Ep. 28: George Azih - Lease Accounting Standards

November 18, 2019 | 18 Minutes

George Azih, Founder and CEO of LeaseQuery, was recently named in Accounting Today's Top 100 Most Influential People in accounting. He joins Count Me In to talk about the recent changes to lease accounting standards and how these new regulations ultimately led to his newest business venture. A financial authority specializing in technical accounting and accounting research, George has served as an auditor for banks, insurance companies, and brokerage firms. Prior to LeaseQuery, he performed Accounting Research and Technical Accounting for a Fortune 500 company, where he specialized in lease accounting, sale-leaseback transactions, build-to-suit arrangements, debt restructurings (modifications and extinguishments), asset retirement obligations and purchase accounting. With all this knowledge and experience, George explains how he recognized a business opportunity to help accountants, and also gets into potential future implications with regard to other accounting standards. Listen in to hear an interesting twist on accounting standards!

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

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's going to be a big headache. So that was kind of what triggered, you know my, I guess going down this rabbit hole of solving a very difficult problem. So that's my experience with it. You know, I used to be an accountant that was faced with this problem. And so our solution, lease query is literally really focused on solving this problem primarily for accountant. It's an accounting problem and as such, you need accountants who have experience it to solve it. 
Mitch: (08:57)
Now I understand in addition to these challenges, there are also some hidden benefits that kind of come along with the new lease standards. So what exactly are you doing at least query to enable accountants to unlock these benefits? 
George: (09:11)
Well, that's an excellent question. Everyone sees this as a burden, but then every burden within every burden lies opportunity. Right? And, and the opportunities here are tremendous. As I said, the having a holistic view of all your leases in one place, that is a huge advantage because then you can start to become strategic, right? If you look right now, only 54% of public companies have actually adopted the new lease accounting standards, right? Only 54% that that's a testament to how complex it is. Now, the 54% that have actually adopted tend to see a lot of great benefits, one of which is they now have a holistic view of their assets right there. There are companies out there that are still making payments on things like forklifts or copiers that they have since returned. This literally is going on every day. Companies are making payments on assets. They, they no longer have. Our software helps them identify this and make sure that, Hey, you have a complete inventory of the leases that you do have, the assets that you are currently in possession of. Right. We saved a client $275,000 in tenant improvement allowances that they were supposed to receive, but they never did. Right? There are payment changes that you have to rely on the landlord for, which is, you know, cam for common area maintenance. These are payments that the landlord tells you you owe that if you have, you know, more than 30 locations, you don't, you don't have the, the benefit of Google or the resources to go through and check every single line item that the landlord says that you owe. Right? Our software, once you put that, the lease terms in there, if the landlord tells you an amount that it's different from what the contractual agreement presents, then essentially our software will flag it. So these are all benefits that, that our clients are currently seeing. Right. And you can tell from the reviews if you go online. Does that answer your question? 
Mitch: (11:22)
Absolutely. Now I just want to make sure our listeners fully understand that this is a software company. So tell us a little bit more about the innovative software technology that is out there in today's accounting industry. And really, you know, kind of how you're using it and how others may be using a different technology to improve efficiency across the organizations of the clients that you're working with. 
George: (11:45)
Well, that's excellent because accounting in general is a very conservative, to put nicely is a very conservative profession, right? No one likes a creative accountant and accountants in general do not like change. So it is an industry that is ready for technological advances. There are companies out there that are doing great things. Companies like Flo Cast, you know, for reconciliations, companies like Wachivia for financial support companies like us least query, right? So technology is affecting the accounting profession in ways that gives accountants more time rather than chasing down data to actually analyze data. Right? The, the vast majority of accountants out there spend a lot of time chasing data down and saying, okay, this is how we're gonna comply. And so you resolved, accountants spend a lot of their time in the past. Companies like Wachivia as I said, like flow cast, like, like you know, even even the newer general ledger systems, these companies enable accountants to change data from just being actual data into information, right? There's a big difference between data and between having data and gleaming information from that data and that deals with how quickly you can assess and analyze that data. Right. At least query, we are revolutionizing the leasing industry because we can tell you, okay, you know what, I had a client the other day that told me that we are borrowing rates are spectacular. And I was like, how certain are you of that? Right. And he was like, well, I'm pretty sure that they are. I just know, well, a lot of times you can't just know. You have to glean that data. We've got bobbing rates from thousands of companies, right? We've got over a thousand clients now. And essentially what we can tell you where your borrowing rates lie as opposed to others. You know, obviously we don't share that data, but as a general rule, we can, we can figure out, okay, you know, what companies have the best borrowing rates and where are they getting those rates from? Right? So these are things that we miss. This is data that we have, right? And we can parse and analyze and be able to tell companies, okay, well you think your borrowing rates are great, but they're compared to others in your industry. They're really not that great. Right? So their average or you know, they're all great, right? Either way we can verify the data that you think, you know
Mitch: (14:28)
Now technology in general is really taking over the entire accounting profession and you know, based on the advancements that you've already discussed, if you had to guess what other new accounting standards may be coming down the pike or other change in regulations that accountants, you know, particularly our listeners may need to be aware of coming up in future. 
George: (14:53)
Well I think it, once again, it all goes back to transparency, right? So there's going to be more transparency and not less, right? Essentially what happens here is the FASB and the boards just because of the sheer volume of data that there is out there. The companies want the, I'm sorry, the boards wants to make sure that companies are actually disclosing information that's useful to the relevant users of financial data, right? So things like Goodwill, Cecil, which is accounting for credit losses, all I mean these are all areas that could be improved upon accounting for as I said, Goodwill for software. You just accounting for software transactions, service transactions, right? Items in the cloud. These are all areas that the boards are focusing on. They just released 606 which is accounting for four which was essentially due for revenue recognition, right? These are all areas that the FASB and, and the ICB as we is for gap US gap ICB is international fire for us and even GASB governmental. These are all areas that these governing boards are focusing on and making sure that, okay, the more they get down to the nitty gritty of giving financial users information that's relevant, the more they need. Companies like us software companies that don't transform that data into that relevant information. So with all the rules that are coming out, it's almost like it's a symbiotic relationship as the FASB issues, these rules for companies to comply, companies are going to meet software technology enabled companies to help them with that compliance process because it's not something that you can do alone. 
Announcer: (16:53)
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