In January 2016, the FASB and IASB issued the lease accounting standards ASC 842 and IFRS 16. To comply with these new standards, almost all lease contracts will now have to be included on the balance sheet at the start of January 2019. In this blog, I share three steps to take to ensure your organisation will be compliant in time.
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Step 1: prepare an overview of the current situation
Even though 2019 is now not far away, it is unlikely that your organisation’s preparations are at an advanced stage. However, it is important to start now, as the work that has to be done is quite time consuming. First of all, you will need to prepare a sound overview of your current lease contracts and data. How many lease contracts do you have? Where are they located? Are they correct? Are relevant changes up-to-date? Are all financial attributes correct? Time will also be needed to clean the data and to validate the calculations in the contracts. As these will have a major impact on your future balance sheet and the Profit & Loss account (P&L), it is very important to start your lease contract investigation right away.
Airlines, for example, will have to include all their lease contracts of airplanes on the balance sheet. You can imagine that this will have a huge impact. They need to know precisely what the impact will be, so that they can inform stakeholders and investors. Naturally, it will be important to explain the impact correctly and well, to avoid unnerving or worrying them.
This sounds quite simple, but many organisations might not even know how many lease contracts they possess. This does not only apply to relatively small organisations; even multinationals sometimes face difficulties seeing an overview of all relevant contract data.
Step 2: determine which tool to use
The second step is to answer the following questions: How does your organisation handle its data? And how do you get the data into your general ledger system? A review of your system’s ability to support the new requirements will be necessary. If there is no suitable system already available, there will need to be a selection process to source a suitable software solution for lease accounting, in order to be compliant with the new regulations.
Step 3: adapt your processes
The third step is the change in processes. The new standards will require companies to adapt their processes to stay compliant. Assistance of a consultancy company or an auditing company is useful here, to ensure compliant processes and to support the impact analysis.
It is very important to know what impact the contracts will have on the balance sheet and the P&L. It is recommended to use software that offers two types of reporting. One way of reporting that is compliant with the current standards during the transition period, and one way of reporting which supports reporting from 2019 and retroactively over the period 2016 - 2019. Your organisation needs to know the exact differences in order to make adaptations to their lease contracts and their relevant processes.
2019 is approaching fast!
All the steps needed are time consuming, and organisations will want the comfort of ensuring enough time for the impact analysis, and the definition and implementation of new practices for portfolio planning, lease administration and transaction management.
The devil is in the detail. What if organisations are not ready and compliant by the start of 2019? Naturally, they might incur a fine, but think bigger. In the end, you do not want your organisation to be the one that is not compliant in time, do you?
Dr. David A. Martin
Business Development Director IFRS | Lease Accounting expert
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