An Overview of AASB 16 Lease Accounting

All right, excellent. Thank you Megan and great to be on with everybody. So we'll start off with a couple of introductions. So I'm Adam Riches and I'm one of the founding members of NetGain here along with Nathan Smart. And so I've been at netgain for about two years. Before that I was at netsuite working at netsuite directly in their finance center of Excellence group where we would focus on all things technical accounting. We worked with the product development team, we worked with the customers that had complex finance and accounting operations and so we really focused all things finance and accounting. And before that I was the controller for a couple of publicly traded companies here in Colorado and started out my career as an auditor with Ernst and Young. So it is great to be on with you this morning.

This is Thinking Smart. I actually started my career right along with Adam. So we spent a lot of time time together early on at Ernst Young. I spent five years there as an auditor and cpa. I spent a couple years closing the books for a large multi a large hospital group and then spent close to a decade with Deloitte Consulting doing a lot of large scale finance transformation which included accounting systems, accounting consulting and overall process improvements. So definitely excited to talk to you about a topic that other people might not get as excited about. But we, we are pretty passionate about accounting and especially Econo.

Yes. And if you do have any questions, feel free to go through. As Megan mentioned on the, on the Q and A there, we are going to have plenty of time at the end and throughout, you know, we'll be monitoring the questions. So yeah, if anything comes up, please, please let us know. I did want to talk a little bit about NetGain. So our company was really built around this new lease accounting standard that came out. So we started with the lease accounting solution which is what we're going to be talking about today. I'm really talking about the lease accounting guidance and the new standard in general. But one of our solutions addresses and helps automate that. We have another solution, the lessor solution which automates the revenue recognition side if you're a lessor. So it's kind of the flip side of the same coin. And then we have our fixed asset solution which is an advanced fixed asset tool that can help automate and manage your tax depreciation and along with your book depreciation and any of the tracking around that as well. And then we have our net loan which is automates the accounting around the principal and interest components of a loan, typically for A borrower, but we also have lenders that are customers of that product as well. So again, we really view ourselves as the cross section between deep technical accounting expertise and expertise on the NetSuite platform. So really, as it says on the bottom, our goal is to simplify, standardize and automate some of these very complex processes that a lot of accountants deal with, typically in Excel. If you're anything like Nathan and I, we used to do a lot of this in Excel. So today we wanted to hit the evolution of lease accounting and talk about how we got to where we're at today with this new standard. And then we wanted to talk about accounting under the new standard, transitioning to the new standard and then also automating it. And then of course, we want to have some time for the, of the Q and A at the end here. So with that, I'll kick it over to you, Nathan.

Excellent. So one of the things I like to highlight, and it gives kind of a context for how we got from where we were up into ASB 16 and kind of this, why this is a big deal and why it's such a significant change. In order to do that, I want to go back in history, not all the way back to double entry accounting, but in. It was around almost 40 years ago where the International Accounting Standards Board, formerly the IASC issued and this was just a few years after the FASB in the US issued guidance around lease accounting. One of the fundamental beliefs and thoughts back in 1982 was around the determination of a contract and whether that contract essentially was a way to finance the purchase of an asset or whether it was a rental agreement of sorts. And so there were these four criteria, bright lines, and we'd use those for the better part of 40 years in determining whether one was a capital lease.

Or an operating lease.

And if it was a capital lease.

It get on the books, it would.

Depreciate and we'd have essentially a debt.

That gets written down.

But operating. The big challenge or the big frustration there is this created off balance sheet obligations. And so if you enter a five year lease, you've got five years of lease payments that clearly contractually you have a liability there. And the challenge for a lot of regulators around the early 2000s was this were some real critique and fraud cases around off balance sheet financing. And so the SEC here in the US as well as the fasb and at that time there's the joint task force. So back I was in college in the early 2000s and there was this big push there Continues to be this push to globalize and create a single accounting standard. So the convergence of standards between us GAAP and ifrs. And so due to with that in mind, the FASB and the IASB initiated their joint project. They worked for three years on it, came to agreement on a few different things. But then you can see around 2013-16 there really was a great split between points of view between the FASB and the iasb. There were a couple of key elements of their considerations that they could not come to agreement on. And what that ended up doing is really creating this divergence around this specific lease accounting topic. So the iasb issued the IFRS 16 and the FASB issued ASU 2016 or which is ASC 842. And then part of this convergence too. And I think this is what's really remarkable about the overall global shift here is this focus on a convergence of accounting standards where we used to have very country specific accounting standards. And if I pick on Australia, specifically.

The.

Australia Accounting Standards Board.

They didn't.

Relegate the entirety of the regulation of accounting to the iasb. But for the most part around most significant accounting, the ASB has adopted IFRS Standards and IFRS 16. AESB 16 is definitely along those lines. I think there's a minor, a minor difference around some non, not for profit little element. But other than that it was entirely adopted IFRS 16 and that was affected 1119. So a lot of you are obviously already live on the new standard. There's been some challenges. And so you know we're coming in right now into our coming out of our first full year audits and I know a lot of folks are having some challenges and I think that was one of the biggest realizations with IFRS 16 that it's more than just the debits and credits. And so a lot of it brought all the assets and liabilities on the balance sheet. Now anything that wasn't operating lease, there's only a single type now, but it is all on the balance sheet as.

An asset and liability. It's interesting, I was gonna crack a joke about Australia, you know, clinging to their old and their own standard. But then I realized that the US worst at this, we were going to adopt ifrs and then that kind of fell to pieces. And we still have our own way of doing it and you know, in the US it's the differences are pretty significant. So anyway with that so I wanted to talk a little bit about the impact here. So there was an estimate, this was just for US so the number is much, much larger. But when we look at what was happening before, where we had, you know, lessor and a lessee, they both offloaded the assets and you know, kind of never really hit anybody's balance sheet. It was a real problem for, you know, the technical accounting snobs that wanted to make sure that everything was accounted for correctly. This was a big hole in the principle. And so the estimate back then was that it was 1.25 trillion, but it's probably closer to 4 or 5 trillion collectively, globally of assets that will now be placed on balance sheets around the world. So the idea is this will provide some greater transparency. There's enhanced disclosures that come along with this. And the idea is that it looks at the economic substance of the agreement. Right. There is a liability that's incurred when you do sign a lease. You do have to pay future consideration for the use of those assets. So that's the big picture shift on this. And we swung from being very basic to the other side of the house where a lot of points of this are very, very complex. And so with that, Nathan, I'll kick it over to you for what the IFRS is doing around Covid.

Excellent. Yeah, unless a lot of folks don't get excited and monitor this. But you know, we've actually had a huge uptick along our customer base. A lot of, a lot of activity around modifications. And in light of our current challenges we're having globally with COVID 19.

The.

FASB here in the US and IASB, both of them concede that something as monumental as a global pandemic and the changes, the lease concessions that are happening right now was not contemplated for in the original standard. And so if you went by the guidance within IFRS 16 any concession. So if we have a lease and then with this, if I am operating a restaurant and my restaurant is closed.

For due to Covid.

The landlord may give me a three month concession and say for three months we won't have.

You pay any rent.

What we'll do is we'll tack that on the back end of the lease. And so a lot of companies working together and what the IASB decided is.

That.

What we want to do is give an optional exemption so everyone can treat a modification as a traditional modification where you would remeasure your lease liability and adjust the difference between your current lease liability and your new lease liability, take that difference and apply it to right of use asset and then recast your depreciation expense on a go forward basis. That is Obviously still allowed for those.

That want to do that.

But what they decided to do is an optional. Where you have a lot of high volume of this. You have the option of exempting yourself from determining whether this is actually modification. What that practically means is that you would take the exemption amounts and you would recognize the cumulative effect of those as an adjustment to your opening balance in retained earnings. You go back and forth. So while it is beneficial that it avoids the need for you on a lease by lease basis to execute these modifications, it does require an additional step to take that impact and make an adjustment to your, to your retained earnings. Where they are right now, they shorten it. So it's only a 14 day comment period. And so that I guess you have one more week if you want to submit a letter to the IASB to get some feedback on that. But I think this does give.

The.

Ability to have some relief from doing such a. A large amount of modifications in mass.

Yeah. And it's in one of the considerations that you want to think about when, when you look at these modifications and how you're impacted by them and what option you want to choose. You can still do the standard modification or this or this modified modification I guess is what we call it. This one is certainly easier to do if you're managing things in spreadsheets. To do a modification in a spreadsheet is a pretty complex exercise and if you have a lot of them, they can be very time consum. So but if you have a system in place, then you may want to consider just going with the traditional modification. I'll walk through one of those in our demo and in the section where we talk about automating it to show how that works in a system. I think again, if you're in spreadsheets and it's a whole different game and you may want to look at this option that they're extending. And there is a question on this too. And the question is about it looks like the Australian National Cabinet Code providing some relief as well, where it looks like there, there's some relief for tenants that are proportionate to the income losses. So it sounds like some of that's waived and some of it's just deferred, which is great because we see a lot of these types of negotiations going on right now and we see landlords giving concessions. But you know, and this one looks like it's. It's kind of a formal process that's been laid out by the, you know, as relief for COVID 19. That is great news for Lessees. It is complex on the lessee side of accounting and it's also complex on the lessor side of accounting. Same thing would apply on the lessor side on the modification. This would come through as a standard modification that it really would help to have a system for. And I'm not sure. Nathan, do you know if this applies to lessors as well? Like this option of kind of a summary modification?

You know, I don't, I don't know the answer to that. That would certainly be worthy of follow up. What the. And you know, the question specifically about the Australian National Cabinet Code and their relief. I want to do a quick confirmation of what the actual accounting and debits credits from that would be. To the extent that, as you mentioned, that it represents a standard modification with an adjustment of terms, then our system would handle that similar to any standard modification currently. So that's definitely something that we'll want.

To look into and get back to.

Those who have submitted the question.

Yep, perfect. One thing too, kind of before we get into the rest of this, this is a big deal right now. All of these modifications that have been coming through, we, we have, you know, across our customer base. So we've, we've heard about it globally, but then within our customer base as well, we get, we've gotten a lot of queries around exactly how to perform the modification. You know, we train them up front and you know, you kind of go through the training and sometimes you forget a lot of the stuff that you go through it. So, so they're reaching back out. You know, we're walking them through exactly how to run these modifications for these leases. This is happening and I think it'll continue to happen a lot for, you know, for lessees and of course it impacts the lessor side of the house as well. So with that I'm going to get into, you know, how do you know if you're impacted first? The, you know, as Nathan walked through the timeline, the deadline to adopt was January 1, 2019. We see a lot of companies that probably, you know, especially smaller private companies that don't only get audited once a year. They don't go through a quarterly review or have quarterly filings, mid year filings. Those companies, a lot of those companies adopted at year end just prior to the audit in going through that. So a lot of them adopted, you know, just, just a few months ago in January, February. And we're actually seeing some who have not, not adopted yet either and that are continuing to convert down there in Australia. So the Question is, how do you know if you're impacted? And I think, I think the question should be reversed. How do you know or how can you prove that you're not impacted? This is really a horizontal problem that hits a lot of industries. It hits some industries heavier than others. But for the most part, the majority of companies lease either the building they're in or at least a copier or equipment that they're using. So a lot of them engage in some form of a lease. And so when the auditors come, if you do not believe you're impacted, it's good to have kind of a formal review or a checklist of things that you did consider when looking at this. And in all the contracts that you're into, fake and to kind of prove out that you don't have any leases. But really, at the end of the day, the lessor grants the right to, or the right of the control of the use of an identified asset in exchange for consideration. So those two things really constitute a lease. Software is one of those gray areas. And I think we're still getting the guidance is still kind of sorting out around software whether software is a lease or whether it's not. So kind of waiting more information. But it looks like, you know, there's conflicting guidance on that. That's kind of out there, that's still being cleared up. So with that, I wanted to kind of talk about what this, this means. And, and so for financing leases, which, you know, previously were capital leases, nothing really changes. You still have the liability on the balance sheet. You've got the corresponding asset. For operating leases, on the other hand, these were completely off balance sheet and now they're moving on to the balance sheet. And so, you know, when we look at like debt covenants that you have that are, that are driven by your asset values or your, or your liability values, we can, there can be a major impact to what those look like and how you report those to the banks. Most banks or PD firms or investment firms are pretty understanding about the new standard. But if you haven't already, it's really good to get ahead of this and get these, get, get the, you know, the impact in front of those, those parties. And then, so that's the balance sheet. But the income statement also has a significant shift in how, how this was recorded on. So, so operating leases would just be a single expense. So if you're renting or if you're leasing a piece of equipment, it would just be rent expenses and that would hit that expense line on the income statement. So then we move to the right and you can see under IFRS 16 or ASB 16 that it's hitting depreciation and interest expense. Which means if you think about the EBITDA calculation, it has completely shifted as a result of this. For companies that are heavy in leasing, this actually is. Your EBITDA will go up as a result because we're pulling out depreciation and interest now where it used to be on the expense side. So again, the way you look at the financials and you may get, you may have already gotten pressure from investors or private equity firms that may want to get clarity into exactly what that impact is from before and after and what that looks like. But the nuts and bolts of the accounting, this is what it used to look like. It was really great. But obviously as Nathan mentioned, there were some that were abusing it. And this is why, you know, we as accountants can't have nice things because people abuse things. And so it went from this now to this where we have to set up that asset and the liability and now we have a five line journal entry to record amortization expense and the interest expense separately we've got that lease liability burned down. Of course the offset to the amortization which would be the accumulated amortization and then accounts payable for the amount of the lease. And of course that changes month over month. So the liability burns down using effective interest and then the right abuse asset gets straight lined over the life of the lease. And so of course they're coming down in two different methods. So you're going to have a net balance kind of in the interim periods. So now we want to talk a little bit about transitioning onto IFRS 16 or Asbury. So I'll turn it over to you, Nathan.

Yeah, one thing I'll highlight, you know, it's interesting. So we've got quite a few customers in Australia and given kind of the, you know, we're so used to the calendar year as a fiscal calendar as well for companies. But you know, given your tax year being so different in Australia, I know it's much more prevalent there for companies to have a non calendar fiscal year. And so we know a lot of folks are coming in maybe months away from their first reporting and filing for this. And so for those of you that have already adopted and have already had your first financials with your auditors, you're probably looking at. And I think the biggest realization that folks have is it's much more than the debits and credits that the disclosures involved are significant. And so, you know, I've worked in my career with a ton of Fortune 500. They have the luxury of throwing, you know, massive CPAs, large accounting firms, big budgets at these kind of projects. But for those of us that are in the medium small, what's, what's really critical about this is coming up with a simple step by step process by which you can as most efficiently as possible identify what the impact is. So what looking at your contracts, seeing what contracts do I have identified assets that I have the right to use and for which I'm paying. And then to the extent that there's the contract review is really the biggest challenge. So really getting a sense across the board of what kind of contracts are out there, doing the analysis on that, coming up with. We obviously are heavy in the system side of things, having a system solution that automates this, but want to just recognize and highlight that the system component is really just one, one piece of that. There might be process changes, there's the validation and then there's the, there's some accounting considerations as well to talk through. And one of the good rules of thumb is early conversations with your auditors making sure that the similarity elections, incremental borrowing rates, those kind of things have been thought of well in advance.

Okay.

And so I think the next what I highlighted, so the DEPM's credits being what they are, one of the big challenges people are having is really when you get beyond a number of leases that you can count on both hands. The challenge is really in aggregating the data. And so there's a lot of disclosures and it's identifying across those various agreements what some of the disclosable information is around renewal options, variable rents, maintenance, terminations, cam the cash flow component. There's a lot of that that is really challenging. And that's where I think all the standard setters back in 201316 thought that this was a problem that could be solved with Excel. I think one of the big takeaways is that getting to the data and aggregating that data makes us really ripe for a system solution to help in that regard. And you know, I had mentioned, you know, the large, large companies, big budgets, ability to throw resources and you know, lease accounting experts at this for the. One of the, you know, thought leaders I think in he runs the accounting tools.com website, Steve Bragg. He says my concern is the smaller companies. There's no way I can see them getting it right. He was talking specifically about US accounting.

So if I have a bias, it's.

Toward the conclusions that reach were reached internationally. I think us may we were so interested on getting the P and L technically right that they forgot about us.

Poor auditors or us poor accountants and.

Us having to take care of it. So it's a big challenge. And clearly, as PwC says, and everybody's noticed that a system and process changes are most likely the result of this.

So I think with that, Adam, I'll come back over to you. Yeah, so I was going to talk about automating the new standard. And so there's obviously a lot of options out there, software options. Obviously Excel is an option depending on the number of leases and the complexity that you have. But I did want to kind of break it up. As we're close to the space. We kind of see three major patterns that have kind of come up over the last couple of years as some of these software providers have adapted or created new systems for this. So start with the first here. So lease management products. This includes really real estate contract management tools as well as lease efficiency tools. These are our tools that are built for real estate management and heavy, whether it's like maintenance or managing CAM charges or managing square footage within those spaces. So a couple of those examples are like COSTAR and Tririga. They're systems that are a few decades old, but they do that real estate management piece. They're very comprehensive in what they can do. The downside is so they recently bolted on the lease accounting functionality to run those lease accounting calculations. The challenge is that's not their core competency. And so these systems tend to be a little bit more difficult to use and very rigid in how they do it. And so you lose a lot of flexibility and you also don't have as deep of accounting on this side. They can run some of the basic calculations, but when you start talking about deep modifications and things like that, they really start to fall short. You should look at one of these tools if you are very real estate or equipment heavy and you are focused on checking the box on managing that real estate and equipment. And the other downside is you either have to build an expensive integration or you have to just export CSV files and upload them as journal entries into your system. The second or least point solutions, so there's a handful of these, these tend to be less expensive, so they're a little more reasonably priced, they're easier to implement. But the challenge that you have here, and some of these were built for the new lease accounting standard and so they're accounting focused and Accounting first. The challenge here is that they'll generate the schedules for you but that's about as far as they take it. You know, you've got to rely on reports and exports to get the data uploaded into your system which is really a struggle when you have foreign currency contracts and things like that that you're trying to manage through. It can be a bit of a headache to manage that back and forth between the systems. And it does take a little bit longer to implement because you do have to, to upload all of your vendor information, you know, subsidiary and your, your segmentation into the lease accounting tool before you can actually get the extracts right. So, so that's number two but the, and these aren't typically as good at the real estate management but they are good at the accounting. And then you have number three. Oh, go ahead One, one.

One other area where I just highlight one and two can be a difficult challenge is on the multi currency. And so you know we, we, we tend to focus a single currency frequently. But for those of you who have multi currency this is a challenge because you know it's, this is really, it requires all the inputs and it becomes essentially a duplicative effort with your core GL and accounting systems to match the foreign currency. And many of them just strictly have opted out from even trying to comply with FX requirements.

Exactly. Yeah. And it can become and that leans on kind of another point too where you have multi cat, you know, where you've got multiple classifications where you may have reporting requirements under US GAAP for certain, you know, certain business unit of your company that may be have operations in the U.S. so that's another thing where one and two are challenged is on kind of multi classification number three. On the other hand these embedded leasing tools, this is where we see a lot of synergy and a lot of benefit. These tools tend to be the least expensive of the group because they are just bolt ons or add ins into your existing accounting solution. An added benefit is the familiarity of using your system. The look and feel is there and so navigation is typically a lot easier. And then the big piece is these solutions take the lease all the way through the journal entries. That includes foreign currency leases. Multi classification Netsuite has multi book capabilities which is embedded into our solution as well. And these look and feel familiar and again take it all the way through. So there's a lot of benefits here that typically easier to implement and you don't have to expand your IT footprint outside of your core GL system. That's the Solution that I'll walk through today, that's our solution is built into the core of NetSuite. If you are on a different solution though, there are certainly other providers out there that have built solutions into some of these other core ERPs. And we're happy to point you in the right direction too, if that's the direction you want to go. But from here I wanted to go over the lease accounting life cycle. So this is essentially the process for a lease. You transition under the new standard and then you commence these leases. You're processing the entries on a monthly basis. If you're steady state, sometimes there's modifications or renewals that come up, sometimes you need to terminate the leases early for whatever reason. Then you get to reporting and your analysis phase. Our solution was built, purpose built to address the new standard. And so on the right hand side some of these are, well, these are all the requirements under the new standard. Some are pretty complex to come back. But we've taken all of the requirements and kind of backed into exactly what you need in order to operate. So I think with that, yeah, I am going to jump in to netsuite here. Let me stop the sharing here and then I will share this. I just wanted to do a kind of a quick run through of setting up a lease and walking through it. It'll give you an idea of what data elements need to be captured in order to automate this and go full circle. But just a little bit of an overview. I'm logged into NetSuite. For those of you who are running Netsuite, this may look familiar. For those who are not, this is, yeah, I'm logged into a full ERP solution. Ours is an embedded solution. So you can see our net lease over here and this dashboard is, you know, kind of our customized version of this built for an accounting for an account accountants role. And you can drag and drop and configure as needed here. And of course we offer the full flexibility that you get inside of NetSuite that you're familiar with. But what I wanted to do was go in and actually set up a new lease to walk through how, how this, how this is done in the system. And so what I'm going to do, I'm going to go in here, I'm going to create a forklift lease for AASB 16. And then the type, this will be equipment type, of course, it's financing, they're all financing. And then let's see now these are going to be sourced directly, the vendor, the subsidiary, the currency, these are all sourced directly from your instance of Netsuite. And then we get down into the accounting information and I'm going to start this on the January 1, 2020. I'm going to do 24 month lease and we'll just do 500amonth and we'll say that there, you know, let's, let's do a thousand dollar initial direct cost that we have to pay a commission to get this lease started. And I'm going to do an uplift for the second year. So I'll do 1121 and then I'm going to have it change from $500 to $600 to show how we can capture those variable payments. This is a piece of equipment. So it's not super common on equipment. It is on real estate, it's more the rule on real estate. And so I'm going to go in and generate my schedule here. And what it's going to do is it's going to build out for the life of this lease for the 24 periods that we're going to have this asset. It's going to build out the schedule, it's going to calculate the net present value of the future payments and to come up with the lease liability. And then of course it's going to take that plus or minus, you know, any of the prepayments, initial direct costs or lease incentives to come up with the, to come up with the right of use asset. So when I refresh here, this should be completed. So if I go down here to the schedule, you can see I've got my lease liability balance for that 12,508 right of use asset balance is the 13,000. So you can see that those initial direct costs add to the right of use asset balance. And then you can see my payment schedule goes from 500 to 600. We've got the straight line amortization and the effective interest method to, to write down that lease liability. So everything is here for me to start booking my entries and moving forward on this. This can also be exported to the, to Excel. And in fact I am going to, I'm going to commence this lease. So when I go back here, you can see that this is now commenced. So when it's in pending status that's in draft mode, you can change it, you can regenerate the schedule once it's been commenced. It is ready for to book journal entries. But what I wanted to show first, and this is something that we recommend for those that you know that are getting ready to go through their first Audit is you can go through and let me get the name of that. It's 2395. I can filter this for. And by doing this I can generate that amortization schedule, but now I can export it into Excel. So I'm going to open this up in Excel and walk through what this looks like and actually let me. I realize I'm not sharing Excel, I'm.

Just going to share my whole screen here.

So you should see this come through. So what this is, is this is the export that we would recommend you send to your auditors. And again, if you don't, if you're going to, if you're planning to adopt an Excel, we're more than happy to provide some of these Excel templates that we've, that we've put together to run these calculations. But what I'm going to do is take the net present value, I'm going to take that rate of 5% divided by 12 and then I'm going to take all those future payments and it's going to get me to 12, 5 08. So if I undo that, you can see the Export value is 12508 and if I redo that with that NPV calculation, you can see it's in there at 125 08. So there's. What I wanted to do this for is to highlight there's no voodoo going on in this schedule. It's very easy to audit and to follow up. So again, it's easy to calculate the interest for the period as well. So you can go in and recalc that and kind of rebuild the schedule in Excel so that you're comfortable and familiar with it. So with that I want to go back into netsuite and back to our lease record. What I wanted to do is highlight. So this is where we created the schedule. This is where most systems kind of stop those point solutions will end. You got the schedule, you got enough information to kind of export things and import it in via the journal entry. But what I wanted to highlight is we take this all the way through. So and of course, you know, we do the short term, long term rate class and things like that to make sure all of the technical accounting is correct. But I'm going to go in and I am going to book my journal entries through March and let me go in and select that lease. I think I got this forklift lease right here and this is going to run the journal entries. Now what you'd usually do, you'd run this wide open across your whole lease portfolio. I'm running it for the just that one lease that we created. And so in here you'll see the full audit trail who did what and what parameters were set to go run this. And when this is completed, if I refresh, it's probably done here. You can see all the journal entries that were booked here as well. So I can drill into these journal entries from here. But I'm actually going to go back to my lease record and refresh this. And you can see here, right on the face of this in our record you can see these journal entries that have been created. So I'm going to go into the. This is the initial balance entry. So this is the one that's setting up that right of use asset and that lease liability. Now remember we had some initial direct costs that were associated with this. Those are hitting this clearing account. Usually those are commissions on real estate leases. So we hit the clearing account so that when the commissions are actually paid out, they may be paid in advance, they may be paid, you know, 30 or 60 days after. Whenever those are paid out, that cash going out will be offset by this rou clearing to zero that out. But you can see we've booked the proper liability and asset amounts here. And then we've got that five line, that massive five line journal entry that's changing every month. We automate the creation of that and so we make it so that from the journal entry you can drill back to the lease record by clicking on the lease here in the header on the line level. So when you're in the financial statements it makes it easy to drill all the way back into the actual lease that's driving those, those journal entries. We're a bunch of ex auditors. So some of the reporting and a lot of the functionality here was, was built to make the audit of this as easy on your end as possible so that you know, you don't have to spin your wheels trying to convince the auditors that it was done correctly. So from here there's, there's a bunch of other things that we can capture here. You know we've got our multi classification schedule. This has all the information like if you have operating lease requirements under US US GAAP and you have these secondary book reporting requirements, we capture it all here so that you can manage multiple accounting standards here as well. And then of course any, any transactions that are hitting this, any vendor bills or any other costs associated with this lease, you could tag them to the lease and you'll see it under the related records tab. Some other Things that we have are our document netsuite has document repositories. You can attach the executed lease agreements, any modifications or terminations you'd see here. And then of course, you've got full system notes that can be captured. One thing that's common on real estate leases are renewal options, expansion options, termination options, things like that. And for equipment, there might be a purchase option. We can capture all of that in here as well. And we can also have notifications go out to notify you when these things are hitting. And I like to use this example where there's a ski resort in Utah called Park City. And I grew up in Utah, so I grew up skiing at Park City. And it was, it was about, I believe it was about 15 years ago and. No, sorry, it was about 10 years ago. I think it was 2011. Park City missed a payment on their lease. So they leased about half of the land that their ski resort was on from a leasing company and they missed the payment. And the payment was $150,000 payment. It had a bunch of auto renewal terms in there. All they had to do was make the payment on time because they missed the payment. The company that was leasing that property out went to one of their competitors and got an offer to lease that same plot of land from Vail ski Resorts for $25 million. And so of course, through this, you know, there were a bunch of lawsuits. But what ended up happening is Park City was forced to sell their ski resort at a highly reduced rate to Vail Ski Resorts because Vail controlled the land that their ski resort is at. So I don't know if we have any ski resort companies that are on the phone here, but in some instances, those key dates and those renewal options can become highly strategic to an organization. And so we can, you know, we've companies that we, they're very focused on that. We have, you know, 90 day warnings, 60 day, 30 day warnings that will go out to management and even the board of directors in some cases. So we do go beyond just the accounting. Just keep that in mind. So if you want to operationalize all this data you're gathering, we can facilitate that as well. But from here. You know, we talked about lease modifications at the beginning and I wanted to talk about the difference between trying to do this in a spreadsheet versus doing a modification here. And there's a couple of types. If you abandon, you know, if you're, if you run restaurants and you decide to shut one down, you may still be on the hook for the lease. But you need to certainly impair that asset. So we can write, and all that is, is writing down the asset, hitting the P and L, the gain or loss, loss. In that case, there's a decrease in scope, which is negotiating down your lease. So if you have two stories of a building, you negotiate it down to one story. That's kind of, it's called a decrease in scope or a partial termination. And then we have the standard modification, which is what this would fall under. And so we had this lease, it's a 24 month lease. But let's say that we were able to negotiate concessions or, you know, there's the requirement that, you know, the lessor is required to give us concessions in this case in Australia. So in that case I want to say that, let's go with April 1st, plug it in down here. So April 1st, 2020, we're going to have zero due and that's going to be for April, May and June. And in July it's going to go back to our normal rate of $500. But we're going to get some concessions for a few months. But then we're just going to, you know, a lot of these concessions end up just extending the contract term for an extra three months. So instead of this, this contract ending December 31, 2021, it's going to end March 31, 2021, and we're going to carry that same $500 payment for those last three periods to make up for what we've missed. So I'm going to go ahead.

2022.

Right. Sorry. Yeah, 2022. Good catch. That's why we do these together, so that we don't. So I'll plug this in as $500 for those last three months and that'll be, you know, effective through the end of the lease from January 1, 2022 to the end of that lease. So with that I've captured the information around this negotiation that we've been able to arrive at with the landlord or the lessor in this case for this equipment. So what the system is now going to do is first and foremost, you know, we have four months of activity that's hit the glass. It's not going to change any of that information that's locked down permanently from an audit perspective that's forever in place. What it's going to do is recalculate the net present value for those future payments, including those three missed months. Now and I'll refresh this to get the table updated. So you can see we're Capturing, you know, for April, May and June, we're capturing that rent concession that taken place. So we're properly capturing that. And this shifted the net present value a little bit. And so you can see it went from 11158 before the modification to 1104 after the modification. And really that's just a result of pushing those payments out, looking at the net present value, what those are. So if I go in, the actual journal entry that's taking place here is going to shift the asset and the liability by that amount, which is $124 in this case. So we booked the journal entry to decrease the asset and decrease the liability. But we've also rebuilt the schedule on a go forward basis. So you can see our amortization amount was 562. Now it's 487 on a go forward basis. And so when we book April's entry, it's going to pick up from this line which is labeled 4.2 over here, and pick up the new information. Go forward. Now one of the things, and I'm sure nobody on the call would ever be guilty of this, but once in a while accountants make errors. And we found early on when we created, you know, this functionality that we had clients calling us scared because they had run the modification and found out that they had, they had, you know, fat fingered one of the numbers or made an error somewhere in that modification. So we have a reverse modification button here that'll undo that entire process and bring this back to before so that you can rerun the modification. Obviously this is something that you would want to, on your permissions in the system, you'd want to restrict this to just those few that you trust to run modifications for you. And of course, you know, we can build workflow and things to make sure that there's proper controls around it as well. But, but now after I've done that, of course, you know, under this modifications tab you can see the modification and what the change was and what happened here as well and take you right into the journal entry that underlies it. So I've walked through a few pieces and I've kind of done the quick version here because we want to save a few minutes for Q and A. But before I drop out, you know, these metrics, these new requirements around disclosures are a pretty big deal for a lot of companies. And so I wanted to show just a couple of my favorite reports that I like to take a look at that help provide some of these disclosures or provide some clarity around the activity taking place in your lease portfolios. So the first one, and I'm going to run this from March through April. But this is a lease roll forward report. This is very similar to a fixed asset roll forward report that you may be comfortable or familiar with that you're providing to your auditor today. I know as an auditor that was typically what we would our go to. And so this shows your beginning balance, any additions, any terminations in the period and then any other adjustment. So we remember we had that modification in April. So I'm going to go in to our assets and I think I put this under the equipment bucket. We can go into that forklift lease that we were looking at from here. I can drill into the lease, I can drill into the journal entry and I've got, you know, quick and easy access to both of those records to take a look at those. So it's very transparent, provides a lot of transparency. But what, what we recommend our customers do is you simply expand the entire listing and then you export this into Excel and send it over to your auditors. That way they can make their selections and then, and then put their request in for, you know, additional detail around it, which is very easy to come by here. So this is my favorite report. But I think because it provides that level of control, you know, when you go through the audit and it provides the visibility that you need for that. This is the expense waterfall report. This is where we get into forecasting and some of the disclosures. This, you know, I set the day parameters and filter by, you know, any of my segments. But I can, I can run this. This is what we're looking at now is for amortization and interest expense to look at your total lease expense. But I can break this out by amortization or interest only and run this. And now we're just looking at the interest expense for our lease portfolio. Again, we can expand this, we can drill into the detail. Very easy to get visibility that you need. And similarly, you've got the lease payment waterfall report. This is just the gross payment. So we're not looking at the expense. This is more for cash flow reporting purposes, to look at your future cash flow, future payments that way. So again, these are just three of my favorites. But we do have a whole host of reports that help you get exactly what you need under the disclosure requirements for the new standards. And then we have some administrative reports and this is where we can get into the, you know, we oftentimes will customize some reports for our customers around specific things they need to know or track on their assets or equipment. So with that, I wanted to pause. We've got about five minutes left for Q and A. And so I wanted to pause and see if there are any questions that we can answer before we wrap up the session today. Yeah. Adam, we do have a couple of questions in the Q and A. The first one here is how many leases the 4 million.