5Qs for Occupier's Matt Giffune on how retailers have come to terms with revised GAAP standards

In 2019, the Securities and Exchange Commission amended their generally accepted accounting principles (GAAP) and turned retail CFOs offices upside down. Thousands of leases bred thousands more liability statements on balance sheets and pandemonium in retail accounting departments. 

Business boomed for lease accounting software providers like Occupier, whose lease management module helps brands such as Claire’s, Bonobos, and Shake Shack wade through the new waves of calculations. We spoke with Occupier’s co-founder Matt Giffune about the broad effect the accounting change has had on the retail industry.

How did the change in the GAAP reporting standards regarding real estate make things difficult for retail companies?
Prior to the GAAP standards change in 2019, companies could record most real estate expenses as operating expenses. Now they have to record future lease obligations expenses as a liability on their balance sheets. This forced them to follow a Byzantine code. Most assets leased will result in a liability, so you need to follow very strict models to account for them. It puts an onus on CFOs and controllers to get up to speed and produce the necessary disclosure reports. Their financial statements will require a disclosure of information as it pertains to their leases, including costs broken down by lease type, weighted average, lease term and discount rate, and variable and termination clauses, lease modification, variable payments. Things like rent escalations, etcetera.

Did the pandemic outbreak exacerbate the problem for traditional national chains?
Yes. Retail as a whole has been affected by COVID-- economic uncertainty, changing consumer shopping habits and the cherry on top is GAAP’s ASC 842 compliance standards. Big national chains have an uphill battle in that they have more locations, more processes, and more leases to account for than their direct-to-consumer counterparts do. With the new lease accounting rules, all leases including finance, operating, and embedded contracts will need to be reviewed and accounted for on the organization’s balance sheet.

Did direct-to-consumer brands gain an advantage in their brick-and-mortar expansions because entrenched chains were stalled?
Direct-to-consumer brands are also impacted by the new lease accounting standard. They have a slight advantage in that they have a smaller lease portfolio to account for than traditional national accounts. Ultimately, fewer real estate and equipment leases means fewer lease modifications, fewer impairments, and amendments and a lower lease liability on their balance sheets. And with that, we are seeing growth from ecommerce brands in brick-and-mortar.