Rapid onboarding - Get ASC 842 ready fast

Okay, welcome everybody to our rapid onboarding event for net lease. ASC842 is upon us and there's still time to get up and rolling on a more efficient way of tackling these lease journal entries. I'll share my screen and walk through what we have to share today by way of introduction. My name is Casey. I am a CPA here at NetGain. I work primarily with our CPA firms and their clients and help them get them trained and ready to roll on a software for ASC842 adoption.

Hi everybody, and I'm Weston Lampe. I'm a CPA as well here at Net Gain, and I lead our partnerships with CPA firms, specifically helping them implement a tool to improve their audit methodology and processes internally, as well as helping them potentially generate consulting revenue and make sure that their clients are ready. And one thing we do want to really highlight in this presentation, given the time of the year that we're in, is that we can get you onboarded very fast this busy season. So we'll definitely touch on that throughout the. Throughout the presentation. So we know lease accounting. That's really the best way to summarize our group here. Some of us like myself, I've done basically nothing but lease accounting consulting since July of 2017. And our team is fully stocked with CPAs that have spent the past couple of years solely focusing on this new lease accounting standard for both us GAAP companies, IFRS and GASB clients alike. And our product has been built to address all three standards that have changed due to the new lease accounting adjustments. Again, our staff is all CPAs and all focused on lease accounting and our tool itself. If you head out to G2, the popular software rating website, you'll notice a couple of badges of honor for us. We are the highest overall rated lease accounting solution. Maybe more importantly to people like myself and Casey and our CPAs that we work with, we're rated the easiest to use, which I think will come across during the demonstration.

A couple things to point out about Net Lease. There's a few different access points. Net Lease for auditors or CPA firms is offered at a flat annual fee. And this comes with unlimited users, unlimited clients, and unlimited leases at your firm. You can take away the unknown billing that could take place if you're charged on a per lease basis at your firm. You enter as many leases as you'd like and your entire firm could access the software if they so choose. We have a whole team of lease accounting experts. Like Weston pointed out, we have CPAs and technical accountants on staff that can help you enter any weird leases that you might come across into the system. We also work with Net Lease from the client side. We'll, we'll show how clients can access leases from their end and have everything auto populate and integrate into your firm side of the software as well.

Right. So again, there's Net Lease for auditors for the flat fee is built specifically for, for your firm. But you can utilize that tool in really a variety of fashions. So the first way is to use the tool as an audit tool. Audit your clients independently calculated ASC842 numbers. You have a known trusted solution to verify those numbers. And then if any of your clients want to purchase a subscription of Net Lease on their own, they'll have their own client owned and operated version of the same tool, and they will automatically flow into your firm's tool. So you can, you know, either have read only access as the auditor, or more commonly, have edit access, which is where a lot of our firms are generating revenue, consulting around the implementation of ASC842 in conjunction with their clients. And then on the bottom, just as a side note, something that has picked up a lot of steam over the past couple of months is Net Lease Complete, which is an offering, a service offering from our team. And we will actually perform the implementation on behalf of your clients. And we can, you know, have a team come in, read and abstract the leases, get the accounting airtight all the way to, you know, getting their transition memo put together and their disclosures so that when your auditors roll into town, you are truly auditing something that's, you know, already been prepared by lease accountants here at NetGain because we've seen so many clients that just don't have the technical accounting aptitude to implement the standard on their own.

Yeah, at NetGame, we really try to touch on all types of resources. You might need the firm software, the client software, how they integrate together as well as kind of that outsourcing model that Weston just described. And as we open the product, we'll help visualize the firm versus client access and help that make even more sense here in just a minute.

Exactly. And I'm sure everybody on this call is mostly aware of 8.42. So, you know, really, what changed? It's a balance sheet adjustment. The P and L is mostly unaffected. EBITDA is unaffected. For any of your clients who are, you know, looking at valuation metrics, the operating leases are now, instead of being tucked away in the footnote, disclosures Those are now presented on the financial statements as a liability with a corresponding asset. They're both discounted at an applicable discount rate, which we'll walk through in the system. But really the transition here especially is pretty complex. You know, this is trillions of dollars of overall financial state impact, financial statement impact in the US Alone. You're going to have clients with little tiny real estate leases or, you know, one single lease that's 10,000 bucks a month for five years and it's going to end up being material. It's going to be 500,000 or $2,000,000 of balance sheet impact in no time. So Casey's going to walk through really what that looks like and how our system really boils it down to. You just need the information around the lease and our system is going to calculate those initial balances for you as well as the corresponding and ongoing journal entries until the lease is expired.

Yeah. One implication of the new standard is that those simple operating leases that Weston mentioned really can get complex back under 840. Operating leases were pretty simple journal entries, cash out, rent expense, and you're good to go where. Now this is a journal entry report produced by net lease for 2022 of a very standard common operating lease. In this case, imagine a office space that has some deferred rent at the prior year end from escalating lease payments. We continue to see some annual payment escalations as noted here. And then we see the client exercise a renewal option, which is again is very common. Maybe they didn't think they were going to exercise that renewal, but then down the road they decided we do want to exercise that renewal under 842. This creates some complexity as we have to increase both the asset and the liability on the books at that modification date. So take a look here at this initial balance recognition entry at 11 2022. For this existing lease that we enter into net Lease, we have our initial balance of $398,000 with for the right of use asset. And then the lease liability, this is offset just a little bit at $402,000 because we have to clear out that deferred rent of $4,000 that was on the books prior. Under 842, deferred rent goes away. So we have to bake that into our initial recognition journal entries. At adoption, we can see lease expense is straight lined at 11,388 every single month. And that's because there's escalating lease payments. Sure, they show $10,000 payments here, but as they increase. We have to straight line that rent for operating leases over the life of that lease. We also see our right of use asset amortization. That's that credit listed here at 10, 770 that changes every month because that right of use asset amortization is actually a plug figure under ASC842. If we come down to June, we can see that this is when that renewal option was exercised by the client. And when they did so, they had to present value the minimum lease payments of those extra periods tacked onto the end of the lease. That increased our right of use asset and lease liability balances by this $286,000. There's some complexity there, but then we also have the added complexity. You'll notice that the lease expense was straight lined at 11388 prior to that modification. But then following that jumps up to 12,255 on a monthly basis. So lots of complexity. I know I had done these prior in Excel at a previous firm I worked at and I was very error prone in this whole process and probably would have taken me an afternoon, maybe a whole day just to get that one modification right. So software really is the right approach to ASC842 because of the complexity as we see here, this journal entry report could take a long time, but with software everything comes becomes pretty automated.

Yeah, and we're really here to hold your hand as the auditor, as the accountant or as the client and walk through the complexities of the new standard. So that initial balance entry where there was the $4,000 of deferred rent, you know, that's something we'd walk you through. There's other transactions that also affect the initial right of use asset balance. So if you have lease balances as a result of a business combination, for example, you know, that would also affect that initial balance and that initial accounting all automated in the software. And that's really what my team, myself, Casey and The group of CPAs here specialize in, is walking through the specifics of your leases as you encounter them with your clients. So this screenshot here, there's a lot of words on this, but it's just a snippet Screenshot from our ASC842 guide for auditors, which you can download from our website or we'd be happy to provide you as a follow up. And it really shows again where we try to provide value to the firms that we partner with. So for example, here's four of the practical expedients. The these are entity, policy Elections and we walk through them, we you know, show you where they're at in the codification, walk through the codification. But then we also walk through what we've seen and you know, are these actually being elected? Why or why not? You know, what the implications for your clients might be? And really at this stage in the game, what are mid market privately held companies doing for discount rate for example, or the separation or inclusion inclusion of lease and non lease components? There's just a lot of really technical areas of this new standard. And we at this point have so much data from all of the firms and hundreds, thousands maybe of clients that we've partnered with that we really understand what are the vast majority of people doing and how is it, you know, benefiting them and what are the cost benefit analyses around each of the aspects of the standard. And as promised I wanted to touch on the the timeline for onboarding. So anybody here that works at a medium or even small firms now, you know, you can certainly attest that it takes time to roll out software at firms. Between the just politics and logistics behind the scenes at a firm or the need to customize and tailor the software specifically for your firm, we've really carved that out of the process for implementing Net Lease for auditors. So here's the standard timeline and literally we onboard clients in a day and Casey will walk through. We've onboarded really huge firms in not much longer time than that. So the timeline as it looks, you'll sign a contract with us, partner with Net Gain. At that moment you're granted immediate access. The software is fully cloud based so you will get a unique URL for your firm and you'll be able to set up an account in 10 seconds and hop into the system immediately. And then we offer 45 minute firm wide trainings and we can record these or do multiple iterations of them for your staff. And those are really focused on how to use the system. And you know, by the end of those 45 minutes, you know, we feel confident and we seen seen it tested out that your attendees will be able to immediately start using the system, start talking confidently about lease accounting with your clients. And then the next steps are adding clients user access if so desired. And then you're you and the client are able to start running reports or generating leases, running reports, disclosures, journal entries, you know, roll forward reports. So really the process again it's an off the shelf tool that you can customize behind the scenes along the way. But there's no initial implementation that you know, Requires your firm to have some sort of blockage before being able to utilize the tool. The second the ink is dry on the contract, you're able to start accounting for leases on behalf of your clients.

Yeah, Weston uses scary word implementation. We like to consider this more of just an onboarding than an implementation because it is so quick, off the shelf and easy to get rolling with. Net Lease. Here's an example of a top 25 accounting firm with over a thousand employees and these are actual dates that they got up and rolling on the software. Sure this happened back in 2022, but this is also a fairly big slow moving firm. You can accelerate this timeline to be as quick as you like, but some actual dates. They partnered with us on October 14th and they were granted immediate access to the software. Auditors got in and started clicking around three days later. On the 17th we did a 45 minute training with a lot of the firm members. Not all of them were able to join at once. So that was recorded and then circulated on their internal site. And everybody was able to get comfortable very quickly with net lease. On November 1st they started adding client user access. They had some of those clients that wanted the transparency into the lease accounting process. They wanted to know what those big gross up entries were going to be for adoption. So they're able to add client access and have them start adding leases on their end as well. And now we see both firm and clients are creating leases, running reports and getting compliant with the new standard ASC842. So very quick for a large firm. If you have a little more motivation to get moving more quickly, you can accelerate this timeline to be same day training. We can send something over if scheduling gets tough. Very quick onboarding. Now, the moment everybody's been waiting for, we will jump into the software itself. Like we mentioned, the software is cloud based so you'll receive your login. No need to download any information. It's all right here. In the cloud we do have multi factor authentication rolled out for an extra level of security. That's what you see happening now as we log into the firm side of the software. Our landing page is all of our clients listed out here to the left and their lease count out to the right. To help visualize the two different access points of Net Lease, let's point out that Net Gain Solutions and Hardware Store here. These are two clients that did not want to access Net Lease on their end. They said, hey CPA firm, you do this for us. And so you've gone in and created them in the admin page and added their 39 and seven leases and sent over those journal entry and disclosure reports where the other 20 or so clients listed here, these are clients that said, we do want that transparency and ability to access Net Lease, create our own lease records. So they've gone in and entered their 13, 148, 7 3. You get the idea. Leases themselves and all that input flows automatically into your firm side of the tool. So you can quickly jump in and see what clients are making what lease inputs and review those records as necessary.

And again, your firm only has one expense throughout the year. It's the subscription for Net Lease for auditors. So Whether you have five clients in here or 5,000, whether you have, you know, 39 leases, 148 one lease, your firm's expenditure is known at the beginning of the year and you're really able to use that flexibility to, you know, upcharge clients for any consulting services, implementation services, or, you know, just use the tool as an audit efficiency gain while your teams are out in field work over the next few months.

Yeah, lots of different options with Net Lease for auditors or CPA firms. We've even had firm clients win new business they otherwise wouldn't have because they can offer 842 compliance in an efficient manner. We're going to click into Casey and Co, they're my favorite client. To view their lease portfolio, we'll click on their 26 leases. The landing page that we see here is the page that clients will view if they have access to Net Lease. So theirs will look a little differently. They won't be able to see all other clients from the firm side. They'll just see their lease portfolio. We can see the 26 leases entered here and we're going to go through and enter a new lease through the user interface by clicking New Lease up top. Now, we know the ASC842 is a new standard. There's not a lot of experience out there and this is going to be the first time creating these lease records for a lot of users. That's why we built out some assistance down here. If I click on this question mark in the bottom right, we're going to use some of our helps to quickly create a lease record for the first time by using our lease Assistant. So view this through the eyes of maybe some of your first year staff that don't have a ton of exposure to the new standard. Maybe they haven't sat through as many CPE trainings as you or even those clients that have very little exposure to the standard. They could still get up and rolling and enter leases on their end and take a little work off of the firm's plate. So we'll walk through the prompts and enter a lease record here. So we'll enter Net Gain Denver headquarters lease type will be a real estate lease and we'll just keep clicking through the prompts. Some of the more complex areas have more detailed prompts on how to select the right input for lease creation. You'll note some more details here, but we're going to mark this as an operating lease because it's an existing lease commencement date. Again we have some more information because this is a little tricky this first year of adoption. That's why our Help window walks us through more details on this commencement date. We'll enter our end date and then our discount rate. This again is a potentially scary area that we have to select our appropriate discount rate to net present value our payments. That's why our help site is linked here on the Help window that pops up if we click on our Help Wins or help site. We're taken to a page where we have everything you need in Net Lease. There's instructions on how to create leases with detailed screenshots. All of our technical technical accounting helps are listed here in a very plain English. Like Weston mentioned, our guides are made for private company adoption, not these thousand page Big four reviews on any possible case with lease scenarios. So this is our discount rates section here that talks about the three options for discount rates for private companies. We have the rate implicit in the lease, the IBR and the risk free rate. And since the risk free rate is most widely used by our private company clients, we've even built out some Excel templates to pull down those risk free rates from the treasury site. And I'll show you where you can upload these tools to support the risk free rate used in Net lease here in just a minute. For simplicity's sake, we'll just mark this as 1.5 and keep creating our lease record. We'll enter our payments say this lease starts at $10,000 a month. The frequency is frequency is monthly. But if the frequency of payment was less often I could change that here. Very common in real estate leases or payment escalation. So let's say that there is a change of payments. We're prompted to enter that change down here say the following year landlord wants some more money out of us $12,000. We would enter any other payment escalations, but let's say that's it. So I'll hit next and create our lease record. So very quickly we're able to produce this amortization schedule that shows our lease liability balance, our right of use asset balance at 535,000 as well as our straight line lease expense. Our payments are displayed As I scroll to the bottom I can see the burn down of the asset and liability scroll down a little bit more to zero at the end of this lease. There's a couple other options to point out very quickly. If this was a new lease I would have to classify this for the first time. All five steps that trigger financing classification are listed here in the software to take the guesswork out of lease classification. And as I mentioned the documents tab here is where we could upload discount rate Support for this 1.5% or lease agreements or lease amendments to house everything related to leases, all within net Lease. We hope to avoid a little back and forth with firm and client on asking for documents, eliminating a few emails here and there and centralize everything here within Net Lease. I'll update our record here and once we've reviewed the amortization schedule and everything checks out, I'll come and mark this lease as active, meaning that this lease will be included in any reports that I run out of netlease. Earlier we walked through the journal entry report that would display all the recognition, amortization or modification entries for this lease record. I would run that here. From our journal entry dropdown I'll run through our disclosure report which is also a huge value add with software. As you probably know, ASC 842 requires a whole host of new quantitative footnote disclosures. All of them are available here within the system. We'll run them for this client, Casey and co altogether by hitting the button up top and generating the port report for 2022. Forgive my fat fingers here. Now recall There was about 26 leases in this package for this client. Our reports are ran by default for all leases in the portfolio in an easy to use Excel file. I'll quickly click through some of these reports. They're all formatted the same as I collapse them. This is the amount that would be included in the footnote disclosure. And as I expand I can see each lease in my lease portfolio that affects the disclosed amounts. We have our undiscounted lease maturity waterfall, our cash flow info, components of lease costs and impairments, any short term leases, and our weighted average term and rate disclosures. So as you can see, there's a lot of information that goes into just these footnote disclosures alone, using software is a quick way to generate everything you need to get compliant with ASC 842.

All right, yeah. And so, I mean between the journal entry reports, the disclosure reports, you know, these have all been tailored and tweaked over the past four, almost five years of the system being in existence to really adhere to the standard, especially for privately held companies. What are they seeing? What do they want to get out of the reports? What's the easiest way for them to get from Net Lease to a certified audit opinion? And you know, we realize that that street goes both ways and the auditors are also going to be wanting to streamline the process on their end. So our tool is really developed to be a simple to use, cost effective tool that's developed for CPAs. It's for lease accounting. If your clients have, you know, is a real estate mogul in New York City and has, you know, a humongous apartment portfolio that he needs to take care of, with thousands of leases and really heavy real estate administrative needs, they might be better served looking at a different tool. This tool is built for accountants. It's built for ASC842, IFRS 16 and GASB 87 and 96. And it's really been streamlined to get your audit teams and your clients from 840 to a certified audit opinion under 842.

I might argue that you can even use the training that we just walked through today to review and then spend maybe another five minutes or so on our help site and that would probably count as your firm wide training to get comfortable using Net Lease. I hope you agree with our G2 ratings that the tool is very easy to use and somebody with very little exposure to the new standard has the ability to quickly get comfortable using Net Lease. With that, we'll open it up to any questions that any of our viewers might have today. And if we don't have any, we might have some that we can answer just that are common questions that were asked.

Some of the, I guess while you're looking at that, some of the questions that pop up typically are, you know, do you have SOC reporting? Yes, of course. We'll provide our SOC reports to your firm to make sure that you guys can really, you know, rely on the system going forward. We're happy to also on the front end, test out, you know, the system with your firm as part of maybe implementing new software procedures within your audit process and methodology. So we'll sit down and hammer through leases and numbers with you until you're comfortable with our system. We're obviously comfortable with it. We've been through thousands of audits. At this point, people like myself. Again, it's sad, but I've done nothing but lease accounting since 2017. I've implemented other tools in the market. And I really do feel that Net Lease is specifically and uniquely designed for the firms and the practitioners and the ability to mass adopt this new standard among their clients. So Casey and myself are definitely available for any questions that might pop up after this call. You can head out to our website, download our resources, reach us there. But we really appreciate everyone's time today. And again, the ending thought is that it's not too late for this busy season to implement a tool for your firm to utilize as part of your audit procedures.

And it looks like we did have one question come in. What do we do with renewal options? Since that was mentioned on the lease that we had. The way the standard reads at adoption date, if the renewal option is reasonably certain to be exercised by the lessee, you would initially build that out in the payment stream. So if starting at 1:1, 2022, there's two years remaining on the lease, but then there's a five year renewal option if the lessee knows that they're going to exercise that renewal option. You would build out all seven years in the payment streams or when you enter that into netlease. But like Weston mentioned, we are available even if you don't want to use our software. Head out to NetGain Tech and you can send us any inquiries you might have. We're happy to help send you the link to our help website for anything you might need. As far as the transition to ASC842 goes.

Awesome. And we'll be following up with follow up information and contact information. So if you have any questions again, please reach out and we'd be happy to address them. So thanks for joining everybody and have a great afternoon.