Latest / PwC's accounting podcast / Leasing toolkit: Demystifying sale-leasebacks and build-to-suits

Transcript

Leasing toolkit: Demystifying sale-leasebacks and build-to-suits · PwC's accounting podcast

• 0:00
  SPEAKER_00: Talk leadership from PWC.
• 0:07
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_03: I'm Heather Horn.
• 0:12
  SPEAKER_03: Thanks for tuning in to another episode in our Toolkit series where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:26
  SPEAKER_03: For the month of June, it's all about leasing.
• 0:30
  SPEAKER_02: I would make sure that I have a thorough grounding in the key provisions of the rules so that I can make sure that the economics of the transaction won't be undermined by the application of rules.
• 0:40
  SPEAKER_01: The devil is still in the details, any standard that deals with complex arrangements.
• 0:46
  SPEAKER_01: Read the whole agreement.
• 0:47
  SPEAKER_01: Make sure you understand the nuances that come up in some of the default provisions.
• 0:51
  SPEAKER_03: My returning guests today are Chad Stores and Mark Jerusalem from PWC's National Office.
• 0:58
  SPEAKER_03: They're going to continue the leasing series with a focus on two areas within the leasing guidance that present numerous challenges: sale lease back arrangements and build-to-suit arrangements.
• 1:10
  SPEAKER_03: There's a lot to cover, so let's get started.
• 1:21
  SPEAKER_03: Chad, Mark, welcome back to the podcast, continuing our podcast series on leases.
• 1:26
  SPEAKER_03: And today we're talking about a topic that I know both of you have spent quite a lot of time on, and that is sale lease facts and build-to-suit transactions, which I think for people who are not spending all their time on leasing are probably two terms that strike fear into heart and are things people try to avoid.
• 1:47
  SPEAKER_03: In addition, these are two areas where there are a lot of changes in the accounting guidance when we moved from 840 to 842.
• 1:55
  SPEAKER_03: So hopefully today we'll demystify a bit and people will realize these are not quite as difficult as they may seem on the surface.
• 2:02
  SPEAKER_03: Although, Chad, you may tell me that people should be scared of them.
• 2:06
  SPEAKER_03: But in any event.
• 2:07
  SPEAKER_03: So, Mark, before we get into the detail on the accounting for a sale lease back, can you describe a basic one for us?
• 2:15
  SPEAKER_03: And listeners, pay close attention because there's gonna be a lot of terms here that you're gonna need later on in our conversation.
• 2:21
  SPEAKER_01: So, Heather, to put it simply, a sale and lease back transaction is one where, let's say today I own an asset outright, but I want to sell it while continuing to use it.
• 2:32
  SPEAKER_01: So my use of the asset is sort of continuous and smooth and nonstop.
• 2:37
  SPEAKER_01: I would then find a buyer to buy the asset from me, either a bank or a traditional lessor.
• 2:44
  SPEAKER_01: I would sell him the asset and then lease it back from him simultaneously or in a back-to-back transaction, in which case I would be the, we're gonna hear these terms a lot today.
• 2:55
  SPEAKER_01: I am the seller and the lessee, seller lessee, and the I've sold it to a buyer who's also gonna lease it back to me.
• 3:03
  SPEAKER_01: So he is the buyer lessor.
• 3:04
  SPEAKER_03: All right.
• 3:05
  SPEAKER_03: I think that's very helpful clarification.
• 3:07
  SPEAKER_03: And as I said, people that it for our listeners, you'll hear those terms referred to.
• 3:12
  SPEAKER_03: So keep track of who's the lessee and who's the lessor.
• 3:16
  SPEAKER_03: The person using the asset in a sale lease back is the lessee.
• 3:22
  SPEAKER_03: Uh let's start with sale lease facts.
• 3:24
  SPEAKER_03: And I know this is something we're seeing a lot more of.
• 3:27
  SPEAKER_03: Why is that?
• 3:29
  SPEAKER_02: Well, in short, it's really economics.
• 3:32
  SPEAKER_02: And Heather, you know, these aren't areas to be scared of, but I would tell you, they are certainly transactions to be aware of because sale lease facts in particular are hot.
• 3:40
  SPEAKER_02: And the reason why is because the economy remains really red hot.
• 3:44
  SPEAKER_02: And we can all look around and see that the value of real estate in particular has really benefited from significant appreciation.
• 3:52
  SPEAKER_02: Many would see this as an opportunity now to monetize some of those gains in value.
• 3:56
  SPEAKER_02: And a sale lease back lets you capture that value by selling the property at today's prices, but the lease back then allows you to actually continue to use the asset post-sale.
• 4:07
  SPEAKER_02: Um, the economics and the fact that lessees are much more likely under the new rules to get sale accounting than they were under the old makes these transactions very appealing to many.
• 4:17
  SPEAKER_02: Finally, I guess I would point out that in a successful sale lease back, the seller lessee actually gets to monitor, gets to recognize the gain immediately.
• 4:25
  SPEAKER_02: In the old days, any gain arising from a sale lease back was deferred typically over the term of the lease.
• 4:30
  SPEAKER_02: Uh, under ASDA42, that gain pops immediately on the date of the sale if you qualify for sale lease back.
• 4:37
  SPEAKER_03: So, Todd, let me ask you a question about the economics before we get into more on the accounting, because you mentioned that this is a lot of it to do with the economy, monetizing the value of real estate.
• 4:48
  SPEAKER_03: And what's interesting is what we're seeing right now versus maybe the past two years when there was a lot of these going on.
• 4:55
  SPEAKER_03: There are is more uncertainty with the economy, is more uncertainty with real estate prices.
• 5:00
  SPEAKER_03: So I'm assuming in some ways that may even make even more so that people want to do these right now.
• 5:05
  SPEAKER_03: So they tend to the point you made, lock lock-in gains.
• 5:08
  SPEAKER_02: I I think what you're saying, Heather, which I think I agree with, which is boy, we better get these done soon because we don't know when the pinch bowl is going away.
• 5:16
  SPEAKER_02: And look, it's not hard to have the expectation of rising interest rates, which would presumably then also make these transactions a little more expensive for the for the lease part of the transaction as well.
• 5:26
  SPEAKER_03: Yep, totally fair.
• 5:27
  SPEAKER_03: Okay, so then let's go back to the actual accounting.
• 5:30
  SPEAKER_03: And you mentioned the fact that under 840, these gains were deferred.
• 5:34
  SPEAKER_03: And now with our new lease and guidance, under 842, you actually do uh get upfront recognition for the gain.
• 5:41
  SPEAKER_03: What are some of the other key changes from 840?
• 5:44
  SPEAKER_02: I I think two, Heather, that really stand out for me.
• 5:47
  SPEAKER_02: And this is probably first and foremost, and a very important one for our lessors on the podcast.
• 5:53
  SPEAKER_02: Sale leaseback accounting used to be only applicable to the lessee.
• 5:57
  SPEAKER_02: Now it is a symmetrical model.
• 5:59
  SPEAKER_02: So you either pass or fail sale lease back for both sides of the transaction.
• 6:04
  SPEAKER_02: And we'll talk a little later about the accounting implications of that.
• 6:08
  SPEAKER_02: I think the second, and I would put this a little more in the sleeper category, folks historically knew there were accounting challenges to getting a good sale leaseback of real estate.
• 6:17
  SPEAKER_02: Now those are far easier to achieve relative to the old rules.
• 6:21
  SPEAKER_02: But these sale leaseback rules also apply to non-real estate, pickup trucks, other types of assets, equipment.
• 6:28
  SPEAKER_02: And they actually tightened up the sale leaseback rules relative to what they were under ASC 840.
• 6:33
  SPEAKER_02: So when you're dealing with a sale leaseback of equipment now, the presence or absence of purchase option may have a very big impact on the accounting.
• 6:40
  SPEAKER_02: And that was not previously the case under the old guidance.
• 6:44
  SPEAKER_03: All right.
• 6:44
  SPEAKER_03: So then let's actually go through the guidance for sale lease backs, and then we'll get into some of the more detailed questions.
• 6:51
  SPEAKER_03: So Mark, what are the general requirements for determining whether or not you should recognize a sale lease back?
• 6:59
  SPEAKER_01: Yeah, thanks, Heather.
• 7:01
  SPEAKER_01: So first of all, you know, in order to get a good sale lease back, because the starting point of a sale lease back is a sale, so we'd have to meet the sale criteria that is in the revenue guidance in either, you know, 606 or 610.
• 7:14
  SPEAKER_01: Um and that revenue guidance tells us that in order to get a sale, you have to transfer the right to control an asset to a third party.
• 7:22
  SPEAKER_01: And they have five transfer indicators.
• 7:24
  SPEAKER_01: And just as a reminder to the audience, those transfer indicators are that the seller, less the seller, excuse me, has a present right to payment, that the customer has legal title, that the customer has physical possession of the asset.
• 7:41
  SPEAKER_01: Number four, that the customer has the significant risks and rewards of ownership.
• 7:47
  SPEAKER_01: And finally, that the customer has accepted the asset.
• 7:51
  SPEAKER_01: So just the five transfer indicators that are 606, we have to meet the those transfer criteria as well for as at least that.
• 7:59
  SPEAKER_03: So, Mark, what's interesting to me if I think about those is that four out of those five are very fact-based and easy to determine in terms of, well, I guess they're all fact-based, but four of them are easier on the surface to determine.
• 8:14
  SPEAKER_03: And that would be, you know, you have the right to payment, customer has legal title, customer has physical possession, and customer has accepted the asset.
• 8:23
  SPEAKER_03: I think the one that can get a bit trickier is around significant risks and rewards of ownership.
• 8:29
  SPEAKER_03: So, how do you think about that?
• 8:33
  SPEAKER_01: Uh, I agree.
• 8:34
  SPEAKER_01: And certainly, you know, as Chad mentioned earlier, we're seeing that Sally Space are popular now because people want to be able to monetize their assets.
• 8:41
  SPEAKER_01: And obviously, if you want to monetize your assets in most Sally Spack transactions, you've probably gotten all the payments.
• 8:47
  SPEAKER_01: Like it's just a typical Sally Space, all the cash is transferred at once.
• 8:50
  SPEAKER_01: I agree with you.
• 8:51
  SPEAKER_01: Most of those criteria are going to be hopefully relatively straightforward to ascertain.
• 8:55
  SPEAKER_01: And you're right, the one about the customer has significant risks and rewards of ownership is the one that would have to be evaluated.
• 9:04
  SPEAKER_01: Remember, these are indicators, they're not necessarily conditions, but that is that is the one that could get in the way of a sales spec.
• 9:13
  SPEAKER_01: Well, let's talk about the two things that do get in the way of sell these back accounting, typically, and one of them is about the transfer of risks and rewards.
• 9:21
  SPEAKER_01: So let's assume for the moment that the lease back is classified as a finance lease, right?
• 9:26
  SPEAKER_01: Well, in order to get to finance lease classification, that is the equivalent of the owner of an asset transferring the risks and rewards to a lessee.
• 9:38
  SPEAKER_01: So in a situation where we classify the lease back as a finance lease, we would say, well, in that case, the customer or the buyer lessor hasn't really received significant risks and rewards of ownership.
• 9:51
  SPEAKER_01: The seller or lessee hasn't really transferred them to the buyer or lesser.
• 9:55
  SPEAKER_01: So that would be one example of where that criteria would get into the way of sell lease back accounting.
• 10:01
  SPEAKER_01: And that is consistent with the guidance in 840 as well.
• 10:06
  SPEAKER_01: Um the second thing that we see a lot of that would tend to get in the way of a Sally Spec, also consistent with 840, is where the seller lessee has the option to repurchase the asset.
• 10:18
  SPEAKER_01: Now, I think under 840, as Chad mentioned earlier, many seller lessees were um acknowledged the fact that if they had a repurchase option on real estate leases, that that would get in the way of Sally specs.
• 10:33
  SPEAKER_01: But it did not get in the way of a Sally spec if it were not real estate, if it were equipment.
• 10:37
  SPEAKER_01: But under 842, if the lease any lease back that has a repurchase option and typically even a contingent repurchase option, could um get in the way of selly spec accounting, it would be a failed sale.
• 10:50
  SPEAKER_03: So, Mark, before you go on with that, the point there would be that if there is a repurchase option, then that you haven't fully transferred the risks and rewards of ownership.
• 11:03
  SPEAKER_01: That's right.
• 11:03
  SPEAKER_01: So if the seller lessee has you know has sold you the asset, but effectively has the right to take it back from you, then aren't they still in control?
• 11:11
  SPEAKER_03: Yeah.
• 11:12
  SPEAKER_03: Seems like it makes sense.
• 11:14
  SPEAKER_03: Just wanted to tie that together in case it wasn't fully clear, just you know, for someone listening as you went along.
• 11:20
  SPEAKER_03: But I know I jumped in, so please go on.
• 11:23
  SPEAKER_01: That's fine.
• 11:23
  SPEAKER_01: So there is a what I'll call a sale lease.
• 11:27
  SPEAKER_01: So that that guidance that if you can repurchase an asset that you sold and you really haven't sold it, is just part and parcel of the revenue guidance, right?
• 11:35
  SPEAKER_01: But if we get into the leases guidance, they say, ah, but we're gonna make an exception for a Sally's back, a limited exception.
• 11:41
  SPEAKER_01: So the exception would permit a repurchase option in a Sally Spec as long as the repurchase option meets two conditions.
• 11:51
  SPEAKER_01: It has to be both of these conditions.
• 11:52
  SPEAKER_01: So the first condition is that the exercise price of the option is the fair value of the asset at the time the option is exercised.
• 12:02
  SPEAKER_01: So it has to be the fair value, the then fair value at the date of exercise, that the price has to be that amount.
• 12:10
  SPEAKER_01: And the second condition is that there must also be alternative assets that are substantially the same as the asset you're transferring that would be readily available in the marketplace, excuse me, the marketplace.
• 12:22
  SPEAKER_01: So basically, if you have any fixed price purchase option, even one that is meant to estimate what we think the value of the asset's going to be at the end of the lease, that would cause a Sally SPAC to fail.
• 12:34
  SPEAKER_01: It will fail that first criteria I mentioned.
• 12:37
  SPEAKER_01: And the second thing is that because there has to be a substantially similar asset that is readily available in the marketplace, the profession has kind of coalesced around a view that real estate would never qualify for that second criteria.
• 12:51
  SPEAKER_01: Because the bottom line is that every address has something unique about it and they're not substantially the same as anything else.
• 12:57
  SPEAKER_03: Mark, one more question before you give your final thoughts on this.
• 13:01
  SPEAKER_03: Did you say you have to meet both or either?
• 13:04
  SPEAKER_03: Or either one would make you fail, or you need both to fail.
• 13:09
  SPEAKER_01: Either one of these would make you fail.
• 13:11
  SPEAKER_03: All right.
• 13:11
  SPEAKER_03: Very key point.
• 13:12
  SPEAKER_03: That's why I wanted to make sure I caught that.
• 13:15
  SPEAKER_01: And then the final point that I wanted to make is that sometimes we see purchase options that are contingent upon something else occurring first, right?
• 13:23
  SPEAKER_01: And I think that's kind of beyond the scope of this particular podcast as to what might work or what might not work.
• 13:29
  SPEAKER_01: But let's just say that there's probably a bias in the profession that a contingent purchase option is still a purchase option, right?
• 13:36
  SPEAKER_01: And we'd look at the specific facts, but it we'd have to look at that carefully because in many cases, contingent purchase options would also cause a sale to fail.
• 13:45
  SPEAKER_03: So, Chad, one thing that I thought was really interesting when I was listening to Mark is, and I know you come from a real estate background, I also dealt with a lot of real estate leases.
• 13:55
  SPEAKER_03: And so this idea that you can't have a repurchase option has always been a problem when we're dealing with real estate.
• 14:01
  SPEAKER_03: Nothing new under 842.
• 14:03
  SPEAKER_03: However, the fact that now any lease cannot have a repurchase option, I think has changed some things in the market for lessees that are trying to get around the sale lease back accounting.
• 14:16
  SPEAKER_03: So, what are we seeing in terms of sort of strategies of how people are dealing with these requirements?
• 14:21
  SPEAKER_02: Yeah, Heather, I think the key is don't become an owner of an asset and subsequently sell it, right?
• 14:27
  SPEAKER_02: Set up the transaction from the start where the equipment is acquired by a bank who will then operate as a lessor and simply lease you the equipment.
• 14:36
  SPEAKER_02: Because remember, in a regular lease, the presence of a purchase option isn't problematic.
• 14:41
  SPEAKER_02: It's only when you have to apply the sale lease back rules that you have to think about this stuff.
• 14:45
  SPEAKER_02: Now, I would have a shout out here.
• 14:47
  SPEAKER_02: You want to be a little bit careful to make sure that the substance of the arrangement is the lessee is a broker for the transaction, helping it facilitate what assets it wants to lease from the bank rather than the owner of the asset itself.
• 15:00
  SPEAKER_02: Because if it's deemed to be the owner, then you're gonna get saddled with having to apply the sell leaseback rules.
• 15:06
  SPEAKER_01: So if I may, just on a related issue to that, we've always seen some transactions where a lessee, or let me just say, uh a company does not own an asset outright, but instead they have purchased an option to buy an asset.
• 15:22
  SPEAKER_01: Let's say they have an option to buy a field that's owned by Farmer Jack, right?
• 15:27
  SPEAKER_01: And then that option is transferable, and they separately enter into a transaction with a future lessor who agrees to buy the option from the option owner, and then they will exercise the option, buy the piece of land, and then lease it back to the company.
• 15:45
  SPEAKER_01: Okay?
• 15:45
  SPEAKER_01: So it's a related thing to what Chad was just talking about.
• 15:48
  SPEAKER_01: Instead of owning the asset outright, all we ever do is own an option to it and transfer it to somebody else who actually exercises the option.
• 15:56
  SPEAKER_01: And the question that has come up is are those transactions subject to sale and lease back guidance or are they not?
• 16:04
  SPEAKER_01: Right?
• 16:05
  SPEAKER_01: You might you might think that they are, or you might be afraid that they are, because the reality is that that buyer would never be able to enter into that transaction had it not been for my involvement as a future lessee, right?
• 16:17
  SPEAKER_01: I have I own that option, I have to transfer it to him and instruct him to buy the asset on my behalf.
• 16:23
  SPEAKER_01: So there is some diversity in practice.
• 16:25
  SPEAKER_01: Um we believe that there are certain factors that the parties should look at to determine whether the option holder is deemed to be a seller lessee in a Sally's bag.
• 16:38
  SPEAKER_01: One of the things that we would look at is whether that purchase option is exercisable immediately or only exercisable at some future date or at a certain, you know, a certain point in time.
• 16:48
  SPEAKER_01: Um another indicator that we'd look at is whether the option price is fixed or is at the then current fair value at the time that it's exercised.
• 16:59
  SPEAKER_01: If we transferred an option, let's go to one bookend, if we transferred an option that was immediately exercisable and it was exercisable at a fixed price, then I think we and probably the whole profession would kind of look at that and say, well, that is the same thing as a sale and lease back.
• 17:15
  SPEAKER_01: Okay?
• 17:15
  SPEAKER_01: And then we would subject it to the sale and lease back rules.
• 17:19
  SPEAKER_01: You know, on the other hand, perhaps if there was an option that we transferred, um, that the strike price was at the prevailing fair value whenever the option is exercised, then perhaps that's not a sell lease back.
• 17:32
  SPEAKER_01: But those are transactions that we've gotten some questions on.
• 17:35
  SPEAKER_01: And again, we could take a look at back to circumstances just to make sure that the strategy that Chad talked about a moment ago still works, so to speak.
• 17:43
  SPEAKER_03: All right, good reminder.
• 17:45
  SPEAKER_03: So, question for you both, because we just have gone through uh repurchase options, but I know we often also see leases that have put options where the lessor actually has the option to put the asset back to the lessee.
• 18:00
  SPEAKER_03: So, Chad, how do we think about those?
• 18:03
  SPEAKER_02: So, Heather, in thinking about put options, a real key to thinking about their impact on the transaction is how that repurchase, how the pricing in that put option compares to the expected market value of the asset at the date of the expected repurchase.
• 18:20
  SPEAKER_02: If the buyer lessor has an economic incentive to exercise that put when the repurchase price is expected to exceed the market value at the time of the repurchase, then no sale has occurred and the sale lease back transaction should be accounted for as a financing.
• 18:37
  SPEAKER_02: In contrast, if there is no economic incentive for the lessor to exercise the put, then that may not be evidence of retained control over the asset by the by the seller lessee.
• 18:49
  SPEAKER_03: All right.
• 18:50
  SPEAKER_03: So we've spent a lot of time discussing how to get to a good seller spec or conversely how not to potentially have a sell lease back.
• 18:58
  SPEAKER_03: Can we run through then how to account for those, perhaps starting with a transaction that is a sale ease back?
• 19:06
  SPEAKER_01: Good place to start because you know that's the easier of the two.
• 19:10
  SPEAKER_01: So if we have a good seller spec, then we would simply recognize a sale of the asset.
• 19:15
  SPEAKER_01: We would de-recognize the asset from our PPE, and we'd record an immediate full gain or loss, whatever the difference between those two amounts are.
• 19:25
  SPEAKER_01: Now, I made that sound very simple, but first we the seller lessee has to determine that both the sale piece and the lease back piece are both at their respective fair values.
• 19:37
  SPEAKER_01: And in order to do so, they would have to consider the best evidence they have for the fair values of either of those two pieces, maximizing observable prices and observable information, get the best evidence as to either the value of the asset sold or perhaps the value of the right to use the asset for a stated period of time, if that is the more observable of the two of the two prices.
• 20:02
  SPEAKER_01: If either of those two are not at fair value, then the seller lessee would recognize another element to the transaction.
• 20:11
  SPEAKER_01: So there are two possible things, right?
• 20:14
  SPEAKER_01: Either the sale proceeds could be above fair value or below fair value.
• 20:17
  SPEAKER_01: If the sale proceeds are above fair value, then that excess should be ascribed to a separate loan from the lease liability.
• 20:27
  SPEAKER_01: Okay, so I still have a lease liability, which is the fair value, so to speak, and anything I received above that would be an additional loan.
• 20:37
  SPEAKER_01: In the more common scenario, where the sale proceeds are actually less than the fair value of the asset, that shortfall should be considered prepaid rent.
• 20:48
  SPEAKER_01: So, and then if we have prepaid rent, we would add that balance to the right-of-use asset, and we'd impute additional sale proceeds, which result in a gain in the PL.
• 21:00
  SPEAKER_02: And Mark, to pick up on that, I cannot overemphasize enough the importance of getting the right fair value for doing this analysis.
• 21:09
  SPEAKER_02: Because that could impact lease classification, and lease classification is an indicator in thinking about whether a sale has occurred in the first place.
• 21:17
  SPEAKER_02: Because only an operating lease will qualify, right?
• 21:20
  SPEAKER_02: Um, one of the criterion uh you use for classification is comparing your lease payments to the fair value of the leased assets.
• 21:27
  SPEAKER_02: So, again, you know, they all sort of fit hand in glove with one another in terms of thinking about uh whether a sale has properly occurred.
• 21:35
  SPEAKER_02: Now, I also would like to point out that when you're thinking about transactions, there's very often some non lease components that go with these types of arrangements, things like maintenance, for example, or other less or provided services.
• 21:46
  SPEAKER_02: And you would want to make sure that before you sort of did your 90% test, that you allocated your payments properly to any other components in the contract, just to make sure that you have the right basis for doing your lease classification.
• 21:58
  SPEAKER_02: And I would point out.
• 22:00
  SPEAKER_02: Out.
• 22:00
  SPEAKER_02: A lot of companies have made elections to combine lease and non-lease components.
• 22:04
  SPEAKER_02: If that election is made, you would follow that election for purposes of doing lease classification and sale lease back, just like you would with any other lease classification exercise.
• 22:14
  SPEAKER_03: All right.
• 22:14
  SPEAKER_03: So John mentioned that one of the biggest issues here is, or they couldn't emphasize enough, the point that it's important to get the right fair value for the sale and the lease.
• 22:25
  SPEAKER_03: So, Mark, maybe going back to what's some of the key questions we get in that area?
• 22:32
  SPEAKER_01: Well, one of the key questions we get is how the building itself, if it were a sales back of a building, or perhaps at the asset, how it should be valued.
• 22:40
  SPEAKER_01: And taking a building as an example, we believe that the building should be valued, I would use the term dark, meaning as if it were an unoccupied building, without giving consideration to the fact that there's also a lease back in the transaction.
• 22:55
  SPEAKER_01: Now, sometimes a buyer lessor will pay a higher amount to purchase a building that has a valuable tenant in it with a long dated lease.
• 23:06
  SPEAKER_01: And a question has been raised as to how to account for the excess proceeds in that fact pattern.
• 23:14
  SPEAKER_01: Remember, I said before, if you sell a building for more than fair value, that excess is accounted for as a loan.
• 23:21
  SPEAKER_01: But in this fact pattern, it would seem that the purchase price of the whole transaction is in fact at fair value.
• 23:27
  SPEAKER_01: In other words, if I were buying a building that has a valuable tenant, that's the fair value of my purchase.
• 23:33
  SPEAKER_01: So I think a couple of views have evolved on this.
• 23:39
  SPEAKER_01: We believe that the parties should first consider you know, if I just had a plain vanilla lease to a good tenant, would I offer that tenant a lease incentive?
• 23:50
  SPEAKER_01: Would that, with a lease with those terms, attract a lease incentive from a typical lessor to a typical lessee?
• 23:56
  SPEAKER_01: And if the answer were yes, then we think that in the even in the sale lease spec, where you're perhaps paying above market for the purchase of the building, but that that excess is similar to the lease incentive you would have offered that tenant anyway, then we think that it would be appropriate for both parties to account for that excess as a lease incentive rather than as an additional loan.
• 24:20
  SPEAKER_01: And that would actually change the math of calculating a gain or loss.
• 24:24
  SPEAKER_01: You know, on the other hand, let's face it, the standard literally says if you sell a building for excess of its fair value, that excess is a loan.
• 24:32
  SPEAKER_01: So if a company said, look, that's what the standard says, and that's how I'm going to account for it as a loan, I think that anybody would accept that view as well, because those are the words in the standard.
• 24:41
  SPEAKER_01: So that's just some of the nuances of the questions we've been coming up with recently on this.
• 24:46
  SPEAKER_03: All right.
• 24:47
  SPEAKER_03: So thanks for that insight.
• 24:49
  SPEAKER_03: Now, we would just focus on how to account if you do have a sales back, but Chad, I know there's also complicated accounting when you don't qualify for salesback accounting.
• 25:00
  SPEAKER_03: So what does that look like?
• 25:03
  SPEAKER_02: Yeah, yeah.
• 25:04
  SPEAKER_02: When a transaction doesn't qualify for sale lease back accounting, let's say because they have a purchase option or the lease is classified as a finance lease, then you treat it as a financing.
• 25:13
  SPEAKER_02: And in short, plain English, I like to call it the mortgage model.
• 25:17
  SPEAKER_02: I borrowed money against the value of an asset that remains on my books.
• 25:20
  SPEAKER_02: So the assets on my books.
• 25:22
  SPEAKER_02: I treat that asset as I did before the sale lease back.
• 25:25
  SPEAKER_02: I depreciate it over its useful life of the asset, not the term of the financing.
• 25:31
  SPEAKER_02: I, in terms of measuring the financing obligation, that is equal to the proceeds that I receive from the arrangement.
• 25:37
  SPEAKER_02: So it's debit cash, credit, financing obligation.
• 25:41
  SPEAKER_02: Now, it's not directly addressed in the standard, but you know, one of the things you want to do as you're thinking about the accounting here is it's not uncommon for the lesser to provide services and there might be maintenance or other activities.
• 25:52
  SPEAKER_02: We would certainly want to allocate any non-lease components.
• 25:56
  SPEAKER_02: I'd say non-lease, recognizing that transaction is a lease that happens to be a financing, but it doesn't stop us from having to separate payments for maintenance, other things that would not be pure financing or interest on the arrangement.
• 26:10
  SPEAKER_02: We want to make sure we do that allocation first.
• 26:12
  SPEAKER_02: Now, in terms of the loan itself, there's no stated rate, so to speak.
• 26:18
  SPEAKER_02: So the seller lessee would typically use the incremental borrowing rate to amortize the loan.
• 26:24
  SPEAKER_02: Um, there are cases they might use the implicit rate, but it's pretty rare.
• 26:28
  SPEAKER_02: And in some cases, that creates anomalies, right?
• 26:32
  SPEAKER_02: I might have negative amortization on the note, or I might have a loss when I come to the end of the financing and I have to return the asset to uh the buyer lessor.
• 26:42
  SPEAKER_02: In those cases, an adjustment to that interest rate may also be required.
• 26:47
  SPEAKER_02: I would also want to point out, and again, I want to stress this, this is the seller lessee's accounting model.
• 26:53
  SPEAKER_02: The buyer lessor in a failed sale lease back also has accounting now under 842.
• 27:00
  SPEAKER_02: And they're accounting symmetrical.
• 27:01
  SPEAKER_02: So when I think about the lessee as a borrower, I'm going to think about the buyer lessor as a lender.
• 27:06
  SPEAKER_02: So instead of a building on their books, they're going to have a loan on their books and their record interest income associated with this arrangement, and obviously income for any other services they're providing as well.
• 27:17
  SPEAKER_03: So, Mark, you mentioned earlier that when the lease is classified as a finance lease, you can't get sale accounting.
• 27:25
  SPEAKER_03: However, I know that in many cases, sale lease backs could include multiple assets.
• 27:30
  SPEAKER_03: So let's take, for example, buildings and land.
• 27:32
  SPEAKER_03: Would it be possible to get an operating lease on the land and then a finance lease on the building?
• 27:37
  SPEAKER_03: And if so, what are the considerations when that happens?
• 27:42
  SPEAKER_01: Yeah, it's a very good question.
• 27:43
  SPEAKER_01: The standard doesn't explicitly address sale lease backs of like a pool of assets that have different lives.
• 27:51
  SPEAKER_01: Um, but because they have different lives, you could easily have one asset like land to be an operating lease while the lease of the building might be a finance lease.
• 28:02
  SPEAKER_01: In general, um, topic 842 requires that lessees and lessors classify the leases of buildings and the underlying land separately if doing so would lead to different results.
• 28:14
  SPEAKER_01: So this is clearly a situation where it would lead to different different results.
• 28:18
  SPEAKER_01: So we believe that in a sale lease back of both building and land, the parties should classify, just like you always do under 842, classify the lease of the building separately from the lease of the land.
• 28:29
  SPEAKER_01: And again, you know, um that may result in the land being an operating lease.
• 28:35
  SPEAKER_01: Now, when we say do the sale allocation, that requires allocating the lease payments to both based on their relative standalone selling price.
• 28:43
  SPEAKER_01: All right?
• 28:43
  SPEAKER_01: So say I have a longer dated lease, and as a result of that longer dated lease, the building is a finance lease, but the land is not.
• 28:52
  SPEAKER_01: Then in that case, we believe you would in fact recognize a sale of the land, but not a sale of the building.
• 28:57
  SPEAKER_01: And you'd have some of those proceeds would be a financing, as Chad had talked about, and some of those proceeds would go to the sale of the land and would be a, you know, go into a gain or loss on the D-Record.
• 29:09
  SPEAKER_03: All right, so definitely a lot to think about when we're dealing with any of these uh types of sale lease back, potential sale lease back transactions.
• 29:17
  SPEAKER_03: Maybe before we move on to build to suit arrangements, any final thoughts if someone's dealing with a sale lease back?
• 29:25
  SPEAKER_02: Uh yeah, Heather, and I I would put in a plug for maybe this is another future podcast for us, but uh certainly there are complexities that arise.
• 29:34
  SPEAKER_02: For example, say I have a purchase option that caused the arrangement to fail sale lease back accounting, but it expires partway through the lease term or before a lease is renewed.
• 29:44
  SPEAKER_02: In that case, questions arise as to how do we think about sale accounting when the thing that precluded the sale goes away?
• 29:52
  SPEAKER_02: Also, we've got to think about what happens when there's a renewal option and something happened that would have caused you to reassess a lease term.
• 29:59
  SPEAKER_02: Think about our reassessment triggers under lease accounting.
• 30:02
  SPEAKER_02: In a financing model, we're kind of in a debt world.
• 30:04
  SPEAKER_02: So how do we think about that overlay of that judgment, that reassessment judgment we have embedded in the lease accounting model?
• 30:11
  SPEAKER_02: Um if it's a failed sale lease back due to a purchase option and it was never previously accounted for as a lease, how do we think about lease classification?
• 30:19
  SPEAKER_02: Not in transition, but in an ongoing uh accounting model?
• 30:24
  SPEAKER_02: Do we think about it at the original sale date?
• 30:26
  SPEAKER_02: Do we think about reclassification events, triggers, other things that might have occurred from the original sale date to the date now where we're thinking we might get a good sale lease back?
• 30:36
  SPEAKER_02: Do we evaluate classification as the date of the latest reassessment trigger?
• 30:39
  SPEAKER_02: Do we evaluate lease classification as of the date the purchase option expires, which might give rise to a different classification than what we might have had had we done it at a date the original transaction commenced, right?
• 30:50
  SPEAKER_02: And sept and commenced.
• 30:51
  SPEAKER_02: So these are transactions that I would say the jury's still out on, but you know, they give you an example of the fact that the basic model is certainly similar to is certainly easier to apply than the older model, but these transactions are complex living transactions, and there's lots of questions that we're wrestling our way through on what is still a relatively new standard.
• 31:10
  SPEAKER_03: All right, so definitely a lot to think about there.
• 31:13
  SPEAKER_03: Um so let's turn our attention with that to build-to-suit arrangements.
• 31:18
  SPEAKER_03: And this is a case where there's been some very big uh significant changes uh compared to the guidance that we had under 840.
• 31:26
  SPEAKER_03: So before we get into it though, I think it'd be helpful just to review the guidance for build-to-suit arrangements and maybe specifically what a built-to-suit arrangement is for those of our listeners who may not be as familiar with them.
• 31:38
  SPEAKER_03: So, Mark, can I ask uh you to answer that?
• 31:43
  SPEAKER_01: Yes.
• 31:44
  SPEAKER_01: So let's talk about, you know, when we refer to build to suit, what are we talking about here, right?
• 31:49
  SPEAKER_01: So we're talking about an agreement between a future lessee and a future lessor to lease the asset either before the asset is built or while the asset is still incomplete, and specifically an arrangement where the future lessee might have some required payments or might have exposure to have to make payments or have some rights or obligations before they even get a hold of the asset, before the asset even exists, or before it's complete.
• 32:20
  SPEAKER_01: So under 840, there were lots of rules that said, hey, if you've got exposure to risk when the lessor hasn't even built the asset yet, I mean this is supposed to be like a two-sided transaction, right?
• 32:30
  SPEAKER_01: You give me an asset and I give you monthly rents.
• 32:33
  SPEAKER_01: I shouldn't have to give you anything if you can't even provide the asset in the first place, if you can't finish building it.
• 32:38
  SPEAKER_01: So that's what we say built to suit, it's having some exposure to have to make payments before the asset's complete.
• 32:46
  SPEAKER_01: Now, typically we've seen these arrangements in real estate, right?
• 32:49
  SPEAKER_01: But realistically it could happen whenever you are going to lease something that has to be built, like an airplane or production lines, etc.
• 32:58
  SPEAKER_01: And what the guidance tells us to do is to look at some indicators that the future lessee has control of that asset while it's still in construction phase.
• 33:11
  SPEAKER_01: The good news here is that we don't have a lot of the bright lines that we had in 840, where if you had like a dollar of exposure, you could be deemed to be the owner of the asset as an example.
• 33:22
  SPEAKER_01: So let's talk about some of the common indicators of ownership.
• 33:25
  SPEAKER_01: And again, these are indicators, right?
• 33:28
  SPEAKER_01: So one is where the lessee is going to pay substantially all the construction costs.
• 33:34
  SPEAKER_01: That one seems kind of self-evident.
• 33:35
  SPEAKER_01: If you're going to pay for most of it while it's being built, it kind of smells like you're buying it, right?
• 33:40
  SPEAKER_01: It doesn't smell like you're leasing it.
• 33:42
  SPEAKER_01: Um, another one is where the lessee has the right to acquire the asset even though it's not complete.
• 33:48
  SPEAKER_01: The right to a partially constructed asset.
• 33:50
  SPEAKER_01: Again, if you think about it, if I were leasing a car, I would not have the ability to say, it's taken too long, just give me the chassis.
• 33:57
  SPEAKER_01: I'll finish the rest of it in the shop and around the corner.
• 33:59
  SPEAKER_01: It would just never happen, right?
• 34:01
  SPEAKER_01: And again, that one actually is somewhat common because sometimes um lessees do want the right that if the construction is taking too long, they want the right to take it back and have somebody else finish it.
• 34:12
  SPEAKER_01: If it were real estate as an example.
• 34:14
  SPEAKER_01: So that's what we see a little bit more frequently.
• 34:17
  SPEAKER_01: Um let's go on to the next one.
• 34:20
  SPEAKER_01: The lessee controls the land that the improvements will be built on, but doesn't lease the land out to the lesseur before construction.
• 34:29
  SPEAKER_01: So if you think about it, the lesseur is building something and he can't even control it because he's building it on somebody else's private property that he has no rights to, right?
• 34:37
  SPEAKER_01: If I hire someone to build a house on my plot of land, and I say, I'm not gonna buy it, I want to lease it, no, you're you're buying it.
• 34:43
  SPEAKER_01: Okay.
• 34:44
  SPEAKER_01: Um and then, or the lessee leases the land in and doesn't sublet it to the lesseur, same thing.
• 34:52
  SPEAKER_01: And then finally, um a situation where the lessee has to start making lease payments, right, regardless of whether the asset's finished.
• 35:01
  SPEAKER_01: We call that date certain rents, is where the lease says, hey, you'll make your first payment on January 1st, right?
• 35:06
  SPEAKER_01: What if it's not done by January 1st?
• 35:08
  SPEAKER_01: Well, still make your first payment on January 1st.
• 35:10
  SPEAKER_01: If we had that coupled with the fact that the lease would be classified as a finance lease, we would say, well, that that's indicative that you actually own it while it's being constructed, not just when it's completed.
• 35:22
  SPEAKER_01: So those are some of these indicators.
• 35:24
  SPEAKER_03: All right, so definitely very substantive indicators.
• 35:27
  SPEAKER_03: I know that's a change from the form-driven uh guidance that we had under 840.
• 35:32
  SPEAKER_03: So, Chad, then let's assume we do have a build-to-suit arrangement.
• 35:37
  SPEAKER_03: Let's start with that.
• 35:38
  SPEAKER_03: What is the accounting?
• 35:40
  SPEAKER_02: Yeah, and Heather, if I can, a slight correction there.
• 35:43
  SPEAKER_02: Build the suit is the construction of an asset you will lease when you are considered the accounting owner, right?
• 35:50
  SPEAKER_02: So a build-to-suit is a type of transaction.
• 35:53
  SPEAKER_02: Accounting ownership is when you say, hey, I as the lessee am in control of that asset because I've hit one of the indicators Mark just described.
• 36:02
  SPEAKER_02: In that case, when I have control, then I pretend that I'm the legal owner of that asset.
• 36:07
  SPEAKER_02: I'm gonna follow PPE accounting for that, let's say it's a building.
• 36:10
  SPEAKER_02: I'm gonna follow PPE accounting for that building and account for it like any other owned construction project.
• 36:16
  SPEAKER_02: And that includes things like capitalizing interest during the construction period and potentially paying ground rent if the land isn't owned, right?
• 36:24
  SPEAKER_02: Lessor funded construction costs are reflected on the books of the lessee as debt.
• 36:28
  SPEAKER_02: So we pretend that the stuff that the lessor funded, we borrowed money from the lessor like we might with a bank who was doing a construction fund, right?
• 36:36
  SPEAKER_02: Um I did point out that you may have to record lease expense during the construction period for the land that isn't owned.
• 36:43
  SPEAKER_02: I do want to quickly point out a lot of people try to capitalize the ground rent expense.
• 36:49
  SPEAKER_02: And our belief is that it has to be expenses incurred.
• 36:52
  SPEAKER_02: You can't capitalize those ground usage costs for a lease into the basis of the asset.
• 36:57
  SPEAKER_02: Now, if I'm the lessor again in a symmetrical model, what I'm gonna do is as a lessor, I'm simply gonna reflect a loan on my book for the amounts that I advance to the lessee to fund construction.
• 37:06
  SPEAKER_02: So they will be a legal owner of a building, but they actually will only have a loan on their books, right?
• 37:12
  SPEAKER_02: Uh and they'll, of course, reflect interest income on the loan, regardless of whether cash payments are made during the construction period or not.
• 37:18
  SPEAKER_02: Now, once construction is complete, both the lessee and lesseur evaluate the transaction as if it were a sale and a lease-backed transaction.
• 37:26
  SPEAKER_02: And if the arrangement qualifies for a sale, then the asset will be de-recognized from the books of the lessee, recognized on the books of the lessor, and then you will book your right of use asset, lease liability, and so on as the lessee, and it will carry on under lease accounting.
• 37:43
  SPEAKER_02: The build the suit guidance applies during construction and construction alone.
• 37:48
  SPEAKER_02: Once construction's over, you're in a sell lease back world.
• 37:50
  SPEAKER_02: Now, there could certainly be differences that arise as a result of say the lessee funds some of the improvements that it made to the building rather than the lessor.
• 37:59
  SPEAKER_02: Or let's say there are incentives provided by the lessor, and you would think about reflecting those like any other lease.
• 38:04
  SPEAKER_02: They might be prepaid rent or they might be under an incentive model when you're thinking about measuring the lease that results after the good derecognition under sale lease back.
• 38:14
  SPEAKER_03: All right.
• 38:14
  SPEAKER_03: So definitely makes sense if you're deemed to be the owner.
• 38:18
  SPEAKER_03: Now, how about a situation where you are not the owner under construction?
• 38:23
  SPEAKER_02: Yep.
• 38:23
  SPEAKER_02: If you're not, then in short, you really don't have any accounting until the asset is provided to you for the asset itself.
• 38:32
  SPEAKER_02: In the case of a building, just be aware, you might get certain floors of a building before the whole construction project is over.
• 38:39
  SPEAKER_02: So as they give you assets to lease, you'll start applying.
• 38:42
  SPEAKER_02: That lease will commence and you'll start doing the lease accounting at that date.
• 38:45
  SPEAKER_02: You'll certainly also have to disclose lease commitments before the commencement date.
• 38:50
  SPEAKER_02: But generally, recognition of right of use asset and lease liability is only a commencement when that asset's provided to you.
• 38:56
  SPEAKER_02: Okay?
• 38:57
  SPEAKER_02: Now, one thing I do want to point out that some people ask about is it's not all that unusual during the construction period for a lessee to build leasehold improvements, provide guarantees, or even fund some portion of the construction costs less than substantially all but some amount of the construction costs.
• 39:13
  SPEAKER_02: In those cases, that involvement isn't enough to give the lessee control over the asset and make it the deemed accounting owner, but it'll have some accounting to do.
• 39:21
  SPEAKER_02: So if I'm funding a portion of the construction of the lessor's asset, I'm going to treat that as a prepaid rent.
• 39:26
  SPEAKER_02: If I'm giving a guarantee, I'm going to think perhaps about guarantee accounting there.
• 39:30
  SPEAKER_02: So there is some accounting that I might have to think about, but it's usually the nature of what my involvement is.
• 39:37
  SPEAKER_02: It doesn't rise to the level of causing me to record the building as if I were the owner.
• 39:41
  SPEAKER_03: All right.
• 39:42
  SPEAKER_03: So then, Mark, I know this is an area where we got a lot of questions.
• 39:45
  SPEAKER_03: So what are some of the key things that you would advise that people look out for?
• 39:51
  SPEAKER_01: Well, if I can focus for a moment on an interesting question, at least that has come up on this, is that future lessees kind of have their plan and their timelines as to when they want to be able to use an asset.
• 40:02
  SPEAKER_01: And sometimes it's just more convenient to actually begin building the asset themselves, right?
• 40:08
  SPEAKER_01: And then in the midst of construction, before they're complete, they've identified a bank or a lender that they want to work with, and they sell that partially completed asset to the bank or the lessor, who will then continue to finish the asset and then lease it back to the lassee, right?
• 40:25
  SPEAKER_01: So one of the questions that has come has come up is whether or not that is subject to salaries back accounting.
• 40:32
  SPEAKER_01: And the theory as to why it might not be subject to sales back accounting is because inherently the asset you've sold, while it is the beginning of something, is definitely not the same asset you're leasing back.
• 40:44
  SPEAKER_01: It's certainly been altered and significantly changed because the buyer completed it.
• 40:49
  SPEAKER_01: So in a situation such as that, um we've actually had some conversations with ASBI, and they did indicate that the asset sold, if the asset sold, let me rephrase that, the asset sold would not necessarily be subject to sal leaseback accounting unless it was substantially the same asset as your leasing back.
• 41:11
  SPEAKER_01: So which I think means unless it was substantially complete.
• 41:15
  SPEAKER_01: Again, the logic here is that the asset sold and the asset being leased back are in fact different.
• 41:21
  SPEAKER_01: So perhaps a bit of good news, there's much more flexibility in the standard than there was previously.
• 41:28
  SPEAKER_01: Another thing I just want to point out is that sometimes these um failed sales specs or failed built-to-suits are not necessarily fatal, meaning that you can have modifications to the arrangement during the construction period.
• 41:44
  SPEAKER_01: And we'd always have to look at those modifications and evaluate the change of the changes to the arrangement based on those modifications.
• 41:52
  SPEAKER_01: So for example, if I had an offending feature in the original transaction that precluded me from derecognizing the asset, and the modification removes that offending feature, that might fix the transaction such that I can get sale accounting on that date.
• 42:09
  SPEAKER_01: So we'd look at a modification essentially as if it's a new agreement, and looking at it from scratch and see does it make things better, make things worse, and go from there.
• 42:18
  SPEAKER_03: All right.
• 42:19
  SPEAKER_03: So we covered two uh, as I said in the beginning, fairly complex topics today.
• 42:24
  SPEAKER_03: And I know I asked you this question on a prior podcast, but I'm going to ask again if you're dealing with these types of transactions, so you can either keep it specific to sell these facts and go to suit, or more broadly, when you're dealing with LISES, what's a piece of advice that you would give uh to our listeners?
• 42:42
  SPEAKER_03: And Chad, I'll go to you first.
• 42:45
  SPEAKER_02: I think the piece of advice I would have is I would make sure that I have a thorough grounding in the key provisions of the rules so I can make sure that the economics of the transaction won't be undermined by the application of the rules.
• 42:57
  SPEAKER_02: I have never believed that you should let good accounting drive bad economics, right?
• 43:02
  SPEAKER_02: You want to do the deal that makes economic sense, but you want to be aware of the constraints because particularly now under 842, they're far more readily managed than they would have been under 840.
• 43:13
  SPEAKER_02: Um, and you should have an opportunity to you want to make sure that the economic objectives of the transaction are met, um, regardless of what the accounting result would be.
• 43:24
  SPEAKER_03: All right, Mark?
• 43:26
  SPEAKER_01: I I guess I would say that notwithstanding that this is certainly a far gentler and kinder standard than 840 was, the devil is still in the details.
• 43:38
  SPEAKER_01: And time and time again, you have a situation where the lease on the surface looks good, but then you start looking into some of the fine print in the arrangement.
• 43:48
  SPEAKER_01: And I always tell our colleagues take a look at the default provisions, take a look at the indemnification provisions.
• 43:55
  SPEAKER_01: Because often the standard provisions are going to be okay, and it's those.
• 44:00
  SPEAKER_01: What if provisions?
• 44:01
  SPEAKER_01: Now we talked about as an example purchase options.
• 44:04
  SPEAKER_01: There might not be any purchase option except that in the event of a default, like if you don't pay rent, you can purchase the asset.
• 44:11
  SPEAKER_01: Well, sounds like you can just purchase the asset by choosing not to pay rent.
• 44:14
  SPEAKER_01: But my point is it may be hidden down in the default remedies or something like that.
• 44:19
  SPEAKER_01: So I mean this goes without saying in any standard that deals with complex arrangements.
• 44:25
  SPEAKER_01: Read the whole agreement, make sure you understand the nuances that come up in some of the default provisions, et cetera.
• 44:30
  SPEAKER_03: All right, definitely good advice there.
• 44:32
  SPEAKER_03: So now we're up to my favorite part of the podcast.
• 44:35
  SPEAKER_03: Get to stump you guys.
• 44:37
  SPEAKER_03: This one is actually involving some lease trivia about at least accounting standards.
• 44:42
  SPEAKER_03: So I have high hopes that you're you're gonna know the answer to this one.
• 44:46
  SPEAKER_03: So we spent a lot of time today comparing between 842 and 840.
• 44:51
  SPEAKER_03: And I think we've mentioned, well, I know we've mentioned on prior podcasts that uh 2016 was when the FASB issued the ASU that became 842.
• 45:04
  SPEAKER_03: 840, as we've also mentioned on prior podcasts, used to be FAS 13.
• 45:10
  SPEAKER_03: Anyone want to guess the year that FAS 13 became effective?
• 45:16
  SPEAKER_02: I believe I know it.
• 45:18
  SPEAKER_02: I hope I know it.
• 45:19
  SPEAKER_02: I believe it was 1974.
• 45:22
  SPEAKER_03: Mark?
• 45:23
  SPEAKER_01: I'm gonna go with the bicentennial 1976.
• 45:26
  SPEAKER_03: Ah, you guys are both so close.
• 45:28
  SPEAKER_03: Well, no, Mark, I almost give it to you because it was January 1, 70, 1977.
• 45:34
  SPEAKER_03: So my guess would be that the guidance said fiscal years beginning on or after December 15th, 1976, in which case you you would technically be correct then.
• 45:46
  SPEAKER_03: So very good.
• 45:47
  SPEAKER_03: Now, do you guys want a bonus question with some pop trivia related to the year 1977?
• 45:53
  SPEAKER_02: Sure, sure.
• 45:53
  SPEAKER_03: How can you pass on such a great offer, right?
• 45:55
  SPEAKER_02: Absolutely.
• 45:56
  SPEAKER_03: All right, what famous musician died in 1977?
• 46:02
  SPEAKER_02: Would that be Elvis?
• 46:04
  SPEAKER_03: Chad, score one for Chad.
• 46:06
  SPEAKER_03: You are correct.
• 46:08
  SPEAKER_03: Elvis was born January 8th, 1935, and he died August 16th, 1977.
• 46:16
  SPEAKER_03: So very good at your pop culture trivia there, Chad.
• 46:20
  SPEAKER_03: Um, both, as always, thank you so much for all the insight.
• 46:24
  SPEAKER_03: Really appreciate you joining me today.
• 46:27
  SPEAKER_01: Thank you.
• 46:28
  SPEAKER_01: Thank you.
• 46:30
  SPEAKER_03: That's our show for today.
• 46:32
  SPEAKER_03: Join me this Thursday when we'll have more ESG reporting content for you with a client's perspective on their role in climate reporting.
• 46:42
  SPEAKER_03: So that you don't miss this or any of our episodes, follow the PWC Accounting Podcast series wherever you listen to your podcast.
• 46:50
  SPEAKER_03: And to stay up to date on all the latest accounting and reporting news, sign up for a newsletter at viewpoint.pwc.com.
• 47:00
  SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
• 47:04
  SPEAKER_03: Thanks for tuning in.
• 47:06
  SPEAKER_00: This podcast is brought to you by PWC, all rights reserved.
• 47:10
  SPEAKER_00: PWC refers to the U.S.
• 47:12
  SPEAKER_00: member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PWC network.
• 47:18
  SPEAKER_00: Each member firm is a separate legal entity.
• 47:20
  SPEAKER_00: Please see www.pwc.com slash structure for further details.
• 47:26
  SPEAKER_00: This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors.