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after a brief pandemic pause, new lease accounting rules will start to hit hard in 2020.
with ane ohm
ceo, founder of leasecrunch
after a delay for the pandemic, new lease accounting rules are set to take effect in 2022 and too many firms and companies aren’t ready, ane ohn, founder and ceo of leasecrunch software tells 卡塔尔世界杯常规比赛时间.
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the lease standard was delayed by a year, ” ohm says, “instead of having been effective this past year, it is effective in 2022.”but the world has changed since the rules were first written.
“the business effect of the pandemic on leases is that people are really reassessing their space and all of the leases that they have,” says ohm. “some people looked at the new lease standard and thought, well, maybe this will change the behavior of individuals. but what’s important is the economic impact, what’s going on in the world. whether it is redecorating, making sure that space is safe, or whether it is changing square footage for a variety of reasons, there’s a lot going on with leases as a result of the pandemic.”
commercial real estate is in flux because organizations just don’t know when or how they want to come back to the office, ohm says. many people want to get back together, but does that space look the same? that’s the fundamental issue and i think it’s going to take some years to figure out exactly what our new in-the-office looks like for all of us.
“cpa firms, i think, are ahead of their clients, which is a good thing because they are the resource for their clients,” ohm says. “cpa firms have been staying on top of the standard. but clients are doing what they’ve always done and accounting standards are not top of mind.”
“if you have a lot of leases, i really hope you look at this soon,” she says. “and if you have any kind of debt covenants, you also need to look at this sooner rather than later because you could have some business impact with your banking relationships.”
transcript
only lightly edited
rick telberg: this is rick telberg for 卡塔尔世界杯常规比赛时间. i’m here today with ane ohm, co-founder and ceo of leasecrunch. ane, what’s going on with leasing standards these days?
ane ohm, leasecrunch: i think the operative word is change. the lease standard is changing for private companies and nonprofit organizations. the non-public companies, public companies have already implemented and at the same time, the fasb is continuing to take feedback and refine the standard itself. really, their focus has been to make things easier as much as possible, but all of this with everything else going on in the world that change is imminent for organizations. it has a huge impact on the balance sheet, knowing impact on the income statement in the united states, but a big impact on the balance sheet. change is coming and the word of the day is be prepared.
rick: what effects are you feeling from the covid pandemic?
ane ohm, leasecrunch: well, the big effect for at least accounting in the accounting world is that the lease standard was delayed by a year. instead of having been effective this past year, it is effective in 2022. the business effect of the pandemic on leases is that people are really reassessing their space and all of the leases that they have. some people looked at a new lease standard and thought, “well, maybe this will change how the behavior of individuals,” but really, what’s important is the economic impact, things what’s going on in the world. whether it is redecorating, making sure that space is safe, or whether it is changing square footage for a variety of reasons, there’s a lot going on with leases as a result of the pandemic.
rick: ane, from your perch, what do you see in terms of the real estate industry, in terms of how it’s affected by covid?
ane ohm, leasecrunch: commercial real estate is definitely in flux because there are organizations that just don’t know when or how they want to come back to the office. work for home has worked, so there is some benefit there that they’re seeing. there are many people who want to get back together but does that space look the same? that’s the fundamental issue, and i don’t think that we’re going to work that out completely until– i think it’s going to take some years to figure out exactly what our new in the office looks like for all of us.
ane ohm, leasecrunch: ane, the standard setters give us a reprieve of one year for the major standard. where do we stand on implementation? are companies and cpa firms up to speed yet?
ane ohm, leasecrunch: cpa firms i think are ahead of their clients which is a good thing because they are the resource for their clients, right? cpa firms have been staying on top of what the standard is, what the changes are, we really do encounter educated individuals within the cpa firms. their clients are doing what they always have done and to be honest, what i did before running leasecrunch, i ran other companies and accounting standards were not the top of mind, right? when things change, you try to fit that in as opposed to maybe getting on top of it proactively. there are those organizations, they’re in the minority, that have started thinking about this, and i’m really glad they have, and really the need for that depends on the size of your lease portfolio. if you have a lot of leases, i really hope you look at this soon. if you have a lot of leases and a bank covenant, some sort of debt covenant, you also need to look at this sooner rather than later, because you could have some business impact with your banking relationships.
rick: what kind of business impact are you talking about?
ane ohm, leasecrunch: debt covenants are written in such a way that they oftentimes don’t contemplate accounting changes so changes to accounting standards. if you have a debt covenant that requires you to have certain ratios with debt and you add a large liability onto the books, you could find yourself not changing your business at all and be out of compliance with that debt covenant at the same time. the challenge with this is there aren’t real standards required or in place from bank to bank to bank, so you really need to make sure that you talk to your bank and know how they are looking at this. larger banks, banks that have public clients that had to deal with this, they’ve made adjustments.
it’s the community banks that are- in my conversations with bank presidents and commercial lenders, they’re waiting for their clients to tell them what the new lease liability might look like because they don’t know, and then they’ll deal with it. the challenge is if we wait too long and you wait until after you’ve had to implement the standard. now you have that on your books, and now you’re dealing with something that becomes an uncomfortable situation. you’ve got debt covenant violations that you’re dealing with as opposed to getting in front of it. that’s really the key there is avoiding those violations getting onto the books.
rick: how urgent is it for cpa firms and companies to get up to speed on it?
ane ohm, leasecrunch: really, honestly, especially if you have debt covenants. the reality is, is most organizations, private companies that are following gap, so many of them do it because a bank is requiring them to, and therefore they probably have some sort of debt covenant out there. even if you have a single lease, it’s not the lease that matters as much as the value of the lease, because if you have office space, so for example, just general generic numbers. if you have a 10-year lease and it has a $10,000 monthly payment, that’s a million dollars that you’re adding onto your liabilities, and that can have a significant impact on organizations’ ability to meet their debt covenants.
it also opens the eyes of the banks to maybe a different way to look at your financial structure, and depending for organizations that are on the edge anyway, maybe they’re closer, this could affect their borrowing rates. that’s an important thing to get in front of. that has always been my experience with banks. they don’t like surprises. they want to know what to expect and they react much better when they are in the loop and what you tell them is going to happen actually does happen.
rick: you started leasecrunch before lease accounting was fashionable. tell us the story about how and why you started the company.
ane ohm, leasecrunch: well, actually one of my co-founders, i have to give him credit. he had the original idea when it was first mumbled that something was coming about lease accounting. he thought, “you know what? i think there’s a thing there.” really, what our perspective on this is it relates to the fact that he and i particularly come out of public accounting. what we saw missing was a solution that the public accounting field could use with their clients, right? our design is different from our competitors in that we can work with organizations directly. we are mostly focused on working with cpa firms because we hear repeatedly from cpa firms that they know their clients are going to need help. we want to take as much of the burden out of this lease standard as possible and make it as easy as possible. that design of working with the cpa firm, that trusted expert along with providing the easiest software in the world like how do we make this as easy as possible?
i know it’s a very new narrow focus but for me, there’s something very fulfilling about knowing that you’re taking something complicated and making it easier for someone. anyone with lease accounting in front of them and like, “oh gosh, how do i do this?” know that there is a solution out there that’s going to make your life better.
rick: how has the world changed for lease accounting and for leasecrunch in the last five years? it’s not the same world it was when you started.
ane ohm, leasecrunch: no, no. there there’s a number of different things that have changed. i think the first thing is that while the fasb when they introduced the new lease standard, they were working really hard to come up with these judgment based standards that are going to help financial statements really reflect the full operations and what’s happening within an organization. totally get it, the revenue recognition being issued just before it was such a big change and took so many resources. then we had the tax overhaul, tax reform, and how late that happened in the year for organizations that just took so much attention. then the new lease standard, that was a little too much.
the first thing that happened is a delay just because private companies don’t have the resources that a public company might. nobody has resources just to dedicate to accounting changes. at the same time, public companies have more resources available to them than non-public companies. the fasb recognized that and said, “okay, we’ll delay a year.” there’s that delay. as much as i want to get going and i see the value of this, i understood that. then we have a global pandemic, hopefully once in a lifetime, never again to happen. that introduced another delay. it also introduced changes to leases, right? how people think about what they’re leasing and why is fundamentally shifting. there’s been a lot of things, not just with lease accounting specifically but the world changing and evolving that’s really pushing the need for lease accounting to change.
that judgment, getting everything onto the books, i think there’s a real value to that. we’re seeing that with financial statement users. they are seeing the benefit of the new lease standard when they’re looking at reading public company financial statements.
one of the things that i found is with all the changes, the need for software becomes even more important because with the new lease standard, there’s some requirements when you modify leases that make it very difficult to properly calculate numbers in a spreadsheet. as people start looking at their leases and making changes to their leases and modifying their leases, it becomes more incumbent that there is some sort of software out there can use and not have to spend all their time figuring out the calculation. they can just get back to managing their business.
rick: leasecrunch now has two main products, the original classic leasecrunch and now leasecrunch verify. what’s the difference and what is verify?
ane ohm, leasecrunch: sure. the leasecrunch classic as you called it, i like that, what you would expect it is to come up with the full lease accounting journal entries, amortization schedules and disclosure reporting for a particular organization. leasecrunch verify is actually comes from direct requests from a number of the cpa firms that we work with. they said, “look, i need a way to be able to test the calculations that my clients come up with because we know not every client, as much as we think they should, not every client is going to use leasecrunch. cpa firms need a cost-effective, simple, reliable, secure way to test their client’s calculations and so we developed leasecrunch verify to help them with that process.
rick: what’s next for leasecrunch?
ane: i think the big thing is to not just help organizations with the new lease standard but to continue to listen to what their needs are and develop new capabilities that respond to those. our passion is around making lease accounting as easy as possible, and we get feedback all the time on ways that we can continue to offer like with leasecrunch verify and with how we can control access to make it simpler so that people know exactly what leases they need to deal with. there’s all sorts of things that we hear directly from our clients and from our users that we can continue down this path of making lease accounting as easy and simple to do as possible.
rick: what’s going on with sb840?
ane ohm, leasecrunch: 840 has been the lease standard for a number of years, many years, and one of the things with it and the reason for the change is that operating leases aren’t on the balance sheet, they’re expensed and because of that, there’s a need to identify whether or not a lease is a capital lease. if it’s clearly not a capital lease, the tracking of that lease, including that lease on the maturity schedule, people really only looked to their very largest leases for disclosure purposes and for tracking. with that, it’s important to note that there are practical expedience available to organizations as part of the new lease standard that helped to get existing leases onto the books in a much more expedient way. again, the fasb is really trying to do things to make it more simple to do this transition.
in order to use those practical expedients, you have to be properly recognizing and identifying your leases now under 840. many organizations are finding that they really hadn’t put the effort in that they ought to. there’s embedded leases, there’s operating leases that they didn’t know about. there is a need for organizations not just with debt covenants, but there’s a need for organizations to identify their leases now before even implementing. it’s nothing to do with implementing so that they have an accurate representation. it’s going to make the new lease standard implementation easier in the future.
rick: what are the key accounting standards regarding leases that cpas must be tracking these days?
ane ohm, leasecrunch: there’s fasb asc 840, 842 is the new lease standard, there’s the international standard ifrs 16, and then there is the governmental standard gasb 87. the key differences between those, there’s a lot that’s similar, there’s a lot that’s similar and that’s good, that’s helpful. there’s key differences for the international standard and for the gasb 87. there is only one lease type in the new lease standard. it is only effectively a financed lease under asc 842. you retain the concept of the operating lease so you have an operating lease and a finance lease under fasb 842.
another key difference for gasb 87 is that gasb is requiring organizations that present comparative financial statements to restate prior years. this is not a requirement under fasb or ifrs. i’ll tell you, i have not seen a single organization decide to elect to restate prior years if they don’t have to. because gasb requires that and because gasb is effective currently, so for years starting after june 15th, 2021. lots of governmental agencies start their years on july 1st. anybody who has the new year starting july 1st, 2021 doesn’t just have to do their lease accounting starting july 1st. they actually have to go back a year. if you wait, you’re going to have a real challenge to try to recreate two years’ worth of financial statements for lease accounting purposes. that’s something that’s really important for people to keep in mind.
rick: ane ohm, leasecrunch. thank you very much.
ane ohm, leasecrunch: thank you, rick. it’s been a pleasure speaking with you.