Ep. 28: George Azih - Lease Accounting Standards

George Azih bio: https://leasequery.com/about-us/leadership/#george
Contact George: https://www.linkedin.com/in/georgeazihleasesoftware/

FULL EPISODE TRANSCRIPT
Adam: (00:00)

Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host, Adam Larson. And for this week's episode, Mitch spoke with the CEO and founder of Lease Query George Azih. This conversation focused on ASC842 and how lease accounting software can help businesses enhance their processes when complying with the new lease standards. George also offers a unique perspective on future changes to accounting standards. So let's go to the conversation to find out more. 

Mitch: (00:35)

I know FASB has issued new standards pertaining to leases recently. What triggered these accounting changes? 

George: (00:49)

Well, Mitchell, thank you so much for, for having me. Essentially it all begins and ends with transparency, right? essentially the boards FASB and ICB are concerned with making liabilities, which by definition mean obligations to make payments at some future time. Making these liabilities actually be reflected on the balance sheet under current gap and undercurrent for us what we have, most leases are called are classified as operating leases and these leases are no longer reflected on the balance sheet as liabilities are. The boards are trying to increase transparency and make financial statement users understand set transparency. And what they're trying to do is make those obligations to make lease payments be reflected on the balance sheets of companies that are, you know, entering the sunset set at least transactions. 

Mitch: (01:51)

And what are the biggest challenges with these new rules? How have accountants been working through some of the challenges to make sure they're complying with these new regulations? 

George: (02:00)

Well, interestingly, there's these three major items, right? One is complexity, the second is time, and the third is completeness. So let's start with complexity. The rules, the new lease accounting standards are 492 pages, right? 492 pages of documentation. Literally these are, I mean it's the fixed stack. So the sheer complexity of the new lease accounting standards is a big challenge. There's also some amorphous or a big use details there, right? Where companies have to, it's not exactly rules-based. So just to predicate this FASB is moving from rules-based accounting. So principles based accounting. Well this means essentially that rather than give you an exact means to explain the way things are supposed to work, they're giving you a general guideline. And what that means essentially is that it's not in black and white, right? So there's a lot of challenges with, first of all, understanding the spirit of what the boards are trying to issue versus the actual way they want you to account for it, right? So the sheer complexity of this standard is a big challenge. The second thing is how much time it takes to comply, right? There's a lot of things that you'll have to go through. Think about a large global corporation or even a small one. Think about the people that are within that organization that need to take part in the requisitions process, which leasing falls under, right? It could be someone in legal, it could be someone in purchasing, it could be someone in supply chain, it could be someone in accounting, right? There's so many people that, that any leasing, any particular lease introduction could could go through. And as such, if you want to capture your entire lease portfolio, these are the individuals that you or the departments, you know, accounts receivable, accounts payable, I'm sorry, not in accounts receivable, but accounts payable. These are the different departments that you have to actually hit. So in a global corporation, it takes a lot of time to coordinate such efforts. Right? The last part is completely it is very difficult for large corporations or even small corporations to determine, okay, what is my actual portfolio of these transactions? Right? It's not just the challenge here is that you don't identify a lease by reading the contract and it says you are leasing this asset, right? There's different things that could be deemed a lease. But in the contractual terms, it never states that it's a lease, right? So companies have this challenge where they have to look at all their contractual obligations to determine, okay, do I have all these, is this the least that should be that should be complied with under topic 842, 842 is the new lease accounting standard, is this a leak that should be followed under 842 or is this a service, a service contract? Right. So, the big three things there are complexity, as I said, time and completeness actually getting a complete look at your, your entire portfolio. 

Mitch: (05:23)

Now what are your personal experiences with these new lease accounting rules? You know, what specifically triggered your initiative of creating a lease query? 

George: (05:36)

Oh, that's a great question. And in my previous life, I used to be, I used to work in financial reporting and in accounting research. And that was my main role. Essentially what that meant is I had to look at what the upcoming guidance is. Upcoming guidance from what's called the EITF is called the emerging issues task force from the, which is a subset of the FASB, and figure out, okay, what are the upcoming rules that they're going to make and how do I make sure that the company gets the preferred accounting treatment? Right? So that was my main role. Now in the same company we, the company had the change auditors and they went from one big four firm to another, and the new auditor said, okay, we're going to take a deeper dive into the financials. And what they did was they looked at every single area to be deemed a risk worthy. And one of the areas they looked at were leases while they pet the pen of the least 10 of the leases at 10 out of 10 of them were wrong. They tested another 10 and tell them the tenor or the world. So basically there were batting, you know, zero out of, you know, zero out of 20 which obviously, you know, is below the Medusa line. So essentially what happened there is that they had to go through and figure out, okay, how do we account for leases in a global corporation? And the chief accounting officer tasked me with teaching the different controllers. I said this was a global organization, how to account for leases. Well, the challenge there was this was accounting for leases under the current at the time, current lease lease standard, which was relatively simple, right on the previously standard was it was topic 840, right? The new standards before the two. So this was accounted for under the easier method, which is 840. Now the boards change it obviously it's 842. And in my role as accounting research and, you know, financial reporting, that in that role, I knew that the boards were changing the rules, right? Going from this easy process to the new co, more complex guidelines. And so I figured, well, if as a company they were having challenges applying easy 840, then by God, when the new rules come and change when the new rules change, then it's going to be a huge headache for them. Right. Once again, batting zero out of 20 under current guidelines when it becomes more complex than it'...