The Financial Accounting Standards Board (FASB) said earlier this month that it’s developing a proposal to delay the lease accounting standard for another year for private companies and nonprofits. FEI Daily spoke with Marc Betesh, CEO and founder of Visual Lease, about FASB’s decision and how software will help companies comply while focusing on rebuilding post-COVID-19.
FEI Daily: Tell me about the big takeaways for private companies on lease accounting from this month’s FASB meeting.
Marc Betesh: FASB is considering extending the deadline for private companies for another year. What was interesting to me is that their reasoning wasn't specifically around the time it takes to get this work done, but was more about having the empathy and understanding that companies really need to rebuild after this pandemic passes. And they didn't want to distract them with focusing on these compliance issues. They thought that compliance, while extremely important, needs to take a back seat to business operations to make sure that people are financially solvent, that they're functioning, that they're returning to normal. This uncertainty has created tremendous disruption in the economy generally, and having to focus on reaching lease accounting compliance is really secondary to restoring the economy to where it needs to be.
FEI Daily: How likely is it that FASB will delay lease accounting for private companies?
Betesh: Very likely. Each member, when they went around the virtual table, expressed their support for an extension. So, I don't think it's going to be subject of much dispute at all. I think it's going to be unanimously approved.
FEI Daily: What are the impacts of a delay?
Betesh: The private market and the reporting from the private market is not going to be consistent with the public market. That's the biggest consequence. There was already initially a one year delay and I think the first year delay was reflective of the concern that they didn’t have the financial resources, they didn’t have the infrastructure to pull this stuff together, and therefore it made more sense to give them extra time. And then extending it even further made sense because FASB realized this is an enormous undertaking. And it still is an enormous undertaking. Nothing has changed. It's just getting spread out more.
The biggest impact is, if you’re an analyst or someone analyzing the financials of a public versus a private company, you're not in an apples to apples comparison. So, that creates a little bit of uncertainty and creates a little bit of disruption. But I think people will get over it. What we're seeing and what we've learned is that this is complex stuff, and it's not just the lease accounting that's complex. What's even more interesting is that now with this COVID-19 emergency, people are scrambling to figure out what their lease says. That's a whole different issue.
FEI Daily: What are the biggest concerns you are hearing from companies?
Betesh: Let's separate out the ‘COVID stuff’ because right now what I'm hearing is, ‘let me get my business together.’ So put that aside.
What we have been hearing is not a surprise to us, and that is that companies don't have their leases under control. It's a big shock to them. And we've been seeing this for 35 years. I mean, we built a business around the inefficiencies created by that.
Just think about this on a micro basis, right? You're dealing with one lease and an issue comes up. The roof is leaking. How do you find out what your lease says? You have to find the lease. You have to find the execution copy because there might be 35 drafts. You have to find the final signed lease, read it, then you have to find all the other ancillary documents. You have to find the amendments and invariably, an amendment is missing. There's a letter agreement that's being referenced in one of the documents and you don't have that letter agreement, and so you don't know what the answer is to the question of who has to fix the roof. You get a bill from a landlord for $50,000. Do you owe it?
Most companies are in their place of business for 15, 20 years. So, you have tons of documents that no one has control over. In some companies you have better control than others. But with the new focus, with lease accounting, financial and accounting executives inside companies are looking at this area as an area of big risk. Real estate traditionally focused on facilities issues, not legal and financial issues.
People don't realize how big real estate transactions are. They're huge. They're multimillion dollar transactions, and the relative lack of control over real estate transactions as compared to other multimillion dollar transactions is glaring. That's really what they're waking up to. And we're seeing this over and over again, as we work with financial executives, accountants and finance people inside companies that are now, for the first time in their careers, really focusing on real estate as an area.
And equipment too. They're looking at the leases and they're going, ‘This is huge. How do we not have the kind of control that we should have on transactions of this level?’ That's really the biggest wake up call. ‘How do we get control over this? We have 20 leases, we have 30 leases, we have 300 leases.’ And every single one of those leases was individually negotiated. Every single one of those leases is different. So how do you get your arms around 50 of these? And have enough understanding of them to be able to manage your risk and manage your financial control. It's a big issue.
Public companies have a lot of resources and they have a lot of this under control or at least under more control than the private sector. The private sector really is in a lot worse shape, and that's one of the reasons why FASB extended the deadline for a year before, before COVID-19. They realized after seeing what happened on the public side, this is an enormous amount of work.
FEI Daily: How can technology help?
Betesh: Repairs and maintenance, or the operating expense pass throughs are all topics within each lease. And these topics have to be organized. So, you can organize your lease information into an Excel spreadsheet, or into a Word document. The difficulty is that by doing that, you don't have a dynamic platform where you can page things, where you can have an audit trail of who changed the summaries, where you can have linkage to the documents themselves.
Wading through the morass of lease language is very slow and very time-consuming. You want to find a way to bring that summary form to your fingertips so you can pivot quickly. And that's where it's really coming up now with COVID-19, is that companies are scrambling to figure out what their leases say. What are their rights and obligations? What happens if they don't pay the rent in May or in April? What are the default provisions? What are the other deadlines that get pushed? We all know the immediate consequences. If you don't pay your rent, you're going to be in default. Bu there are so many downstream consequences, like if you want to sublease your space and you're in default, you can't sublease the space.
I mean, I think landlords are very... Everyone's being very sympathetic right now. But you will have fringe cases where landlords will take advantage and tenants will take advantage of opportunities. They wanted to get out of the lease anyway, and now here's an opportunity.
The real thing that companies need is to get their arms around the magnitude, the scope of this project, and then execute on it. And they need to execute it with proper consideration and proper thought. Because if it takes X number of hours to assemble and read and summarize a lease, and then put it into a system. For one, how many do you have? How long did it take you to organize the documents? Not how many hours did it take you to put the file together. But you send an email to someone, they didn't respond, now you to have to follow up with them because you're missing that second letter that the lease refers to, and you don't know what it says. All of that stuff takes time. And we see companies that take months and months and months to just collect the information. They just don't have it organized. Or where they think they have it organized but when they start digging into the files, they realize they're missing things.
FEI Daily: What surprises are on the horizon for financial executives when it comes to their leases?
Betesh: The pandemic is causing everyone to look at their leases and to look for ways to generate cash. Look for ways to conserve expenses. A lot of deals, a lot of leases will get adjusted. Landlords will say, ‘Don't pay rent for three months, just add three more months to your lease term at the end. Or you can defer the rent for the next three months and pay it over the next two years.’ There are a lot of different ways these are going to change.
Those things require accounting adjustments. Because in the US under, under ASC 842, you don't have to make adjustments to your calculations every time there's a little fluctuation in an index. But if you have a change in the lease, you have to report it. So, all the disruption that's occurring now is going to cause a ripple effect on the lease accounting side. You have to rerun the calculations on all of those leases that get changed. And our system does it.