Ane Ohm, cofounder and CEO of LeaseCrunch, checks in with an update on lease accounting implementation. She walks us through readiness for compliance, issues affecting debt covenants, and lease modification and concession implications. Does that all get your anxiety up? Don’t worry: Ohm also looks to ease the mind of those stressed out by the approaching implementation deadline.
The PICPA Accounting and Auditing Conference webcast on Dec. 9-10 will also address the impending lease accounting implementation. Review the agenda and register here.
By Bill Hayes, Pennsylvania CPA Journal Managing Editor
No greater compliment can be given to today's guest then the fact that, when we have questions about lease accounting, we know exactly who to call: Ane Ohm, cofounder and CEO of LeaseCrunch. Today, she joins us to discuss the latest info on the date for public firm compliance with lease accounting standards, current numbers on implementation readiness, common mistakes CPA firms make during implementation, and more.
We're going to be releasing this podcast in November 2021. Just for an idea of the urgency here, when is the date for when private companies have to join public firms in complying with lease accounting standards?
[Ohm] This is very important to get right. It's for fiscal years starting after December 15, 2021. So, this coming December 15th. That means the initial date that you have to adopt the new standard is for your fiscal year that starts in 2022. If you're on the calendar year-end, your financial statements at the end of the year will have to include the new lease standard for the entire year of 2022.
Your company, LeaseCrunch, recently conducted a survey of auditors at CPA firms. What did that survey reveal as to the status of implementation of GASB 87 and readiness for compliance?
[Ohm] It's actually for both GASB 87 and for ASC 842. We learned that accounting standards are adopted the same way every single time, which is we wait until the last moment we have to comply.
It's not something where people are really working to get ahead of it. This is a thing … I think it's a really important point. I've been thinking about this a lot and I do think there's another factor that's at play here. The largest CPA firms that have worked with public companies and even software providers, the organizations that we've worked with have had very large lease portfolios. So, the commentary we offer often relates to those very large lease portfolios. We forget, and this is something that the CPA firms we work with they reminded us, that most organizations have 20 or fewer leases and the bulk of them have just one or two leases.
We've developed this narrative that it's going to be a lot of work. I think this is scaring organizations for which this is actually not a huge lift. I think also playing into this is companies are waiting, because it just seems like this big, massive project that's better to delay. One of the things I'd like to do is shift that narrative to assure organizations with just handfuls of leases that this effort's not going to be overly difficult. The sooner they start it, actually the easier it'll be.
What are some common mistakes made when CPAs work with ASC 840, the lease accounting standard, where do they get tripped up?
[Ohm] You know, ASC 840 is the previous standard, if you will; ASC 842 is the new standard, and with ASC 840, it's important because you want to make sure that you've got things tied up under the old lease standard because it makes transitioning to the new lease standard easier. Under ASC 840, because leases were only represented on the income statement, if they were an operating lease, the effort to identify those, they would look at maybe the office leases and say, well, this is material. I'll include this in my maturity schedule, but didn't do a lot of effort to identify embedded leases, for example. Because now these leases are being added onto the balance sheet for ASC 842. They could actually become material, especially if it's a longer lease, even if it's a smaller dollar value, if it's a longer lease that can add up.
I think probably one of the big things is, right now, making sure that you have identified all of your leases. The good news is a lot of stuff hasn't changed, for example. Embedded leases are pretty much the same as they are, 840 to 842, it's just they matter a little bit more now. So, I think that's a big one, making sure that you've identified all of your leases under the current lease standards. When you go to the new one, you are ready to go.
Are there ways that CPAs can ensure that they remain independent when helping clients implement the new lease accounting standard?
[Ohm] CPA firms need to make sure they're independent and yet they are the best experts for their clients on the new lease standard and the new lease standard is a judgment-based standard. Figuring out what that judgment needs to look like, it can be complicated.
I think there's a few different things. Probably the biggest one is making sure their clients have good education early on and really narrow down the information that the client has to collect about each lease. So they can be more successful, have a better chance of being able to collect that information themselves. One of the things, for example, that we do is we allow CPA firms to work with their clients collaboratively in our software so that the clients themselves can actually enter the information, which then they're taking clear responsibility for it while the CPA firm can collaborate, they can ask the right questions, make sure it looks right, but the client is taking responsibility for that.
Another thing is to make sure that any information that is collected, there's a management assertion to the accuracy of data input so that when it gets to what the numbers are on the financial statement, the client is taking responsibility for any inputs that are related to their leases so that the CPA firm can show that they take primary responsibility for it.
Are there any debt covenant implications that CPAs and their clients should be aware of when they're working to implement this standard?
[Ohm] This is a big deal, especially for organizations that have debt covenants with debt, and then those debt covenants with smaller banks, community banks. My conversations with those community banks tend to be that they're waiting to hear from their clients what that lease liability is going to look like. Oftentimes, the way those covenants are written, they don't contemplate an accounting change. So, your organization might not change at all. You could become out of compliance with the debt covenant. The important thing with this is just to get on top of it early.
My experience with banks is banks don't like to be surprised, right? That's probably the biggest thing. Making sure that you start early before you have to report it to them, make sure that you understand the lease liability that's going to be added onto the books because, yes, there is an asset and a liability, but it's really the liability that matters for this purpose.
When that liability is added, you must understand and disclose that to your bank. If there's anything that needs to change about the debt covenant, my experience has been they're generally good with getting ahead of it. What doesn't work as well is if you don't disclose that, you don't work with your bank, you don't do the calculation, and then, bam, you're out of compliance. That puts you in a completely different place with your conversation with your bank.
This is one reason getting ahead of the new lease standard, not being afraid of it, the list is not that great, making sure that from a CPA firm standpoint, that they really are encouraging their clients to work with their banks early. That's a big deal.
How are lease modifications, lease concessions, affected by the new standard? Has there been any complications in those areas as it's connected to COVID-19 and some of the work-at-home restrictions that came from that?
[Ohm] One of the things that happened with the pandemic is that there's been a lot of looking at leases. There was a lot of immediate companies going to their landlord and asking for lease concessions, because they couldn't have anyone there. They don't have any income and landlords granting those. The good news for those situations is that the FASB quickly came out by April 2020, which for them that was within a month, and said that if there is a lease concession that's related to the pandemic, it had to be related to the pandemic and you can show that, that you could consider that just an income statement effect as opposed to having to go through and reassess your entire lease from a modification standpoint. That was a huge benefit, particularly to large public companies.
What we're seeing on an ongoing basis now though, is that organizations are looking at their leases and saying, alright, what do I actually need going forward? This gave us a different view on how people work in my organization and I might need less space. I might need space configured differently. It is leading to real lease modifications and not necessarily pandemic-related, but the future of work, where does work-from-home fit in with the office space that we lease.
You do have to think about. This is one reason why software becomes helpful with the new lease standard because on a go-forward basis, when you have adopted the new lease standard and you have a lease modification, the standard requires some specific calculations that are really hard to do in a spreadsheet. Just something to think about as organizations look to adopt the standard and knowing that modifications will be forthcoming. There's just some complications if you have to do it all manually. That's probably the biggest thing.
Are there any other issues that you think CPAs and their clients should be aware of in the area of lease accounting that we haven't discussed here? What should they be on the lookout for as they move forward with implementation?
[Ohm] I think one of the big things that we've seen more recently as organizations do start ramping up their preparation is that organizations need to be aware of the practical expedients out there that the FASB offers to make things easier. For a transition lease, which is a lease that exists before you have to apply the new standard and transition to the new standard. You don't have to go through a full examination of whether or not this is an operating versus finance lease. You don't have to go through and reassess whether or not you know the right term. There's some practical expedients that make this all easier.
What I see people do is they learn about the new standards and they try to apply these things retroactively. And it's really hard. Because it could be an old lease. I don't have that data available to me as easily as I did. And I hadn't thought about this lease for a long time. Good news is you don't have to. I think my overall message on this is don't underestimate. I'm not saying it's just going to take you three minutes to implement the standard. On the other hand, don't overcomplicate either. Make sure that you are aware of all the things that are available to you to make this easier.