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'...