Navigating New Lease Accounting Standards

Today, our guest is Joel Hess. Joel is a Principal at LeaseCrunch. LeaseCrunch is a company which provides comprehensive cloud based software solutions to help companies implement the new lease accounting standards, which is a much bigger deal than I even know, and so today, that’s where we’re going to concentrate on talking with Joel is these new lease standards and actually how LeaseCrunch can help CPAs and their clients with these standards coming up. Joel, welcome to The Unique CPA.

Thanks, Randy. I appreciate you having me. Appreciate it very much. Great to see you again.

Yeah, it’s great seeing you too. It’s yeah, we actually did see each other recently—oh, we were in Park City, Utah.

Yes, still catching my breath. 

Oh, that was unbelievable. I go up three flights of stairs, and I was huffing and puffing. I didn’t realize that we were over 8000 feet high or something.

Yep. I’ve got family in Denver. And it’s 3600 more feet above Denver. Because Denver is 52 Mile High obviously, right? This was 8000 or 8600. But it was, yeah, it took a lot out of me that—it was unbelievable.

It was crazy. So we can talk about that all day. It was fun. It was great seeing everybody there. But now there’s some conferences this year. And actually some more coming up in January, it looks like as well. But so okay, but we can reminisce on the old days. In fact, that’s where you and I originally met was at a conference, probably four or five years ago, 

Going well, actually going back to 2019 is because LeaseCrunch launched in early, mid 2017. And then we finally started going out to conferences in 2019. And this was before the first, let’s call it, the non public delay happens. So there was that scramble because everyone was supposed to be adopting the new standard as of 1/1/2020. And then enough people, both CPA firms and their clients said, hey, you know, we’re dealing with Rev RAC. We need to push this back. In the end, the FASB listened and said, Yeah, okay, you’re right, we shouldn’t be stacking these pronouncements on top of each other like this, and announced a delay for non-public entities to one 1/1/2021. And then obviously, the pandemic hit and the FASB quickly acted in April of 2020. Push the, you know, again, push that implementation date to January of 2022. And that’s what we’re facing, because a couple of weeks ago, the FASB announced there are no more delays. I mean, there was a FASB meeting, No more delays. So CPA firms and their clients are really gearing up to start implementing this as of 1/1/2022. 

So as you and I sit here, that’s like 10 days away, once this, once this is out live, we will be living in a time where these standards exist. And everybody? Well, I’ll ask if everybody or at least certain companies are going to have to comply with it. Give me an idea. I’m a tax guy, I’ve always been tax guy, was not an audit, I did not enjoy audit. I honestly don’t even, that big a fan of doing accounting, but these standards in general, tell me what this is and why it’s a big deal. And why everybody’s, I guess somewhat—your customers, the people that our customers have here, are probably scrambling to get this implemented. Now, what are the standards all about?

Oh, the standards are really about bringing operating leases onto the balance sheet. I mean, if you really want to go back and do kind of, you know, history of why the new standard, I mean, we could take it back all the way to Enron and WorldCom, where a lot of these were off balance sheet. And I don’t want to go into a lot of detail. But I think that was really the genesis of putting these leasing standards in place for organizations to get those future commitments onto the balance sheet and it makes sense. But again, I don’t think anybody was raising their hand or, you know, going pick me, let’s, we got to get this onto the balance sheet, but it makes sense. 

And one of the FASB, well actually last December, I sat in on a FASB roundtable where they’re talking about post implementation review with public companies and some very large private companies that it had implemented. And they all agreed that they actually, it was a good standard—it helped them, you know, help them better understand their leasing commitments. You know, nobody asked for this, but the overall perception is that it was a good standard and it’s being applied correctly. And again, there’s going to be some little things that people are going to be upset about, you know, I only have one lease or I only have a lease and it never changes or never modifies and we get that but that doesn’t change the fact that you’re going to have to, if you’re, if a CPA firm’s client is issuing GAAP financials, they are going to have to adopt to the standard going forward. 

Okay. And so issuing GAAP, is that not just an audited financial statement or reviewed financial statement or just a financial statement in general? Is that a compilation, do compilations still exist? I don’t even know.

Compilations do exist. And I liken the compilation—and maybe I shouldn’t say this, I liken it to George Costanza putting together the Penske file in Seinfeld. Like a review, or an audit that’s being performed, that’s under US GAAP, then yes, then those organizations. You know, as long as it’s material, we could talk about materiality here in a little bit. As long as that lease is material, you know, they should be putting those leases on the balance sheet and then correctly accounting for them.

So by doing that, the whole goal then is just to show this future liability we have and we’ve signed this lease, it’s multiple years and needs to get on the balance sheet. 

Yeah, I mean, that’s a great, simple definition of that. Yes, I mean, and the balance sheet is going to be impacted. I mean, if you take a look at, you know, our most downloaded content piece was a side by side comparison. Under the old standard, you know, the operating lease is not on the balance sheet. You take a look now, and you have a 10 year lease with $10,000 a month payments, I mean, that’s a million dollars right there. And that can, we can talk about banks if you want as well, but some banks are going to look at that and go, Oh, my gosh, you know, this company is out of out of covenants and this company, boy, this is an opportunity for us to exit this industry or exit of this organization. And some banks, again, I’m probably jumping or jumping ahead here, but some guys are looking at this and going, you know, we’ve already accounted for that. No big deal. It’s an accounting change, we’ll make the adjustments, nothing’s changing. Other than this, this is coming on to this operating lease, this building lease is coming on to the balance sheet.

Okay, and when we’re talking leases, it’s not just the property, I mean, not just the building lease, right? I mean, we’re talking if I have a car or if I have a coffee machine, or if I have, I mean, anything, right?

Yes, exactly. I mean, you’re gonna have to and the firms are gonna help their clients get through this to determine, yes, you know, first of all, was that material, but what’s interesting is the FASB didn’t say, hey, you know, here’s the materiality guideline. This is actually a very judgment based standard. But what again, what most organizations are doing is they’re applying their current PP and E guidance to determine materiality. So once you determine materiality, you look at vehicles, look at copiers, look at obviously, the building and the real estate leases, healthcare, oh, my gosh, health care, MRI machines, refrigeration units, you know, some of those industries really lend themselves to a lot of leases. 

And looking at restaurants. I’ll tell a story here in a little bit about, the restaurant industry is fascinating. Because again, they have a lot of these what’s called embedded leases, you know, where it’s embedded inside of a service contract. And I did a demo for a CPA firm, and their quick serve restaurant client on the West Coast back in January, and the CFO was adamant. I’ve got 31 leases, I’ve got 31 Real Estate leases. We were just talking, we’re having a conversation about other services that the restaurant provides. And he’s like, we buy the POS systems. I’m like, okay, POS systems aren’t a lease. And he says, Well, you know, we do have breaks, the arm personnel that comes by to all of our stores every other day, and picks up all of our cash deposits out of their safe. I’m like, Okay, well wait a second. You said their safe. Is it your safe, or is it the Brink safe? He’s like, Well, it’s Brink’s safe. And you know that it’s called a Smart Safe. Well, needless to say, we went through an exercise to determine if that really qualified as a lease or an embedded lease. And it went from 31 leases to 62 leases because all those smart safes qualified as a lease and they checked the box of materiality. So he wasn’t, he was glad I helped him, but he wasn’t really my friend at the end of the day. 

You’re making enemies.

The firm was happy.

Yeah, that’s awesome, we met the standards now. So let’s talk about I mean, this seems somewhat daunting, we got coming up in well, again, in 10 days from when you and I sit here right now, we’re 11 days, and we need to start to implement a program to start tracking these new lease requirements. Well, how do you get going? 

Well, the easiest part is what the FASB has done is they’ve actually put together some of these practical expedients and that’s a word that you’ll hear, these policy elections where you could just basically take your current lease portfolio and not really change anything. I mean, you can, you know, they call it The Rule of Three or the three pack is, you know, something along those lines, each person calls it something different. And they really just apply it to the new standard. So there are these practical expedients that are available to the end user, that’s going to make that transition a lot easier and less daunting. But you still want to be able to capture all of your lease requirements. 

So looking for those embedded leases, going through that contract review, that’s going to be the more daunting task because on average, it takes to review a contract, it takes about 10 to 15 minutes to review a contract. And if you have 10, you know, 100 contracts, you’re going to have to read through those. And what we’ve seen is that on average, between 10 and 15% of those contracts do contain an embedded lease. So it is a worthwhile exercise that they should be doing. But then, you know, implementing the standard, this is where I think software really helps, because those calculations, especially those weighted averages, and those CPA firms that have tried to recreate that calculation, their clients that have tried to recreate that calculation, can find out really quickly that they can get over their head. And that’s where those calculations, you know, in the disclosure are, I think one firm call it a monstrosity.  

Okay, so we need a standard program for implementation, but how do we even identify? So a lot of people that I deal with, because I’m on the tax side, are tax individuals? And so, you know, are they going to be able to identify, are they gonna understand this? I guess their firm might be working on the accounting as well, and the audit, but how does a tax person see what they need to do here?

I mean, the tax individual, I mean, there’s a lot of times where firms, you know, have just a relationship with their clients on the tax side, but they should be aware of the standard. I mean, not necessarily have to be able to apply it. But listen for, asking the question is, how are you handling the new lease standard. Because, you know, they’re gonna take the information from the financial statements, and then obviously, you’ll run through their tax exercises based on that. So you want to make sure that your client has accurate financial statements so that they can properly assess their tax commitments, if you will. 

So just being able to ask that question, you know, how are you handling the new lease standard? How many leases do you have, you know, just being able to have that conversation around very general and not get into specifics, and then being able to say, hey, you know, what, we have a lease accounting group committee inside our firm, or we understand that this is a big deal for you. I’d like to introduce you to our lease accounting leader at our firm. And that’s really that the tax person really has to do—being aware that it’s being implemented now as of 1/1/22. So being aware of that implementation date, and then just being able to ask a couple of questions in terms of how they’re handling it, because it does have an impact on the financial statements for their clients that, again, are issuing those GAAP financial statements.

And I’m gonna be naive here. But when we’re now, obviously, talking GAAP financial statements, and we’re talking tax, there’s probably a difference in the way this is treated. I mean, so you, I’m assuming there’s a tax and GAAP difference.

Yes. And maybe your client, and we’re starting to see this because some CPA firm clients are saying, you know what, that’s it. I’m buying out my leases. I mean, that’s reality, or the other one is, I’m just gonna go to a tax basis accounting, again, they might have to get approval from their banks. But that’s something, you know, that’s been an outcome of the new standard. So, again, you know, I don’t know what that transition looks like, from a tax side. I don’t get involved in that. But it’s something that also the tax partner, or the tax person assigned to an engagement, you know, might, well is that is that feasible? Does that, you know, does changing accounting methods from US GAAP to a tax basis or cash basis—I think I’ve heard also—does that make sense for my client?

Okay. And you had mentioned before, you know, a firm having a lease technical group on staff, is that common or what size firm normally do you see that in?

That’s a great question, Randy. And one of the things that we’ve seen consistently across all the firms that we work with, regardless of size, whether you’re, you know, a top 20 firm according to Inside Public Accounting, or you fall outside that, that top 400, it’s been consistent from firm to firm to firm of having some form of committee or some carve out of a practice or something along those lines. So whether it sits in audit, or client accounting services, or advisory, but it’s been consistent from firm to firm to firm that we’ve worked with, regardless of size, that they have some expertise on staff to help their clients implement this as well.

Alright, so that’s, I learned something there. So we are not obviously, you know, a sales pitch podcast or anything but I think it’s important to see what the solutions are and obviously, LeaseCrunch is one of them. And before I even talk about that, so I had Randy Johnston on the podcast last week, we did a recording, and I asked him his opinion of LeaseCrunch. And it was all thumbs up. So Randy was very complimentary of the software. So obviously your software is your program, you in general are available. And so let’s talk about this, because people need an answer, people need a solution. So how does LeaseCrunch help with this? Or you know, obviously any other ones, but LeaseCrunch is obviously the best.

I appreciate that. And Randy Johnston, I appreciate the shout out very much. So, I think the best way to describe LeaseCrunch is we are purpose built for CPA firms. We do not want to go to market and try to capture every client out there, every direct client. We’re purpose built for CPA firms, first of all. So the CPA firm is then taking this to their clients. Again, the team here at LeaseCrunch, we’ve spent some time in public accounting, I spent almost five years between Clifton Larson, Allen and Grant Thornton. And I saw firsthand how deep that relationship is between the CPA firm and their clients and becoming that quote, unquote, trusted advisor. So that’s the first thing is that we’re purpose built for CPA firms. 

The other thing that makes LeaseCrunch unique, very appealing to CPA firms, is we’re actually the only lease accounting software that allows for client accessibility. So instead of the CPA firm taking on the burden of all the work, there’s gonna be some clients out there that are sophisticated, or have the capabilities to, you know, do some of this work on their own, or they can collaborate with their clients. So you know, these courses are designed with three workflows, the CPA firm, which is unfortunately reality, taking on all the work, the client taking on the work, but then you have that middle piece, where we’re seeing a lot of successful implementations, is collaborating with their clients, or maybe their clients will set up their account, their GL, the reporting entities, and the CPA firm enters in the lease information. And so we’ve seen that relationship work really well. 

And then LeaseCrunch meets all the requirements from a hosting perspective. So we’re cloud based. So it’s not on the client’s premise, it’s not on the firm’s premise. So that we’re checking that box as relates to the hosted solutions, hosted services set forth by the AICPA. And then there’s reports that can be run out of LeaseCrunch that their clients could sign off on as a management assertion, when the CPA firm signs, when the CPA firm is doing all the work on behalf of their clients. So we check those boxes. And that’s, those are some important things that were thought out in the design of LeaseCrunch when we started going to market a little over four and a half years ago. 

Forgive me if I missed this, but I’m assuming it’s everything start to finish? I mean, does it generate like the notes to the financial statement as well? Or how’s that work?

I mean, some of the main reports that get generated, the main reports that the CPA firm clients care about, are their journal entries, their amortization schedules, and then most importantly, the footnote disclosure. To tell a story here, the first time we took LeaseCrunch out to the different Alliance conferences, and our co founder and I were showing lease crunch to a group of ndividuals, and they saw the footnote being generated. And I personally have never seen a high five over or cheering over a spreadsheet. That’s what LeaseCrunch did. I was like wow. Okay, I didn’t expect that. But that’s awesome. 

I think I’ve highfived over some tax things before, so I can relate for sure.  

Yeah, going back to that ease of implementation. A CPA firm, they had a client, a hospital client in Atlanta, with 450 leases. Now I get that this is a little, you know, on the extreme side. But this demonstrates how easy it is to implement LeaseCrunch. Between a manager at the CPA firm, controller and assistant controller, and I believe it was one other, maybe a staff level person that had established, is called a staff level person. They had 450 leases, they had public debt, so they had a deadline to meet. This was at the height of COVID. So think, early Q2 of 2020. And between the four of them, they were able to get 450 leases into LeaseCrunch, their accounts set up in under a week. You know, when I look at what LeaseCrunch is based on, it’s based on two principles, ease of use and flexibility.

All right, well, that’s great. And I can attest that you’re also good people. I’ve had more than one beer with you before in the past too. So anyone I have a beer with, I can tell they’re good people. So before I ask you a final question, any final thoughts on the just lease in general, or you know, this deadline, and people need to be scared if they’re in mid January, and they don’t have something in place and they get nervous, any ramp up you got for anybody? 

Again, the earlier you can start taking this on and really just break this into chunks. I mean, you know, take a look at the first step. You know, okay, our first step, our current lease commitments, what’s going to be transitioning from our current lease commitments to the new standard? Two, take a look at your service contracts for embedded leases. Three, go through the process of evaluating software options. I mean, that’s important, I will say, of every CPA firm again, regardless of size, they want their clients to be utilizing a software, because like I said, those calculations, especially all the weighted average calculations in the footnote, are an absolute monster. And one, if you revise one lease, you know that that’s where those calculations really start to break down. 

And then from there, you know, implement, you select that software that you’re going to go with, ask the right questions regarding that software in terms of accessibility, ease of use, obviously, pricing is a factor, and then start the process of getting leases into your system. And again, it should go relatively smoothly, especially if you’re applying those practical expedients that I talked about earlier. But that will help with the ease of implementation and getting this handled successfully. And then your auditor’s happy and their banks happy and then and then you can take it, take it from there and go into you know, day to maintenance. So whatever that would look like.

Okay, so not too daunting, we can get this done.

Yes, there’s a lot of you know, if you’re out there, you got to get this done now, and you should. But I think that that’s been overplayed, and that’s just my opinion. You should be taking some time out to take a look at this, but also don’t buy into the hype. That is, you know that it is an end all, be all, that this is way too much work. Because the people that have done this and the firms that I’ve done this with, they’re like, you know what, it wasn’t that bad. I mean, it was work, but it wasn’t this tsunami or this wave that we were expecting.

Okay, well, good, good. All right. Well, before we wrap up, I want to ask one last question, which I’ve said this the last couple podcasts. I for some reason went away from this for a while, but now I’m getting back into it because I think it’s important. You know, when you’re not eating, sleeping and dreaming about leases, what do you do for fun? What’s your passions outside of leases? 

There’s a lot of passions that, I am based here in Milwaukee, one of my biggest passions is baseball. I mean, you know, I still play it for the past, this will be my 10th season. I still play wood bat hardball. You know, overhand pitching. I will say as an older gentleman, 90 feet is a long way away. I turn a lot of doubles into singles. Not the fastest guy but I have an absolute passion for all things baseball, and I can’t wait for the new season to start. Great bunch of guys. It’s really, you know, it’s really helped me kind of relax outside of this because, you know, there is so much going on in our industry, obviously. And then the other thing is music, I absolutely have a passion for music. I’ve started a you know, my daughter helped me get back into vinyl collecting. So I guess I could be a hipster, I guess, again. But I’ve turned my basement into a listening room. So I’ve got a nice vinyl collection started that my daughter and I are working on and curating together. And it’s been an absolute blast.

All right. That’s awesome. Baseball and music. And what do you think about the Brewers for the upcoming season?

Well, first of all, I hope, I’m sure they’ll figure it out. The Players Association, the owners, they’ve got some work to do ahead of, you know, for a collective bargaining agreement. But I mean, the Brewers pitching is absolutely stacked, and that’s gonna carry you. They do need to figure out a couple of things on offensive, hopefully, Christian Yelich bounces back to MVP, some semblance of an MVP form, but with the pitching staff that the Brewers have both on the starting and the relieving, they should be favorites to win the division again. 

I would think so. And you know, you’re talking to a Cubs fan here. So I’m, I had my run, you know, five years ago now. And it was very good, but we’re in rebuilding mode. So yeah, I got a feeling the Brewers will be the class of that division this year. So all right. Well, Joe, I really appreciate you getting on. I didn’t mention before, but I appreciate you being part of our virtual conference that we ran earlier this month. I appreciate you getting involved with that. And if anybody wants to know more about you or get some information about LeaseCrunch, how would they get ahold of you?

I mean, the best I mean, we have forms on our website, go to our website, www.leasecrunch.com. We have a contact us form, we’re willing to answer any questions that anybody has regarding the new standard, regarding our software. Leasecrunch.com will be the best place to start. 

And I was navigating around that today. It was a very nice website. So alright, well, thanks again for being here. Thanks, everybody, for listening.