Melissa Waters: Good afternoon, everyone, and thank you for joining us today for they got leases and introduction to the new lease accounting rules.

We have Andrew McCown with LeaseQuery here with us today talking Got Leases? Introduction to the new lease accounting rules.

This webinar is sponsored by JMT consulting and I want to go over a few housekeeping tips. Talk a little bit about Andrew and then I will turn it over to him.

So in terms of housekeeping, we are recording this webinar for you as you will get a copy of the recording as well as a copy of the slides at it will hit your inbox within 24 hours of this event.

If you have any questions at all during the webinar. There's a Q&A box at the bottom of your control panel.

You can submit questions in there and we will answer them at the end. Finally, I want to introduce Andrew, he is a senior manager of technical accounting at lease query.

He works with new and prospective clients to easily understand and recognize how to transition to the new lease accounting standards.

As a technical accountant Andrew is responsible for demonstrating these queries, ease of use, providing user specific functionality as well as offering lease accounting subject matter expertise.

He also assist in ensuring that least queries roadmap and application are constantly evolving to meet the needs of our clients in it, in accordance with accounting standards update

Prior to joining least query. He worked at the corporate accountants and supply chain analyst at a fortune 500 manufacturing company in Atlanta, Georgia. He graduated with a bachelor's in accounting from the University of Georgia. And with that, I will turn it over to Andrew, thank you.

Andrew McCown: Alright, everyone. Well, thank you for joining us. Thank you, Melissa.

For the introduction.

I do want to go ahead and highlight again that JMT is our sponsor.

JMT consulting obviously focused independent innovative and proven, just to reiterate some of the housekeeping notes.

If you do have any questions, please don't hesitate to add those to the questions box. We will be sure to save a little bit of time here at the end to address those questions.

So again, thank you for having us today. My name is Andrew McCown today for the agenda, we are going to as the session mentioned, we're going to introduce you to the new lease accounting rules now.

As you can see it as an overview. We're going to talk about what's changed, and we're going to define a lease and talk about a little bit about the slight nuance differences in the definition of Elise. We're also going to take a look at identifying if there is at least. So we're going to talk about the the steps that you need to walk through one of those is going to be that concept of control, which is a very technical definition.

We're going to lead into embedded leases embedded leases are going to also be something that really has always been around. It's not new to the new standard, but it is getting a lot more attention because of the way the requirements.

Make you report more and therefore some of these embedded leases that you've had in the past may have not gotten the attention and actually not even made it into the prior reporting for leases.

However, now there's going to be more focus there. We will then wrap up with discount rates, which is another hot topic. Again, these are really the, the, the higher the larger hotter topics of this of this new standard

And then finally talk about some myths and pitfalls as least query specifically has been involved in over 1000 implementations of this new standard. So we have a lot of experience seeing what is and isn't true, as we've heard a lot of things leading into the projects and after the projects now to get kicked off.

We do have a polling question.

And I just really want to ask this for everyone's understanding, I'd like to get an idea of where you stand personally as. What do you know about the accounting rules. You don't have a clue. That's why you're here, you know, a little but not need to learn more.

You're dangerous, but wouldn't go on lease accounting jeopardy, or you know everything about the standard will give you about 30 seconds there. And again, this will allow me to understand how technical I can expand on certain topics as we work through the webinar today.

We do have a question is lease query. What is lease query. Is this a marketing session for the tool least query is a tool. This is not a marketing session for that tool, however.

We are going today to talk about the lease accounting standards and what's changing at least query is a solution for the new lease accounting regulations to help with that. But today is not that specific session.

But we'd be glad to help set you up on a session to review the solution. If you'd like to see it. So I think we can take a look at the poll results.

It's looking like we've got a pretty good mix of knowledge here so we'll do a good. We'll do a dive into all the different topics at the at the medium level. I'll say.

So we'll just jump right in. At this point, so again, as I mentioned, we're talking about the new rules. So we're going to begin with the definition of Elise

Now, under the old rules and you'll hear me refer to the old rules and new rules today a lot

That's going to refer to 848 40 and ASC 842 so as the 40 year old as the 842 our new now these are the FAS BS accounting standard codes and the number. Okay so 840 again old rules. A 42 new rules now under the old rules. As you can see here on the slide, Elise exist.

If you had either the right to control the use of an identified asset or you obtain substantially all of the economic benefit under 842

This is actually become an and statement. As you can see highlighted there and underlined. Now that's important.

Because that's going to preclude certain agreements that were considered leases before won't qualify as at least under the new rules and we'll talk a little bit more about that.

So I do want to jump into the identification of a lease

And as we work through the identification of Elise, I want to make sure you know that this flowchart here.

It's available within the guidance. It's available on our website a bunch of different places, but this is something that you'll something like this is something you want to reference as you're getting into the new lease rules.

So why is that. Well, the reason is this flowchart needs to you actually need to assess every single lease.

To determine or every single agreement, you have excuse me to determine if it has a lease because one of the practical expedience

That the boards have given to help us in this transition to the new rules is that you don't have to re evaluate your old leases.

But that is assuming you have already done this evaluation and quite frankly speaking, most people have not performed this evaluation in the past. So it's still best practice to go through this evaluation on all of your leases, even if you're confident

In the ability and the ability to

And the ability to understand

Where the leases lie is this contract. Is this an agreement Elise. So the first thing

The first thing that you're going to, you're going to have to cover. Is there an asset involved. As you can see at the top. Now, if the answer is no.

No asset at all, then you don't have a lease.

So when you take a look at the

The four chart here. The first thing is asset is an asset involved. You say, Yes, we have. There is an asset, it could be a machine. It could be a location. It could be a lot of different things now.

When you take a look down one level you have implicit or explicit identification. So let's talk a little bit about that.

When you take a look at identification, you have the explicit or the implicit and explicit explicit identification.

Is just as it sounds. It is named. So within the agreement machine ABC serial number x, y, z is going to be available that is explicit this bus that floor and the building. All those things are explicit

The last mile for example of a pipeline explicit. But when we talk about implicit. It gets a little more complicated.

What type of asset would be implicit in an agreement, but one example.

Would be a specific type of truck or rail car, for example, maybe you have an agreement with a transportation company.

And you're a food services. Your Food Services Group and you're sending refrigerated goods. Well you know that you're good to have to go on this specific rail car that is has this technology and in it, it must move your goods.

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Andrew McCown: Now in the agreement. It doesn't say all of that, but based on your agreement that is what has to take place. That is an implicit asset. You have the right to use and control and direct the use of that asset.

And therefore,

That's going to be Elise. Now, again, a lease and we'll talk a little bit more about this as we get into the embedded discussion.

An agreement could be a lease. But just because something says it's a lease necessarily at the top of their the document does not make it Elise. So again, it's about the content.

So that's explicit and implicit identification. So now we know what the asset is now we know you know what we are, what do we get access to what are we, what are we benefiting from. So that's the first step. So we can cross that bridge and we can jump back to our flow chart.
So we say yes, we have an asset and at this point we've identified if it's implicit or explicit. Now before we move on, implicit and explicit, we need to understand. Do we have a right of substitution

And again, we're going to take that after we've identified asset and after we've identified the asset, then we must understand that these criteria are met.
Now, if this if this is true.

If these two criteria are true.

Then that asset is not identified. Again, this is the identification discussion here we're talking about we've said it's this asset. Now we need to determine do we control the asset.

Do we directly use

o before we even get into that again in the chart direct use and driving benefits and control does the supplier have the ability to substitute this

And the two things that have to be met that determine if the supplier has that ability or that there are alternative assets available and that giving you the less or, or excuse me, the lessee giving you a different asset to to fulfill the agreement must also benefit the supplier.

What does this mean, so let's just jump into our rail car example we implicitly identified, we had this this

Frozen rail car or this refrigerator rail car that was one of the maybe the only ones are we knew this rail car was going to move our goods and then

The supplier said, you know what we have. We actually have 10 rail cars that meet those specifications and you know the one that we were shipping your goods honor that we

Had implied. We were shipping your goods on that one actually gets down to zero degrees and the one than yours, your container only needs to maintain 30 degrees.

So, you know, we're going to go ahead and take this this implicit asset effectively that you were using. We're going to use it for another job.

And we're going to make more money from it. We're gonna that's going to benefit us. So we are now substituting they have a right of substitution

To give you another asset and that asset that substitution right benefits them.

Now if they could just simply say, well, we have 10 refrigerated rail cars and we can give you any one of them at any time. But there's no benefit to the supplier for it for substituting those effectively, you still have an implicit asset.

So again, these are the supplier here, the less or that you are working with has to have alternate assets available and to make that change with you, it must benefit them.

If it doesn't, you still have a lease. Now, again, a lot of times in the past and the old standards, this is really where the workaround came in, what happened was the less or would say, yeah, we can substitute all this stuff.

And you go, okay. Well great, then we don't have a lease and so that allowed the lessee to get out of it. So again, I want to mention something that came in the, the basis of conclusions. It's number 129 related to ASU 2016 dash 02 which is the leasing standard ASU the update

The basis of conclusion says that really this condition this substitution criteria. It is really meant to help explain that this is a supplier controlled asset versus a customer controlled asset.

And again, this is how you do it. There are other alternatives available and will it benefit them.

So again, now we've talked about the implicit or explicit asset and then if the if the supplier has the right of substitution. If both of those are true. We're going to keep moving. We still aren't sure if we have a lease. But now we get into directing the use and deriving the benefits

So, when we talk about directing the use, the first thing we're going to talk about is control.

So, when we talk about the control test, we want to make sure that customer, as it says here, is able to direct how and for what purpose the asset is used. So, directing how that's directing the use, right, and for what purpose is really leading towards obtaining those benefits right you'll notice here while you will have the ability to directly use direct how something is used

And for what, there are a few things. A couple of them here, that won't prevent. Well, excuse me, won't exclude you from having saying I don't have control. So the first one is, is

I wouldn't say obvious, but after you talk about it sounds pretty obvious the protective rights as a supplier doesn't preclude the customer from having a right to direct the US. So you may have at least have an airplane and they say you can't fly it in this controlled airspace.

Again protective right it's not precluding you from directing the use

Also, if the decisions are predetermine then customer may control the asset, if the customer designed it or if they operate it. So one thing one example here, as far as when you start to think about, well, what is control and what is precluded as control. What's excluded.

Think about a crane. So you may, you may Lisa crane to build a build a project to build a building and in in within that the the company that you lease it from is going to build the crane on your site. They're going to provide the crew to operate the crane.

However, in that crew. They're going to operate as you control as you determine how and when. Now you can't move it.

And and the crane cannot be moved in an unsafe way. You can't say to the crew swing this around here.

If that's not a safe movement. So you know that that is a protective right that the supplier is protecting the crane they're protecting their people, but you have the right to control how and when. So that is still at least you have control. In that case,

So that control part again is very important.

Because it allows you to understand that you have the ability

To control the asset. Again, you now have an asset and and in the new rules. You have a right to use the asset.

Whereas in the past, we just simply had an obligation to pay to utilize the asset.

Now again, that is the control part that is that is directing us. So if we take a step back, we take a look

At our flowchart and we're down. Now we've. We do. We have the ability to direct the use, we do so, along with that, we're going to move down

And we're going to take a look at deriving all the benefits. So again, we're still in this concept of control. Okay.

But, and at any point if we have a know throughout this flowchart it directs us to not having a lease. So we're still in the lease and we're going to walk through. Now, do we get the benefits

What are the benefits

How do you determine that.

So the benefits are going to be your primary outputs and byproducts, just like it says here, it's going to exclude things which would be related to ownership right now.

How much of the benefits

Do we derive all the benefits is what we had in our flow chart. Well, in fact, the language that's written in the agreement or in the standard, excuse me, not the agreement is substantially all

However, the faz be did is a great common service, I would say, I guess if you're familiar with faz be guidance. They did not define substantially all within this guidance.

But they have to find it in other areas and substantially all is a is a concept within accounting and technical guidance that typically means

90% or more

So are you getting 90% of the output.

From any machine any pipeline.

Any data center things along those lines. That's where you've got to think, are you getting all of the output. Are you getting access to substantially all of the economic benefit.

And if you are well then you have a lease again just like we've talked about in the flowchart as we're working through we check all these off. And as we get through. We understand that we have an asset.

We understand that we have the identification implicit or explicit. We understand that there is no substantial right of substitution. Again, there may be the ability to substitute like we discussed, but it would not benefit the supplier, so they don't have that substantial right

We have the ability to direct the use of the asset. And then finally, we're also going to get all or substantially all the economic benefit we have a lease.

For further this conversation. We're going to talk a little bit more now about those embedded leases.

An embedded lease is not a new concept. It is not a new thought. It really is very similar to the embedded lease language under the old rules which again as I mentioned topic 840 however

The entire Old standard did not give the attention to Lisa's it deserved, which is ultimately the reason we have a new standard a 42 which makes everything more clear.

But one of the problems is with the old rules than the old standard, we had the embedded lease information.

We were supposed to evaluate all of our contracts, but because the lease disclosures and the commitments, there's the footnote in our disclosures weren't getting the attention.

That everyone expected or wanted them to embed at least is weren't getting the attention. Why spend all this time reviewing our contracts to determine we owe.

$25,000 more over the next year when that's all that really would have been the impact of identifying an agreement that wasn't a better lease.

However, with the new standard change, we have this massive impact because if you haven't evaluated, your, your agreements and determined that they were even leases from the beginning, from the old rules.

They should be on the balance sheet tomorrow under the new rules.

In which case, you're going to have potentially millions of dollars if not just thousands but millions of dollars that need to be on the balance sheet. You need to have that right abuse asset.

You need to have the least liability. So again, this is, this isn't a totally new concept, but it is new to a lot of accounting groups as the amount of investigation that is required documentation and process that need to be in place to ensure we are tracking and

Accounting for these embedded leases properly.

So the first common question when we start talking about embedded leases as well who hasn't been at least is who functions into this. Well, everybody has that at least is unfortunately

It's really, again, going back to the point I made earlier that if you have a contract and agreement with a firm COMPANY. WHATEVER OF THE LIKES IT MAY any contract, maybe a lease.

Just because it says service contract at the top, doesn't mean it's not a lease or doesn't mean it doesn't have a portion of that agreement that is Elise. So the entire agreement may not be. But there may be areas of the agreement that classify as leases.

Similarly, but different on the other side of that a document may read lease agreement at the top, but in practice and fact it's only a service contract.

So again, it's not so much the title of their agreements as the content. And so when we look at what organizations are impacted

As I mentioned, all now these are just some examples from banking to government entities, when you start to think about it.

When you start to think about, well, where are these when you look at banking you have ATMs. That's pretty identified, but the land ATM SIT ON MAY NOT BE

In manufacturing. You have all types of agreements from warehousing like you see it with logistics. So maybe a warehouse agreement to have store stuff and spend a certain amount of space.

That may actually have a carved out area within a warehouse. So you actually technically have a lease of that corner of the warehouse, things like that.

With an energy oil and gas, you may have pipeline agreements, you may have, and there may be a capacity involved in those. So you need to understand is it substantially all. Are you receiving it here. How much are you getting their

Healthcare, you know, you may have agreements to service a certain machine, right, wow, the agreement may read service, the machine.

You really start to dig into it and you realize

Oh, guess what this this is is a lease, you know, we have an agreement to buy all of the masks from said company.

But the masks only work with this machine or this accessory only works with this machine. So we're going to buy all this from them, but it's because we're using this asset.

And oh, by the way, that that asset is at least now we have asset we have control of it. We use it. It is our assets. So again,

All organizations impacted in a number of different areas. So where do you find them. When you talk about an individual organization.

You really, you've got to look everywhere. You've got to turn, you know, leave no stone unturned

Because again, part of the evaluation and transition to the new rules is making sure that you had a good handle on it under the current rules. And so when you think about that, again, you need to go back and review potentially agreements that have never been reviewed.

So you look at your logistics contracts, you look at your transportation agreements, you look at your warehousing agreements data center.

Right you again, you may get all of the capacity of a data center, a specific data center. And therefore, you actually are leasing this data center.

You've really got to get in the data center ones get really complicated because you when you start to talk about the substance substantive rate of substitution. You've got to talk about, well, does it does it.

Could they switch out this server for another server and that benefit you or benefit them because they can charge more to a different client, things like that.

Those really start to get complex the embedded leases around those types of agreements again ATM, like I mentioned, it could potentially be the space on ATM.

Or the actual machine. So supply chain.

That really catches a lot of these under one umbrella logistics transportation warehousing and such. There's all different types of agreements supplier agreements that are going to come into play that may impact your, your portfolio. So that's important to make sure you're looking at

All areas really of your supply chain and the agreements and contracts that you get into and evaluate those to understand if there is actually a lease.

Within that, and then finally internet another common one. For example, you may move into an office space and you need so much internet, you need a dedicated line. So maybe from the street to your building that is 100% your line for Internet that may actually be Elise

So there's things to consider related to all of the different services that you may be utilizing as a business.

And who should be involved, right. So we're talking about this the embedded lease analysis.

Everybody, I hate to say that

But on certain level. Everyone needs to be aware, I should say, maybe not necessarily involved in the process of evaluation that may be left to accounting or somebody that has control of the contract bank or the contracts within the business.

However, you really need to uncover the areas of the different agreements because a lot of times supply chain will just enter into agreements or real estate will sign a new lease.

Or procurement will make a supplier agreement final before maybe running it through the accounting group to determine if this actually has an implication on the balance sheet. So, you know, a lot of these are things that

Probably never happened in the past and another one of the the problems that we see many companies undertake as they start this project and work through

The project is simply that they don't know where all of their leases are they've never really had a central repository.

A lot of different areas of the business to get involved in leasing practices and again because I sound like probably a broken record, but because the old standard

Did not require as much visibility to the leasing practice within a business, the businesses that did not quite frankly, have a great reason to consolidate everything to centralize everything and to really have a good handle on it.

Unfortunately, when things like Kobe happen and we have these these

Life changing events and business changing quite frankly, we've seen a lot of people

Realize how beneficial it may be to have something in place to be able to forecast spend and things like that, rather than just have

The expenses that come up for these agreements. So again, you really want to make sure everyone is aware, again,

As far as the analysis goes, you're probably not going to have them all involved in that.

But you do want everyone to be aware of the new standard aware of the rules aware of the impact of the agreements that they're entering into and just really educate them on what to be thinking about. Another thing to think about when they're getting into these these agreements.

Just to give you a few key words here. Now again, there's no silver bullet for embedded leases, but you'll see things like exclusive use see words like solely or identification number, things like that, you will see more commonly

And again, that's just going to help you take a, an agreement and say alright this. Let's look at this a little closer.

You know, there's nothing better at the end of the day, I hate to say it, we get questions all the time. How are you, reviewing these what are you doing to

You know, understand that this is embedded. Well, it's a manual process, there are systems out there. There are companies out there that claim to have AI that can release and output. The, the necessary information, we haven't found one that we feel is sufficient enough to trust.

The any that we've reviewed, we still have found errors in and want to again manually intervene. Anyway, so we found that it just be most efficient to know what you're looking for and and process those rather than have a robot do it as

These agreements are so unique and they are not cookie cutter and they are not standard. So, so much so that interpreting meaning.

Gets lost a lot. There's a lot lost in translation. So again, no silver bullet. No magic tool that's you know $50,000 that'll just handle this for you.

Unfortunately, the most tried and true is going to be the manual intervention here the manual review of those agreements.

So that's a little bit on the embedded leases. Again, we walked through how to identify at least in that flow chart.

We also again highlighted some of the nuances here to where you'll find some of these agreements where they have embedded leases.

We also do have least great has a free tool on our website, which you can click through and help yourself identify if an agreement does have an embedded lease.

So we're moving on here, we're going to get into some of the more technical areas outside of identification of the leases and the embedded leases rent talk discount rates.

This is

Well, yeah, I'll go ahead and say this is probably the most asked about topic that we get

And the real reason is the confusion and the difficulty of finding this number and attaining this number and the fact that, again, going back to the standard and the faz be

They didn't do as a great service in

Where we're going to get this information or how but just told us that we need to need to have it so.

We're talking about discount rates one size does not fit all.

As I'm sure many of you are aware

The standard asks for the implicit rate. So you'll see on a lot on the left there the implicit rate is what is

Required by the standard now.

You'll also notice on this screen WCC weighted average cost of capital, with a big cross through. You may be asking why

Well, that's one thing we commonly hear asked about can we use our whack. Can we use our weighted average cost of capital is that number going to suffice. And quite frankly, the answer is just know

This the weighted average cost of capital includes more

Than you should in obtaining that rate you you aren't including that that cost of capital, you need a rate.

That is relatable to

The amount being borrowed or the asset being borrowed the fair value that asset borrowed, not the rate at which your company, your overall company can borrow money.

So, that's out. Now we'll talk a little bit about some of the things we've seen people do. But though the whack is out.

Now I br. That's what everyone should use provided you don't have the implicit rate. Now the incremental buying rate is is supposed to be for for who well it's for or for what I should say pardon, it's for a collateralized loan and the amount of

The fair value of the asset of what you are leasing what you're borrowing.

Now, where do you get that. Well, you're gonna have to go to the bank, you're gonna have to go to a loan officer, you're gonna have to ask somebody say, hey, I want to load. I want to borrow $50,000

For what well for this Ford F 150 okay well you're buying $50,000 for this asset. Well, that's going to be a 4.3% rate. Okay. And that's difficult

And that's something that not everybody has the veil. Not everybody has the ability to

Get that number to ask their bank to understand that.

So one final note to this page is the risk free rate. Now, the risk free rate. As you can see, is only available for private companies. It is one of the practical expedient.

So again, the risk free rate is not available to public companies, they've already adopted.

It is, however, available to private companies and then it relieves you from the need to worry about implicit or the IPR but

We want to talk a little bit more about each of those

Before we get into some of those final myths and pitfalls. So let's let's let's talk about the implicit rate a little bit more and really understand a, what is it and be, why can't or why WALL OR WHY DON'T. Most people use it.

implicit rate is simply as it is explained here present value of the lease payments and the present value of the and guaranteed residual value. The combination of those is going to equal the fair value of the asset. Plus, the less wars initial direct cost. Now that sounds pretty simple.

But what's wrong with this here.

What's wrong with this is we don't have this information.

So yeah, if we had all the data calculating our rate is pretty simple. But if the

Less or were to give you the present value of their of the guaranteed residual they're basically expected residual

And their initial direct costs.

They probably wouldn't be in business.

Because that'd be giving you a great insight or a great view into the margin. They're making on you as a lesser. So while this is and in theory, a great idea to have this implicit rate if less doors were giving this away, they wouldn't be a business.

So again, at times, we've seen it, it happens, there are plenty of agreements where there is a rate stated. And plus it

That is not the, the more common scenario that is the uncommon scenario and most often you'll never be able to calculate it. As you will not have the information necessary to make that calculation.

So where does that take us again we skipped by that whack, because that's not allowed. And let's talk about the incremental borrowing rate.

As I mentioned, this is going to be the rate, the less you would pay to borrow

On a collateralized basis over list similar term equal to the payments and the same environment. So again, that's, that's very wordy but again it's them. It's, it's the rate that a bank or a borrower would would offer for you to borrow that asset. Pretty simple.

In theory, but again, when you start to talk about all of the conversations that you're going to need to have that you're gonna have to ask where you're gonna have to go to get this data. This is something that's just something you Google or fine, right, you have to

Get this number. So, so what what we've seen quite honestly, other than then everyone asking and finding this is a lot of companies have built synthetic synthetic curbs.

And so, you know, with that they've they've built a model that does take into account their borrowing habits and their rates and then they've they've built a curve that they can plot and pick off of based on the term and the value of

The differently since they get into. So that's one thing that some, some companies have done.

But that's the IPR again. That is what should be used, provided you don't have the information needed for the implicit rate which is most comments, so you should find yourself here with the IPR. However, as I mentioned, we did discuss there's that option for the risk free rate.

So when you're taking a look at the risk free rate.

You want to say, well, who can elect this so it can be elected by private companies not public. We do have a question. Referencing nonprofits. Yes. You also can use the risk free rate. So the risk free rate can be elected by non public business entities.

So again, in this case we are talking private companies nonprofits and the ability to use a risk free rate.

Which is, as you can see here, the rate of return of investment with no risk right now. This can't be elected for us so we can throw that one out. This is a gap faz be expedient.

And you'll notice here we also put a resource for these rates would be on treasury.gov. So this sounds great. You've got a risk free rate.

It's easy to find. It's easy to apply. However,

There may be some reasons why you don't want to use the risk free rate. And we're going to talk about those here briefly.

So what's the impact of the risk free rate when we start to think about this. Why would you elect it. So over here on the left.

Well, the obvious one is it prevents having to do the complex calculation for the IPR it prevents you having to ask your bank, it prevents you to having to try to calculate the rate implicit it really eliminates those concerns.

Why would you not elect it. Well, let's think about that. Well, the first one, the liability is going to be higher, you're calculating the present value of your payments, that's a part of this new standard, you're going to have a big old liability and it is going to highlight

How much you oh well.

We know a little bit about present value around here. And everybody in accounting and finance knows when you have a lower interest rate.

You're going to have a higher liability, the higher interest rates going to discount your present value more

So if you're looking at the IPR and maybe four or 5% you say wait a second, my present value my liability is is 10 million. Well, you go to zero percent or, you know, point something percent risk free

About liability, maybe 13 or 14 million. So again, the liability may be higher. And then second to that the company, your company may be, may plan to go public.

And guess what, if you're planning on going public anytime in the future. You're going to have to backtrack and rewind and undo and rework. So even if there's no direct, immediate plans for it. If it's a thought in the future.

You may not want to like that because it's just going to cause so much work in the in the follow up from that. So, again, very, very helpful option great expedient for those private and non public entities, but a couple of things to consider as you're making that election and that determination.

So now we're going to talk about to wrap up here. We got about 15 minutes left.

I am going to leave about five minutes or so, here at the end for questions. So by all means, you know, we've gotten a few questions throughout. So keep those questions coming and we'll, we'll take a look at those and address as many as we can, at the end of the presentation.

But when we talk about myths and pitfalls. I just want to give you an overview of really where we're going to where we're going to go

And again, having, having worked with and helped over 1000 companies to this point through this transition. We've seen a lot of

Problems, but we've seen a lot of successes and we really have seen what's worked and what hasn't. And so again, we're just going to go through the impacts.
The impact of all the pieces are all assets. Is that a myth or pitfall the exemption for low value, which again gives you a little more introduction to some of the nuances.

Is this affecting our debt. How will EBIT da be impacted and that we've got a lot of time left to get ready for this. So let's go ahead and just jump through these

First one.

The scope of this the new lease accounting standards impacts all leases of all assets.

Well this one's

True, but there's some false, which some false do it I guess there are certainly does that get excluded. So it doesn't include all leases unless

You're in tangible

Or short term.

So intangibles as well as

Living assets. So as you can see, timber livestock, things like that. Not going to be lease, however.

You will exclude those you'll also exclude short term now short term is something that we get a lot of questions on and we didn't include it as a part of the changes here.

Because, again, this is sort of under the lines of, it's not really changing as much. So as the attention, that's being brought to it is is as important as a lot

Any least that is less than 12 months or 12 months or less as a commencement.

Is going to continue, just to have the 840 accounting treatment where you straight line and don't have to create an asset and liability now.

The common question there is, well, what if I have a 12 month lease that I just continue to auto renew and that's very common that question is easily addressed. There is an area of the standard that says if you are reasonably certain that you will renew

That needs to be included in the term and therefore your term is not short it is not 12 months. So that's a quick PSA for that one.

It's really where most people are trying to play games in that clause. They're really prevents the ability to play that game, so to speak, where you just have a one year agreement for everything and renew it so

All these are included with a couple caveats. That's not a man. That is the truth for the first one.

Now the myth, the second myth here.

Is that there is a low dollar value or their low dollar values can be excluded for for PR 842 that is totally false. There is no materiality threshold within the 842 standard

There is a materiality threshold within accounting in general, everyone's aware of that and there is also one in the international lease accounting guidance, which I believe is part of the reason why we get the question so often. What is the threshold with

faz be a gap. Now again, as I mentioned, I'm not sitting here to say materiality doesn't exist. And there aren't thresholds to be set up, but there is no explicitly stated

Threshold and 842 so company by company case by case, you can make those determinations. You can get those understandings and you can really define

What that threshold is or isn't going to be

The three coming up here that 842 is going to expand my debt.

So we've briefly talked, and again, most of this has been about the changes to identifying the lease.

But at a high level. We've mentioned you're going to bring the liability and you're going to bring an asset on your balance sheet related to those leases that you never had before.

So the immediate thought is, oh my goodness, my ratios my debt covenants everything are going to be out of whack.

That's not true. Now there are some caveats, and we're going to talk about those here but at the ultimate at that statement that's a false myth. It's just simply not the case, why well

This is why 842 operating lease operating liability. So it's stating that we're not going to include those in debt covenant financial ratios now finance leases. This has not changed again.

I feel like a broken record and to some extent I am under the old rules. We had a finance least under the new rules, you're going to have a finance least that is not changing.

So that continues as is there shouldn't be any effect of the new standard changing the debt there now. All that said, to say

What do you need to do to ensure this doesn't happen again, as I mentioned, this is, this is the facts.

But at the end of the day, you may include some of those things. And those ratios, you may have already believe it or not, your, your loan company, they may have already calculated some sort of liability that that they're using from your commitments. So when we take a look

At this, I want to, I want to mention that many loan agreements and arrangements contain frozen gap clauses. So if there is a change in gap.

A change in the financials related to change in gap, it won't constitute a default or will require both parties to negotiate. So that is something that is an option that you may want to look out for. You may want to review your covenants and check on that.

What we've seen what we've seen from the, the fact of the matter is that private companies, less commonly have that type of information in their agreements, so be sure to review those again, if this is

Going to change any ratios are leveraging get ahead of it. I want you to make sure that you know that this isn't going to impact you.

And the only way to do that is to really get into the weeds here and really start to understand how is this impacting my financials. How is this, how is this going to affect those ratios, if at all.

So again, you got to get into the leases, you got to get into some of these calculations and quite frankly, you probably want to do this even before these calculations need to be reported. Again, we talked about the timing of all this, and we talked about the

The ability to understand this, for example, and say, Listen, this needs to be reviewed. You need to talk to your, your finance department you talk to your CFO, whoever that may be the controller, you know, make sure that you've got a handle on this so you don't come across any surprises.

And then the fourth myth which is EBIT da. Now I know a lot of you aren't necessarily tracking EBIT da. But for those of you who are usually similar measure earnings before interest. Taxes, Depreciation, and Amortization

It's before all of those things right.

It's not going to impact it

There is no direct impact to the EVA da. Now that is precluding you'd had no changes and classification again.

Old standard new standard how it was classified under the old rules can maintain that exact same classification, provided it was correct. So when you transition to the new rules. There should be no impact on EBIT da

However, as leases do get renewed as leases do get reviewed. If you come to the conclusion that they need to now that classification has changed or something has precluded a change in the

Lease that may impact EVA da but that is not because of the standard. Okay. Just, just to be clear on that. And then finally, the last myth.

Is that you have plenty of time. Now I will, I will give you this. You have a lot more time than you ever had you. Well, that's true. And it isn't true at this point.

The standard originally was set to go into place at the end of last year and that got pushed back in the middle of last year for private companies till the end of this year.

Well as we're all aware, we are in a very unique situation, having to deal with the pandemic and that has caused the fast me

To forgive more times to allow more time. So now, rather than

Implementing it right now, quite frankly, and being ready to go here at the beginning of next year, you now have until the end of next year, which is great.

From the standpoint of, now you have time I maybe I should have changed this as I the the myth, the myth is that you don't have that you have plenty of time. The truth is that you have time, not necessarily plenty. So whether you like it or not, the standards are coming

It's imperative to get started. Hopefully, as we've talked through some of the differences. Today, you realize there are a lot of questions that you need to ask before you really get into the weeds of the new standard

There's potentially a team, you may need to pull together or areas of your business. You need to reach out to or you need to survey and you need to say

Let's get, let's get a handle around this. Maybe this fourth quarter is a great opportunity to start those surveys, because, you know, guess what, now that we have been afforded this time.

We don't have to have it ready before the end of next year, but we can prepare now so that say at the end of the

Year End and once we come up for air at the beginning of 21 we have a nice plan in place to tackle this project over the next six or eight months to lead into the end of the year.

So that's the final myth. Again, you have plenty of time. But the time that you have is going to go quickly and we haven't seen anybody solve this

I would say quicker than anticipated in the past, it always takes a little more time than you'd expect, whether it be analyzing those different specific leases or reviewing the agreements to determine you already have the correct calculation and everything that goes with that. So again, there are a lot of steps that go into this

In a lot of different areas. So for the final polling questions. I did want to mention or ask, would anyone or when would you like to review the least query solution.

Immediately would be in the next month or so soon would be before the end of this year to help plan for next year. If there's an incentive to see the demo, I'd probably take a look. Never. I'm not interested in seeing a demo of the solution or never, I never want to see a solution there.

So that is going to be the end of our presentation.

We can go ahead and everyone please answer that poll. I did want to mention if anybody did answer if you would like to give me an incentive to see the demo.

I would love to offer $500 off if you see a demo before October 16 if you would email Adam weights at least great calm.

And reach out will also be sure to follow up from this webinar with the recording. But I do as we are at the end of the time. Here we have a few minutes, I want to take a look at some of the questions. So we do have a couple of questions here.

Obviously, some of them are housekeeping. One is, will the slides be provided. Yes, we will be sending those out as well as the recording.

The nonprofit.

That was a question asked about, would you be able to use the risk free rate that absolutely is the case. We had a question about the balance sheet. So how will this look on the balance sheet that is a really good question.

Quite frankly, it's not as easy a question to answer within the time that we have, however,

I will say that

Within a demo, you'd be able to see that we can also have a ton of content on our website that is very educational. We have a resources page.

Where you can take a look at a example, start to finish of the new rules and actually get numbers to those numbers to paper so you will you will be able to to understand

That that is definitely something that's definitely something that we'd be able to show you and highlight. So we'd be glad to do that on a demo.

So that about wraps the webinar up today. Again, I do want to thank everyone for joining us. Just final housekeeping. If you have questions, please don't hesitate to reach out to myself. Andrew McCown or Adam weights.

Our contact information will be within the deck here. And finally, I would just like to thank JM T consulting for allowing us to participate in this webinar and present to you all today.

We really appreciate the opportunity and we look forward to working with any of you as the as the opportunity permits. So thanks for joining us and have a great day.