Myth: Existing Lease Will be Grandfathered



George Azih:

The next myth is that EBITDA will be affected. So that is a myth. EBITDA will not be affected under GAAP, once again because the new rules will cause an increase in your liabilities and but those liabilities will not be deemed debt.

As a result, because there’s no debt, there’s really no interest expense. Similarly, the asset component, the right of use assets that will be added to your books under the new lease accounting standards, the amortization of that asset will not be called depreciation. So because interest is not affected and depreciation expense is not affected under GAAP, then you do not have any effect on EBITDA.

So the point is EBITDA will remain the same after and prior to adopting the new lease accounting rules for GAAP companies. Once again, for IFRS the EBITDA will be affected.

Now another myth that we have, and this is a big one, existing leases will be grandfathered. That, ladies and gentlemen, is not true. All leases will need to comply as of January 1, 2019.

Now as I mentioned earlier, the look back period of two years for public companies and a year for private companies, the boards are considering eliminating that. We think that will pass, it just hasn’t yet. We’re not sure what they’re waiting for. However, the existing leases being grandfathered a lot of companies think that, “Oh, all my existing leases today will be grandfathered tomorrow.” And the reason that that misconception is out there is because of the whole hindsight of expedients that the board give us. That is not the case. Existing leases will not be grandfathered. Existing leases will need to be considered under 842 or IFRS 16.

This is obviously the last one. The myth is that this will never happen. There is still time. Obviously a lot of you have ascribed to that, apparently 72% of you, because you’re just in the early stages. All right?

So there is still time to make a wise decision here. However, please understand that time is running out, right? As it relates to lease accounting, there is such a thing as being too late, and that time is almost upon us. Not too late yet, but we have to understand that there is certainly urgency, especially for you companies that are public companies out there.