attention 381 00:19:29,492 --> 00:19:32,880 to operating leases because they just expensed it. 382 00:19:32,880 --> 00:19:35,658 So it didn't really matter if they identified them 383 00:19:35,658 --> 00:19:38,492 when they started looking through 384 00:19:38,520 --> 00:19:40,992 all of the arrangements that they had. 385 00:19:40,992 --> 00:19:45,960 For example, hospitals,  hospitals will use consumables. 386 00:19:45,960 --> 00:19:49,325 So let's say it's a thermometer, 387 00:19:49,325 --> 00:19:52,206 and the thermometer has a little plastic tip on that, 388 00:19:52,206 --> 00:19:53,580 this is back when they actually had to touch you, 389 00:19:53,580 --> 00:19:55,991 put it in your ear or on your forehead, 390 00:19:55,991 --> 00:19:58,980 so that that little plastic tip was a consumable. 391 00:19:58,980 --> 00:20:01,325 You need to dispose of it every single time. 392 00:20:01,325 --> 00:20:04,140 So companies would actually say, 393 00:20:04,140 --> 00:20:06,658 "Hey, if you buy all of those consumables from us, 394 00:20:06,658 --> 00:20:09,158 we'll throw the thermometer itself in 395 00:20:09,158 --> 00:20:11,160 and you don't have to pay extra for it, 396 00:20:11,160 --> 00:20:13,680 if you buy this much in consumables." 397 00:20:13,680 --> 00:20:18,158 Well, guess what, that thermometer actually becomes a lease. 398 00:20:18,158 --> 00:20:21,780 - Wow. - Yes, because it's a physical asset 399 00:20:21,780 --> 00:20:24,158 and you're using it for a period of time 400 00:20:24,158 --> 00:20:27,991 and you are compensating a company for it. 401 00:20:27,991 --> 00:20:31,620 So you got to pay attention to the physical assets 402 00:20:31,620 --> 00:20:35,158 that your organization is using. 403 00:20:35,158 --> 00:20:39,824 Very importantly, it doesn't  have to be called a lease 404 00:20:39,824 --> 00:20:42,180 in order for it to be considered a lease 405 00:20:42,180 --> 00:20:44,491 under this new Lease Standard. 406 00:20:44,491 --> 00:20:46,920 - So you really got to read the fine print 407 00:20:46,920 --> 00:20:49,324 and the rules, and see exactly what it is. 408 00:20:49,324 --> 00:20:55,491 - Yes, so one of the things that, from a resources standpoint, 409 00:20:55,491 --> 00:21:02,040 to, for example, uncover situations like I just described. 410 00:21:02,040 --> 00:21:05,640 We actually have what we call an embedded lease identifier 411 00:21:05,640 --> 00:21:08,220 for free, on our website. 412 00:21:08,220 --> 00:21:12,120 You go to our Resources page and the purpose of it 413 00:21:12,120 --> 00:21:18,660 is to help an organization understand is this contract, 414 00:21:18,660 --> 00:21:20,991 is this arrangement, is this agreement, 415 00:21:20,991 --> 00:21:23,040 is it possibly a lease? 416 00:21:23,040 --> 00:21:25,324 Is there possibly a lease in here? 417 00:21:25,324 --> 00:21:29,520 And you go through five questions and they're not easy. 418 00:21:29,520 --> 00:21:35,324 But it's just five questions, one at a time, with examples of yes versus no.  419 00:21:35,324 --> 00:21:40,200 And at the end you actually can  have a report emailed to you 420 00:21:40,200 --> 00:21:42,600 that says, "Yes, this is a lease." 421 00:21:42,600 --> 00:21:44,580 Or "No, this is not a lease." 422 00:21:44,580 --> 00:21:49,440 And for an organization, this can be a helpful audit tool 423 00:21:49,440 --> 00:21:50,760 to show their auditors, 424 00:21:50,760 --> 00:21:54,300 "Hey, we went through all of our arrangements." 425 00:21:54,300 --> 00:21:59,640 All these different reasons why, maybe I have a regular payment 426 00:21:59,640 --> 00:22:01,560 to a company and I just want to make sure 427 00:22:01,560 --> 00:22:04,500 that is this, or is this not actually a lease? 428 00:22:04,500 --> 00:22:07,324 I've gone and I've done the consideration, 429 00:22:07,324 --> 00:22:10,920 and I know it's not a lease and it's okay that I don't apply 430 00:22:10,920 --> 00:22:12,824 the new Lease Standard to this. 431 00:22:12,824 --> 00:22:16,824 So the good news is there are resources out there, 432 00:22:16,824 --> 00:22:19,657 look at our website, leasecrunch.com, 433 00:22:19,657 --> 00:22:28,324 we have a lot of free tools, and guides, and educational materials 434 00:22:28,324 --> 00:22:32,490 to help people understand this standard. 435 00:22:32,580 --> 00:22:36,490 It's hard enough, leases are complicated. 436 00:22:36,490 --> 00:22:39,420 We don't need to make it harder than it has to be, 437 00:22:39,420 --> 00:22:43,657 so, we really want to try to ease that burden for everyone. 438 00:22:43,657 --> 00:22:45,900 - Well, awesome, well, and I'll make sure 439 00:22:45,900 --> 00:22:47,820 to have those links in our show notes. 440 00:22:47,820 --> 00:22:50,460 So my audience, please make  sure you click those links. 441 00:22:50,460 --> 00:22:52,380 And, Ane, thank you so much for coming on 442 00:22:52,380 --> 00:22:55,500 and trying to break this complicated subject down for us today. 443 00:22:55,500 --> 00:22:58,490 I think we all have probably have a better understanding. 444 00:22:58,490 --> 00:23:00,657 - My pleasure, thank you very much for having me. 445 00:23:00,657 --> 00:23:03,157 < Outro > 446 00:23:03,157 --> 00:23:05,520 - This has been Count Me In, IMA's podcast, 447 00:23:05,520 --> 00:23:08,700 providing you with the latest perspectives of thought leaders 448 00:23:08,700 --> 00:23:10,380 from the accounting and finance profession. 449 00:23:10,380 --> 00:23:11,700 If you like what you heard 450 00:23:11,700 --> 00:23:13,200 and you'd like to be counted in 451 00:23:13,200 --> 00:23:15,490 for more relevant accounting and finance education, 452 00:23:15,490 --> 00:23:22,490 visit IMA's website at www.imanet.org.