An Overview of IFRS 16 Lease Accounting

Welcome. Yeah. To this session on ifrs. We're excited to walk through it today. So I'm Adam Riches and I, along with Nathan are one of the founders here at NetGain. I've been here for about two years and before that I was at Netsuite for four years in the Finance center of Excellence and we would work with the NetSuite product team on technical accounting issues. We'd work with customers that had complex finance and accounting operations and, and really focused on all things finance and accounting. And before that I was the controller for a couple of different publicly traded companies and started out my career as an auditor, which is incidentally enough where I met Nathan. So get over to you.

Yeah. Hi everyone, this is Nathan Smart. Pleasure to be talking with you today about one of our passionate topics. But yeah, I started with Adam and R.C. young as a CEO, CPA and auditor, spent five years there, a couple years closing the books for a ten $12 billion hospital group and then spent close to a decade with Deloitte Consulting doing a lot of large scale finance, transformation, accounting, adoption and systems implementation projects. And so excited to be talking with you today.

Right. And I wanted to give a little bit of an overview of NetGain before we dive in. So we are a company that's. That builds suite apps for NetSuite customers. So our. We've got four key solutions that are all built for NetSuite, all embedded solutions. Right. In the core of your NetSuite instance we've got the Net lease product which, which is related to our topic today, IFRS 16. We've also got the lessor solution that's the other side of that, which is the revenue recognition side. We won't be diving into that side of the new standard today but, but we do have a solution for the Revrec side and then we have our ass which is advanced fixed assets inside of NetSuite which can manage your intercompany and some very complex transactions that way as well as any type of depreciation under the sun, including makers tax tables as well. And then we have our Net loan solution which is really accounting for loans, the principal and interest portions of the loans outstanding from a borrower's perspective. So we are. Yeah, again, glad to be with you today. And our agenda, we're going to talk about the evolution of lease accounting and then of course accounting under IFRS 16, transitioning for those who may not have transitioned yet and then how you can automate that with the different tools that are out there. We'll highlight ours but just know that, you know, a lot of the system tools are out there to help, to help make this easier for you in the transition. And then we are going to leave some time at the tail end for Q and A. And hopefully we leave plenty of time so that we don't end up going the whole hour and maybe end a little bit early here. So with that, I'll kick it over to you.

Thanks a lot.

So we wanted to give a bit.

Of context and I know we're talking about AFRS 16, but I think it's great as we think about lease accounting, to think of the broader landscape of accounting itself. So we will go back in time, not all the way to Italy and then, you know, 14, 16, hundreds, but we'll talk about. So how accounting has for leases has kind of progressed over time. And so the long and short of it is IASB 1982. This is a few years after the FASB issued their equivalent standard. That was an accounting standard that has been in place for international accounting standards for essentially 40 years. And so up until the early 2000s, there really was no substantial, just slight tweaks, interpretations and so forth. But really in the early 2000s here in the US but also globally, there was a lot more scrutiny about off balance sheet financing. And so the basic underlying premise prior to IFRS 16 was that there was essentially a bright line of four criteria approach to say, is my lease a capital or an operating lease? And really the underlying crux there of those four questions is saying, am I in effect financing a purchase of an asset or am I renting an asset and incurring monthly expenses associated with that? And so early 2000s, a lot of focus on the convergence of IFRS standards. The FASB and the IASB joined up together to create a joint project on leases. So they issued in 2009 their preliminary views. The challenge coming out of it is there was complete agreement in principle that if you enter a three year lease agreement, you have a liability, your contractual liability, to pay those payments. And so everybody agreed that's a liability. And then what's the offset? The asset is you have an asset, a tangible or an identified asset, and the right to use that asset, where they unfortunately differed is really in the trade off between the ease of implementation or the ease of managing with the P and L impact. And so we'll chat really quickly where those diverge. But there was, there was the great schism of 2010, 2013 where we went back to two pumps. And so now 2016 is when IFRS 16 and effective January 1, 2019, IFRS became effective. I know for a lot of companies there was a lot of work going into it, but I think what has clearly been evident in the adoption of that it was a bit more effort, a little more work, and what everyone thought could be on spreadsheets might need a little assistance from software tools as well. Yeah, excellent.

And then the impact of this, and this was a 2005 estimate, a very old estimate, but the estimate was that there were just here in the US that there were $1.25 trillion in off balance sheet financing. So this is huge. And for the accounting purists, it's very bothersome that the lessor, you know, accounts for it one way and the lessee accounts for it another, thereby getting these leases completely off the collective balance sheets that we have globally. So in that regard it was good. It creates greater transparency, but it does, you know, shift into this a very complex standard that does require a lot of effort to get, to get stood up and kind of transition to very, very different than kind of the easy going way of doing it in the past. And just there's, you know, with this session in particular, they're, you know, with companies, you know, in Canada or Mexico maybe, as well as some that are operating under ifrs here in the US there oftentimes is a gap. You know, sometimes there's reporting requirements under US GAAP and ifrs and things like that. And it's interesting, the timeline here is that, you know, if I do go back to the timeline, IFRS, the effective date was January 1, 2019. One of the big differences between IFRS and US GAAP is the FASB permitted an additional year for private, private companies to adopt, whereas under ifrs everybody adopted at the same time. Which makes perfect sense from a comparability perspective. And so here, now we've got private companies that don't need to adopt yet, they actually extended an additional year and then as a result of COVID the FASB extended it a third year. So now I guess for people on the call, why this matters is you may be required to operate under ifrs, but if you do have reporting requirements in the US gaap, this is just something to consider that the US GAAP is now lagging potentially up to three years. It still allows for early adoption, but yeah, there is a three year lag between the two. So comparability is shot between ifrs and US GAAP on this point and between publicly traded companies in the US and private companies that haven't adopted yet. So FASB loves to throw some other things in. And there are some other differences too that we'll highlight as we go through the presentation here.

We did want to highlight kind of the current events. Obviously we're all globally impacted by COVID 19 and stay at home orders. And if we think from a company perspective and leases, there are a lot of shutdowns currently in place where there has been a, as a result of COVID 19 and the global pandemic, a significant increase in activity around adjusting leases. And so FASB issued met previously and they issued similar guidance in the U.S. but for IFRS, the International Accounting Standards Board met just last week and they fully acknowledged that, you know, the effects of a global pandemic were not anticipated in part of the lease guidance. And so what they are in the course of doing right now is essentially issuing an exposure draft that provides an optional exemption. So if we think about the pure following of IFRx 16 and a modification, if I have a three, if I negotiate with my landlord, a three month deferral of my lease agreement until the very end. So if I'm a two year lease, I'll just add three months at the end of the lease and defer all payments back for three months. That would trigger, according to current definitions, a modification which would result in a remeasurement of the lease liability and an offset offsetting adjustment to the right of use asset. And then your depreciation expense on a go forward basis would be remeasured based on that. What the IASB is in the process of allowing for is an optional exemption which will allow you to treat those rent concessions as if they were not lease modifications. What that effectively means is that you would go in and retrospectively identify the cumulative effect of those of those concessions and post that to the opening balance of retained earnings at the reporting period that the lessee first applies the amendment. And so while it does significantly help from the perspective of not going to, you know, an entire portfolio of leases and one by one calculating the modification. Now I'll note that this is optional, so one can still go in and lease by lease, modify the lease according to current guidance, it's beneficial for that perspective. But then for those of us accountants, what we're treating as what you then need to do is go on and manually create these adjustments as well.

So, and I think one thing that was kind of shocking to the IASB and the FASB on this regard is the volume at which this is happening right now across, across organizations that where these renegotiations are happening and if now and I'll walk through what it looks like in a solution to run these modifications. But if you are running this in spreadsheets and you do not have a solution, I think that's one of the big considerations. If you don't have a tool to run these modifications, the best bet is to use the option that they allow for. If you do have a solution, we can walk through and show how it works. It's certainly one less thing to worry about if you do have a solution and you can automate it. But I think that's where the help really comes into play is for those companies that are doing this on spreadsheets right now, we're seeing it in house here with our customer base that is running it. We trained them up on modifications, and now all of a sudden they're all coming back asking how to do that again, because they actually have a lot of modifications that are going on right now. So anyway, we'll touch on the modification point and show what that highlights here. So companies are across. This is. We look at this, you know, some things, like the new revenue recognition standard that came out really impacted certain industries very heavily and certain types of companies. We look at this as more of a horizontal impact where, you know, there are companies that do a lot of lease, engage in a lot of different leases, and some that do less. But the impact really goes horizontally across industries. It's really anybody who leases an identified, you know, asset or gains control of an identified asset in return for consideration. So real estate leases certainly fit the bill. Vehicle leases, copier leases, you know, depending on the size of, you know, the dollar amount of those can really be big drivers on whether you're impacted or not. And the default, I think, is that companies are, unless you can prove otherwise. Right. From an auditor perspective. So if you do not have leases, you still would want to put together a good, you know, let the auditors know that you have done your homework to confirm that there aren't any in your organization.

You know, there is one gray area that has not quite been settled yet, and it's the question on the software. And so we wrote a blog post a few weeks ago and referenced some specific guidance. But, you know, I think that's an area where I would expect the accounting firms and the IASB to settle at some point with a clear definition, because there's conflicting guidance between international standards that exist for that. You know, there's arguments both ways. And so that's one to keep peel that if you have Software that's definitely one to talk with your auditors in advance.

And there is a difference, a hard difference between FASB and IASB on this issue as well. Software is definitely not a lease in under US gaap, but that does look like, you know, depending on how things shake out, that it may be under ifrs. All right, so this is pretty straightforward. You know, the financing leases are capital leases under the old, old standard. There's no, no shift here, right? Those are still on the balance sheet like they were before. Operating leases is where there's the big shift. They were off balance sheet obligations that are now being moved onto the balance sheet. So now you have the right of use asset and then you have the offsetting lease liability that now needs to be carried on the balance sheet. And this is going to impact EBITDA or some of these key metrics that you may be, you know, your companies may be operating under right now in that before, you know, like let's call it just rent expense is now going to be broken out between depreciation and amortization component and an interest expense line now. So if we're looking at EBITDA calculations or if you have debt covenants that are that lean on that EBITDA metric, those will definitely shift. And especially if you have debt covenants that are on, you know, you get assets or liabilities that feed into those metrics, those will all be impacted with this or have been already impacted for those who have already adopted. So this is just an important thing to keep in mind that this is a pretty big shift in how you look at your earnings post adoption. One thing I wanted to highlight though, the fasb, again, I keep going back to the differences here because there's a stark difference between the FASB and the IASB on this issue. In particular, operating leases under the FASB are still going to sit in that operating cost line, that single expense line. Financing leases. Again, there's no change. But this is one of the big differences. There are still two classifications under US gaap where there is only one under international accounting standards, which obviously makes things easier. You don't have to have the classification debate with your auditors like they still have to in the US So ultimately the big takeaway from all of this, right, is that this is what your entries would have looked like before if you had a, you know, in this case, it's a three year, you know, example of a lease with $500 a month, zero down payment. This was your entry. And so it's gone from this for this rental to this. And so you have to capitalize the asset and the liability on the, on the front end. And then you have these five line journal entries that account for everything from the payment, interest, expense, amortization expense all the way through. And then of course those are changing every single month based on the effective interest component there. So again, it takes something that was very straightforward and converts it into a very complex transaction for the accounting teams out there.

And so given knowing that the adoption date was January 1, 2019, I know there's, for a lot of folks there's.

Been a.

A catch up that perhaps there's been additional preparation that hasn't. But you know, one of the key things for those that are, you know, now finding themselves and they've perhaps had to quickly work with their auditors to get an answer, you know, as you think about it, you can modify something like this, but the key point here is in the adoption. It's good, it, you know, good, good for those massive companies with huge budgets that can throw teams at these kind of projects. But for those of us who are smaller and medium sized, what's important here is really putting together a simple but coherent plan to get from point A to point B. And so, you know, we're obviously in the software space, that's one element there. But really the big hurdles were all, we're all around the contract analysis and gathering that information, the key challenge that folks are having. And so I think from the perspective, especially for those of you that had capital leases well before the.

If you've.

Had capital leases before the new IFRS 16 standard came out, you're used to dealing with this, but a lot of folks typically only have the operating leases, but even those that had the capital leases before, one of the big hallmarks of this new guidance is around the disclosures and documentation that is required. So while if all you had were capital leases, you're relatively unimpacted from the pure debit and credit accounting side of things. But from a disclosure perspective, there is more data that you need to have. And so beyond just the spreadsheet creation or the debits and the credits, there's the issue of, well, where is the additional information that I need for disclosure to highlight disclosures under the new, under the new IFRS 16. So you know, clearly for experts in the standard with exceptional Excel skills, that they can do this with low volume. But you know, one of our favorite kind of thought leaders around accounting, he's local to Colorado, US Region, where we live, but he says that My concern is with smaller companies, there's no way I can see them getting this right. And that's due to the, essentially the enormity and the challenge of the new standard. And then PricewaterhouseCoopers highlighted that the system's support now, certainly from an IFRS perspective, it's not as challenging as the US gaap, but there still is significant disclosure and data that will be needed to be aggregated across your entire lease portfolio.

All right, so now we get into automating IFRS.16. So there are certainly options out there and there's been some options that have come out over the past several years in response to this. And so we wanted to talk about, you know, there's kind of this idea that all lease accounting solutions or you know, they run your calculations and they're all kind of created equal and they certainly, they are not right. There are different buckets that these really fall into. And I'll start on the left hand side. So the lease management side of the house, there are some solutions. There's like, you know, COSTAR and TRIRIGA, IBM's TRIRIGA and COSTAR that have been out for, you know, decades. And, and they are really real estate management solutions. They help you manage, you know, the maintenance on your facilities and how efficiently you're using those facilities internally. And there's a lot of great tools that come along with that. They are heavier, obviously, they're very expensive to implement and very time consuming. And in a lot of cases they're on premise tools just due to the age of them. And so what they have done is they've added on kind of a lease accounting calculator on the side that runs some of the calculations that you require. The challenge with those products is one, they can be very expensive. So in certain instances, if you are super heavy on the real estate side and your primary focus is to get that box checked then, and you know, then these, these may be able to help you on the lease accounting side. Where they struggle is they don't go very deep on the accounting side of the house and they, they struggle with complexity and things like modifications and changing any variables of those leases when they're ongoing. Also integration, you don't have a deep integration, so you're going to likely get an export of Excel and then you're going to have to take that and try to, you know, convert it into a journal entry to upload the second one. Are these lease point solutions? These are newer solutions. They're solutions that have come out in the last five Years, most of them in the last three years. And these solutions run your accounting. They will run the lease accounting calculations and they'll create the schedule, but they also stop, right, they stop at the schedule generation and you pull a report out and you use the data on that report to generate your journal entries. Where they tend to be weak is on the, on the journal entry, you know, integration on foreign currency, intercompany transactions, things like that, they simply can't manage because they're not, not inside of your erp. They also tend to be weaker on the property management side. And then the third bucket is an ERP embedded leasing solution. These are solutions that are into the core of your ERP and built for the lease accounting standard. And this is, these are things that do the accounting very well, but they take it all the way through to the general ledger. And the weaknesses here are they, it's really on the property management side of the house. If you do have a massive real estate portfolio and you do need to go deep on the, on the real estate management, you have a large real estate management team. These typically don't fit the bill, but they do tend to be less expensive because. And easier to use because you're already used to the interface that they're built upon. So and that's the bucket that we fall into today. So when I go through the demo, that's, that's the side of the house that we're on. So our solution, you know, this is the lease, sorry, Lease accounting lifestyle is gonna call it process the lease accounting life cycle, you know, from when you transition all the way through the life of the lease. And again, one thing that stick, it sticks out here, particularly right now, Covid, is the modification or renewals of leases. There are changes that can happen to these leases during their life. And if you look at the right hand side of the screen, these are some of the requirements under the new standard. Certainly not all of them and we won't dive into the details on those. But from here we wanted to jump into a demo. I'm not sure if you had anything to add before we go into that.

Nope.

And I guess as we go into.

The demo and take a look, we wanted to look at from the perspective of the application of the accounting standard. So obviously showing our product how this does. But more broadly, as we kicked off the call, it's a discussion of how a solution can help aggregate the data and do some of the things that, you know. One of our favorite feedback from a demo is immediately after doing a modification, somebody said that you just did in five minutes what it were and couple minutes what it took me three days to do. So yeah, we'll highlight each of those as we walk through.

So starting out I'm logged into NetSuite. So those who may not be familiar with NetSuite, I'm in the NetSuite interface and this is all the different functions that NetSuite has and we're simply an added tab here. So the process for installing this is like an app on your iPhone. You download it in and then all the function functionality resides within your instance. This dashboard is configurable so I can take these different portlets, move them around, I can change the values on them and I can bring forward what I really need to see. We built this for from an accounting perspective, but just know that you know, if you have a property manager or a maintenance person or contracts manager, their, their dashboard would look very different as they logged into this because we certainly manage those different aspects of it as well. But what I wanted to walk through really quick was really what information you need to enter a lease and what you start thinking about, you know, if you're pre transition, what you should consider aggregating and then the information you would need if you're going to move on to a system. So I'm going to set up a lease and then actually create a modification to it to show you what that would look like in a system here as well. So, So I'm going to create a real estate lease to properly capture the impact that a lot of our customers are going through right now. So I'm going to go in and I'm going to select the subsidiary. Obviously we integrate in so there's no uploading of subsidiary information into our, our solution, it's just linking it directly into those subsidiaries that you may already have in your system. So from here we can select the currency we tie in as an ERP solution. We tie into the native currency functionality that your system has.

It's always interesting, I joke with our ifrs customers and friends that for many of us in the US we are very monocurrency and foreign currency is always one of those really head spinners that we have to deal with. But you know, most or a lot of biopress companies, especially in the in Europe or they deal with currency and reval the monetary non monetary components of the balances pretty significantly too. So it's interesting.

One of the pieces I wanted to highlight here too is we've layered in to kind of help with the understanding of the information that needs to be gathered and the definitions here, we've included in here, you know, the reference under IFRS 16, exactly what constitutes in this case, you know, I think we're looking at initial direct cost here to help clarify and ensure that you don't all have to become lease accounting experts to run through the transition. So I'm going to have this is a real estate lease and so I'm going to have an increase in the lease payment in year two. So first year is $15,000. The second year is 16,000 now backing up. So we've got some key elements of information here that are important to note. If there are any renewals, you'd want to capture that information as well and build that into the your calculations here if you're likely to renew. So I'm going to go in here and I'm going to save this transaction. I've got the information I need to properly run this. And so from here I can generate my schedule. And what I'm going to be doing here is building out my full schedule over the life of the lease where similar to what you would do in Excel to capture the right of use asset, the lease liability and all the information for the life of this. So right now it's building that out and it should only take a minute here for that to build out. So if I click on here, you can see that it started to build this out and it looks like it's about done. But it's calculated our lease liability balance and to back up. So the lease liability balance is simply the net present value of all the future payments discounted at the incremental borrowing rate that we see up in the header here. So those future payments discounted back at $354,000 in this example, one thing to keep in mind as you calculate that net present value is the fact that these lease payments may be paid in arrears or in advance. A lot of real estate is done in advance. Sometimes you get these that are paid in arrears. And then of course you can see that 354, we have a balance here. So we had some lease incentives of $25,000 that are going to drive the right of use asset balance down. So the right of use asset is the liability balance plus any prepayments, plus any initial direct costs, minus any lease incentives, which is how we got to this number right here. But from here build this out so we have the first year payments of 15,000 and then the second year of 16,000. And assuming no changes at all. This is, you know, kind of your future glance at what the journal entries are going to look like. So I'm going to refresh this here and we should be good to go. So I'm going to commence my lease. Having reviewed this schedule, I'm good to go. And one thing I wanted to do before we actually start booking journal entries, and one thing that we recommend for companies that are transitioning is to export these schedules and get at least a sampling of them in front of your auditors beforehand. So I'm going to take to do that. I'm going to run one of our reports here for this lease right here, and I can export this schedule directly into Excel. So from here, I now I'm looking at that schedule that we just built out on our lease record. Now I'm going to export it into Excel. And one thing that I think is important to know, you know, most accounts are very, very good at Excel. There's certainly no voodoo going on in our calculations. And. Sorry. All right, sorry. It's opening up on my other screen here. All right, so. So one thing that we can do here. So this is that schedule that we just built out. You can see it's, it's there for the, the full 24 months that we had. And you can see that both our, our asset and our liability zero out at the end of the. So one thing that I like to do, you know, that you can do to send support over to the auditors is run an NPV calculation. And so this, we're going to take that 5%, of course, divided by our 12 periods. And then I can go back and I'm going to sum, this lease in particular was paid in advance. And so what that means is we don't want to capture that first period in the mtv. We want to add that back in to replicate exactly what the system is doing. So you can see that I just ran the Excel formula and I got that $354,000. Now if I undo that, that is the exact value that we had in there before. So I could go through and run my interest expense calculations off of this to tie right back to exactly what the system generated to really rebuild this entire schedule as support to the auditor so that you can be very transparent and see exactly what's going into this. And so with that, I'm going to go back now. One thing, too. If you're not using a system today and you haven't even started, we're more than happy to send you our template here for this and you can leverage this to adopt if you just have a few leases that you need to get into Excel. So, again, feel free to reach out for some of these templates. So with that, though, I wanted to move on to actually generate the journal entries from here. So, again, this is one of those benefits of being an embedded solution is we can actually go straight into the gl. Most lease accounting, those point solutions stop right here. They give you the data to report out, but they don't give you that deep integration to get the journal entries processed. So I'm going to take it all the way through and book some of these journal entries for this lease. Now, we've already commenced the lease, so I'm going to go in. Usually you'd run this across your whole portfolio, but I'm going to run this for just the lease that we created, which we have the ability to do right here. So I'm going to save this. And, you know, because we're in netsuite, of course, we have the full visibility into the audit trail to see who. Who ran these journal entries and exactly what parameters were set. You can control this and lock people out that you don't want booking journal entries, and, you know, open it up to the people that you do want booking these. But I'm going to refresh and this gives us a summary of all the output of these leases. We have some clients that, you know on a monthly basis, they have 10 leases, you'll have 10 journal entries. We have some clients that have thousands of leases. So you'll have a massive batch here. But what's nice is you don't have to do your review here. You can go back and take a look at the lease record itself. So I'm going to refresh this and you'll see the journal entry showing up right here. So I want to drill into just a couple of the journal entries here. First the initial balance and then these amortization journal entries. So the initial balance is what you would expect. We're setting up the right of use asset, the lease liability, and then we have this clearing account for the 25,000 of lease incentives. And we may collect on these lease incentives down the road. It may net against the rent that we actually pay. But however that happens, you want it to flow through the clearing account here. And we have a report to show what your balance is in there. And if there's any reconciling differences that need to be handled, this transaction is approved. But we can also default it to be unapproved and go through a workflow to, to get proper approval before acgl. This is one in particular. If you're not running a system, this is a journal entry that you'll want to pay attention to because this is what you want to be booking on a monthly basis off of that Excel spreadsheet. So the first is that right abuse amortization expense. And then, and this is simply the straight line of your right abuse asset. Then we've got the lease liability, which is the offset between the interest expense for the period minus the payment gets you to the lease liability. Then of course, we have your accumulated amortization that matches the amortization amount.

You know, one thing I wanted to highlight here, for those that are, that have perhaps treated offline capital leases in the past, a common approach which we see is that the first and the fourth line, you're essentially your depreciation expense and accumulated depreciation. I know a lot of folks have capitalized the asset into whatever fixed asset system they're using, and then they would use that for their straight line depreciation over the period. And then typically there's an offline Excel schedule. You know, one of the real benefits here of having it all in one is that any of the modifications, any of the adjustments, it's all right here in a single journal entry. Whereas I know a lot of folks are doing this in really two separate entries. The depreciation accumulated and then the effective interest drawdown of your liability and interest expense.

Perfect. All right. And then one thing to note too. When we book these journal entries, we're not calculating anything at the journal entry level. We're just simply pulling values right here off of the record here. So for a lot of customers, they lean on, they don't have these routes or an approval process when they run the journal entries. They simply rely on the initial review of the table in advance. There is a question that just came up that I did want to address. So the question is, if you've already transitioned onto IFRS 16 on spreadsheets, how then would you transition out to a tool like ours? So I think ours and any good tool out there would have a process for transitioning on ours. You know, I started this lease and that's probably what raised the question. I've started this lease as if, you know, we had already adopted. If we cut over midlife, for example, if you're adopting in this case on January 2021, we would build the full schedule, but we would cut over midlife. Or we could simply start, set the start date as of January 1, 2021, and only build this out for the remainder of the period. There's several options for transitioning and we've built the tools in here to make it as easy as possible to take those spreadsheets and load them up here. But what I wanted to do right now is modify this lease. So I'm going to use that scenario that we had just talked about where, you know, maybe you've negotiated a few free months of rent and let's just go from, from May 2020 and let's say you've got, you know, May, June and July, so three free months. So in August you're going to have to start paying again. But as part of this, obviously the payment's going to go up. So our payment was $15,000 through the rest of the year. Let's say that to make up for this, the payment's going to go up to 16,000 for the rest of the year. And then starting next year, instead of being at 60,000, it's now going to be $17,000. Oh yeah, let me adjust that to 2022. No, no, no, that's 21. Yeah, that is a two year lease, so. Oh yeah, that one's 20. Okay, thank you. All right, excellent. So what I've done is I've built in the rent free period from May through July and then I've changed the payment structure entirely. Now it's set of 15,000 in 2020, 16,000 instead of 16,000 in 2021. Now it's 17,000. So we've really negotiated a restructuring of this lease entirely. So with that, I can now go in and simply modify my lease. Now just keep in mind this is a standard modification, but we have the ability to repair the right of use asset or decrease the scope of your lease. So if you have two floors of a building and you negotiate it down to one, that's a whole different type of modification. These two have a P and L impact. The one I'm about to do does not have a P and L impact at all. So with this, I'm going to click the modify lease button. And what the system's going to do now is it's going to take that into account and rebuild the payment schedule back into a new npv. And then it's going to adjust the NPV and the right of use asset by the change in that new npv and it's going to book a journal entry to make that adjustment. And then of course, we'll have the full new amortization schedule. On a go forward basis that accounts for this properly in future periods.

But one of the key call outs here is that all of your activity historically is locked and it's maintained right here on your lease schedule. And then prospectively we show in out months what the adjustments actually result in.

Excellent. So you can see here that we have our lease modification entry. But what I wanted to highlight first is up through April now our ending balance for at least liability was 299,000. As we've restructured this it's, it's decreased our NPV a little bit here. So there's a decrease now and looks like $28,000 for that. So you can see the corresponding decrease in $28,000 on the right of use asset side which is of course reflected here on our lease modification journal entry. So we've now properly adjusted the asset and the liability for that modification. And if I go back, you can now see the future periods are built out. So the payment instead of being 15,000 is 0 for the rent free period, 16,000 and then 17,000 for the remainder of the lease. So again it makes it very easy to quickly run through some of these complex modifications that seem to be happening quite frequently right now. One of the things that we built in, because after we, you know, we, we get this rolled out to our customers, they'd run modifications and, and immediately realize that they may have made a mistake on the modification. So one of the things we, we can do here is reverse the modification with a button. It's kind of an undo button to get it back to what it was before if you needed to change any of the variables on that modification.

We had talked a lot about audit trail and detail and that's why we didn't talk much around each of the tabs on the bottom there. But modification specifically all of our modic modification history is maintained right there. The effective period and all of your pre modification inputs as well as your adjustments. And so as you interact with your auditors at the end of the year they're going to ask about that. You've got a clear audit trail to a single record that has all of your pre and post modification details.

Yeah, and that's the same with you know, terminations obviously there's. We can use this as a document repository. We can capture property specific information if you need to. You can build this out as needed. Any provisions like renewal options, termination options, other contract provisions can all be built into this solution as well. We can send notifications out if you're about to come on A renewal term. And then of course, any transactions that hit this, that impact this will fall under the related records. And then, you know, we've got our accounting information here as well. So with that I wanted to, you know, in the last few minutes that we have here, I wanted to touch on two reports and I wanted to leave plenty of time for Q and A here. So I'm going to quickly hit these two different reports. The first is our roll forward report and then the second would be our lease waterfall report. Of course we have our lease payment waterfall report, which is good to see as well. The first here is similar to a fixed asset roll forward report. This is one where you've got your beginning balances and this will become really the standard for reporting this to your auditors. The beginning balance represents what existed at the beginning of the period. Then of course, like fixed assets, you've got your additions, terminations or any other changes to it over the life of this. And what's nice is we can expand this and export it into Excel to send off to your auditors and they can make their selections from here. But what's also nice is you can drill in directly into this to find any of those adjustments. And of course, so we had our, this is our lease down here. I can drill into the lease record or I can drill into that, that other change to this balance. And of course I can go right to that journal entry that we just created as part of the lease modification. So we try to make it, we're ex auditors, so we tried to make this solution as easy to audit as, or as painless for you, I guess, on your side to provide information to the auditors as possible. This is the least expense waterfall report. So this is highlighting the expense. You can see here. We've got amortization and interest included here. But I can filter this down. If you want to know what your interest expense is over these future periods, we can drill it back just to that or look at just the amortization side. So this is a forecasting tool that helps, but it also helps with some of those disclosures that are required under the new standards. And then finally we've got the payments. This is just the gross payment amount that will be going out regardless of what the expense components are. This is just for cash flow purposes as well. So those are three of the reports. But again we started with the standard and backed into what we needed to build out in order to get these metrics. So we have all of the metrics that you need for the New disclosures that are now taking place under the standard. So this I wanted to kind of end and go back into our presentation but while we do that. Nathan, is there anything that I missed that you wanted to add here?

No, I guess I could give kind of the closing comments in summary relative to the new accounting standard. But first and foremost that you know, lease accounting is a significant change not just from the, from the accounting debits and credits, but from the, from the disclosure, the need for data to be captured and aggregated across the board. And so it has created a new norm that systems can be relied upon and help become part of your permanent landscape. And then you know, doing this in Excel, it's doable but tough especially as you get into volume. And so that's, that's one area that to keep in mind for those I know as, as an Excel self anointed expert I take, I take a lot of pride in my Excel sheets but really aggregating data across a lot as is really challenging. And then obviously, you know, net lease for us, we're really proud of the product and the ability it does. Certainly the, our mission is really around easing the burden of accountants having been in your shoes, finding ways to ease your burden and lighten your load across the board. So with that let's go ahead and open up for any questions. Maggie, did you have a list running of open questions?

Yeah, we do have some questions that came through. The first here is how are all those expenses, interest and lease payments showing in the cash flow? I think kind of related to the reporting section Adam went through.

Yeah, so from a cash flow perspective that's, that's clearly the lease components. And so what we were showing there is essentially a summary of all of your lease schedule detail. And that's the nice thing if you think of net lease as your sub ledger and you're reporting into the cash flow statement, all of those are accessible right there to meet all of your needs around a cash flow perspective as well.

Yeah, and the cash flow is one of those things right. Where you kind of get, especially nets, where you get the canned cash flow. We provide all the detail to adjust, you know, whatever needs to be adjusted in there to properly display it under the new standards.

Okay, and then we have another question here. Can we record non USD leases in this module?

Yeah, absolutely. Yeah.

I mean this is a demo account that we show just for purposes of ifrs, Netsuite itself. I'll lean on Adam. He spent four years there working through a lot of folks. But you know, one of the key as you think about the foreign currency, you've got the asset side of things, which is historical and then you've got the lease liability, which is you've got the monetary and non monetary piece. And so netsuite already has an incredibly powerful engine to handle your foreign currency differences. And we leverage that existing. There's just one area where in the event that you have a subsidiary with a base currency different than the contract currency, that's one area where native Betsuite wouldn't come into play. But we've added as part of the solution all of your foreign currency impacts to keep your asset at a historical basis and liability recording and aggregating appropriately. So all of that is handled. And that's one of, I think one of the big benefit areas of using NetSuite for existing customers because we're tapping into the exact same rate conversion tables and so forth.

Yeah, yeah. This is a big deal that we did focus heavily on because of the international, the nature of Internet. You know, under ifrs there's a lot of these foreign currency leases. And so it is definitely one. If you have that issue and you're looking at a solution, definitely dig in deep on the foreign currency because it is not something that a lot of solutions can handle very, very well or at all there.

In the sub ledger we capture the historical rate at the date of commencement and all of that gets captured in Bolter as well. Excellent.

Great. And we have two other questions right now. The first here is can I maintain both IFRS 16 and ASC 842 leases in your solution?

Yeah, that's a good question. It's something that I kind of glossed over just because we didn't have a lot of time on the demo. But, but the way we've structured this is to capture all lease types, whether it's, you know, under the old standard where you just simply straight line rent or whether it's an IFRS lease or a U.S. gap lease. We capture all the information for every lease regardless. And so that information is always there. So if you have a multi book solution that you're using, you can certainly leverage that to book the journal entries or you can just use it for reporting information. But yeah, definitely. Yeah, looking across the standards, you can certainly see and report against.

Yeah, utilizing multi book you can actually, if you're using multi book already, this is an easy plugin to reverse your IFRS and post 842 if you're not using multi book. And this is just an offline exercise, all of the data, as Adam mentioned, is right there available for you. We've got plenty of searches that aggregate that information to easily help you make the adjustments from your ifrs to GAP or vice versa. I shouldn't say gaap. Gaps gap, ifrs to us. GAAP or vice versa.

Yeah. Again, this is a particular challenge for you know, if you don't have to worry about it, then great, you know. But for those that do have to worry about it, it can be a challenge. And so again, another thing to look for in a solution if it is a concern requirement of your.

Okay, great. And then one final question here. Are there any country specific requirements for IFRS 16?

Yeah, it's interesting. IFRS 16 by definition and intent was to create an international accounting standards. And I like the history of this in that the ifrs you had, countries by country had their own accounting standards. And most companies have adopted ifrs completely. Many companies still maintain their or many countries still maintain their local country accounting. I'll pick on Australia as an example. They have the accounting Australian Accounting Standards Board and they specifically for IFRS 16 have adopted it in its entirety with the exception of one kind of edge case around not for profit specific industry challenge. But so that's, that's interesting. If you do have, if you are in a country and you have reporting guidance that for the most part country countries have adopted IFRS 16 in its entirety. Some, some have slight modifications and you know, certainly if there's something outside that's significant enough, we're happy to talk through that after you've consulted with your auditors and figure out what the correct accounting. I always think of it as, you know, you've got your accounting that you've got that you're trying to do and then you have a system that helps you accomplish that. So if we can articulate.