IFRS 16

Example of IFRS 16 in practice

These images illustrate an IFRS 16 financial report example for a 30-year lease contract (from 2017 to 2047).

We see the monthly lease payment (€10,000 in this example) and how this is decomposed each month into an interest part and an amortisation part (“net movement”). We also see how the balance sheet and P&L are impacted by this lease contract. The interest paid on the contract shows the typical decreasing trend during the lifetime of the contract (this is normal for every annuity) and the depreciation on the right to use (RoU) the asset is constant in time (the green line).

How to become IFRS 16 compliant

From our experience implementing IFRS 16 software for multinational clients, we advise that you keep these steps in mind as you go through this process.

_{1. Assess your situation}

How many leases do you have? How many lease management systems do you currently use? Identifying your starting point, even without the extensive data collection that will come later, will help in selecting a software system and financial partner for implementation.

_{2. Select a software solution suitable for IFRS 16 reporting}

The information applied to the IFRS 16 standards should be handled in a SOX-compliant way with clear history of changes and authorised workflow, a level of maturity in data management that a simple spreadsheet will not offer. The process of selecting IFRS 16 software is an important step in your implementation process and you should be sure to choose software that has been validated by the top accounting firms. 

_{3. Choosing the team} 

Once the target model has been decided, the implementation starts and the right stakeholders need to be involved: group and local finance departments, contract management, the external auditor, and possibly external consultants to run the project and act as system integrator. Don’t forget to include internal IT and relevant technology vendors.

_{4. Select a reporting method compliant with IFRS 16} 

The data requirements for the contract life cycle depend heavily on the transition scenario that is adopted. For a full retrospective approach, the lease contracts are administrated as if IFRS 16 would have been in use from the start. This means that all life cycle data needs to be entered into the systems for all existing contracts. For the modified retrospective approaches the data requirements are less ambitious. For a successful IFRS 16 implementation, it is important to decide which approach to adopt. 

_{5. Collecting the data}

An important step will be to collect all relevant contract data and migrate the data to the contract management system. This should be supported by relevant tools for data migration and cleaning. Especially if you decide to adopt the full retrospective approach, the data requirements are considerable.

_{6. Implementation according to international financial reporting standards}

Planon’s IFRS 16 implementation approach has four phases, starting from scoping the project, through technical set up, to support during go-live. This implementation phase requires both technical expertise to set up systems, and also accounting knowledge to determine how use-cases will be applied.

_7. Testing

After implementation, but before go-live, testing takes place. During testing, it is recommended to include all exchanges of data in the testing. One could also consider embarking on a certification process for the accuracy of journal entry exchange between the lease contract administration and the general ledger. 

_{8. Training}

Training of end users is also a critical step in the implementation. Training is especially important to make the most of an IFRS 16 implementation, so the result is not only IFRS 16 compliance but also improved contract management. This means that contract managers have a clearer overview of the lease portfolio and can better anticipate management actions such as stage transitions, renegotiations and exercise of renewal and termination option.

Lessons learned from IFRS 16 software implementations

Lessons learned from IFRS 16 software implementations 

• Based on early adopters, these are the lessons learnt and examples which will help you to successfully move to IFRS 16: Involve stakeholders in time, including local teams/colleagues in different countries.Take care of data (completeness and quality).Understand scope of your limitations, ERP, number of entities, currencies, interface and sourcing system. Learn from Refresco’s IFRS 16 implementation with KPMG in this example. 
• Assemble a comprehensive RFP to source what is needed for software and services. Understand time constraints and include provision for slacks, testing errors, corrections and buffers. Full retrospective is complicated and time consuming, hence one lesson learned is to concentrate on a modified approach for IFRS 16. Set up an approach for calculation of interest/borrowing rate and indexations based on your contract portfolio.
• Learn more from Accenture on where to start with your IFRS 16 lease accounting implementation in this white paper full of tips & tricks.   Assemble a comprehensive RFP to source what is needed for software and services.

These lessons learned will help you to plan and execute a successful IFRS 16 implementation project for your organisation and ensure the lease accounting software is successfully implemented. Please contact Planon if you need assistance becoming compliant with either IFRS 16 or ASC 842.