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05 April 2018

IFRS 16 is fast approaching! Is your organisation ready?

For organisations that lease, 1 January 2019 is approaching fast. As I wrote in my blog post more than a year ago, the new IFRS 16 standard comes into effect on that date. This has created a de facto race to the finish line in the area of lease accounting.

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In order to meet the standard, organisations often have to examine thousands of pages of lease contracts, choose new software to organise this arsenal of complex figures, and implement these new systems in an expert manner within the organisation. Only then can correct numbers be published.

Thus, you can safely assume this is a huge task. That is why organisations were given three years to get ready, as the new rules were first announced at the beginning of 2016. Now that we are two-thirds of the way down the line, we can start to look at the numbers. Have organisations made any progress? And what lessons can we learn from the findings so far?

Organisations are jumping on the IFRS 16 boat

Now that the start date for the new standard is merely months away, we are on the eve of an implementation wave. Most affected organisations have already started collecting all the relevant information about their leases and their correct interpretation. Many are looking for an advisor who can help them find and implement a suitable software solution.

It seems that the compiling of 2017 annual results is a trigger for many organisations to start working on IFRS 16. However, if you put the scale of the job into perspective, that is quite late in the day. There are a lot of risks involved; employees who have to work behind the scenes using IFRS 16 are under real pressure, as resources in this area are often scarce.

Learning from the pioneers

The good news is that we can learn a lot from the 'early adopters'. These pioneers started the process almost immediately after the announcement and are now fully into the implementation phase. In the meantime, Planon has implemented its software several times for this group and gained a lot of experience as a result.

This involved not only challenges surrounding software and implementation, but also in the areas of data collection and coordination with auditors on the customer side. There are partnerships with Big Four audit firms that advise their clients and are able to implement the Planon software.

This is an ongoing process, because the new rules can sometimes be interpreted in several ways. We therefore look for solutions that are configurable, simple to use and scalable. In addition, each organisation has its own policy and way of working. It is a matter of fine tuning and refining where necessary in order to be able to achieve a compliant result in consultation with all parties involved.

There is one last group of organisations that has not started yet - only addressing IFRS 16 in a piecemeal fashion and not giving enough consideration to its consequences. In my opinion, this is a worryingly large group for which the changeover to the new rules will be a challenging task; especially because the right approach still has to be decided within the organisation.

Establishing preconditions

For these organisations especially, it is important to get started immediately. Key lesson at the start: set up preconditions for a quick implementation by streamlining all data and information from lease contracts. This is not easy, as lease contracts have been cast in different models in the past. Often these contracts go back years and have gradually been adjusted by mergers, acquisitions or divestments. It can also be that they originate from different countries and have therefore been designed differently.

In addition, you should decide on the right direction for your organisation. An accountant often uses the words 'that depends' after hearing a question about the application of IFRS 16. This is because the auditor can interpret the new standard in different ways and thus influence the complexity of the implementation. By determining the way forward in consultation with the auditor before the actual implementation, you can better prepare and thereby reduce risks.

Conclusion

I conclude that most listed companies wrote IFRS 16 in their agendas in bold letters for this year. They are slowly focusing on the implementation or have already started working on it. Organisations that are not that far along yet will have to follow quickly and are hopefully able to replicate the success of the pioneers who preceded them.

Let me ring the alarm bell one more time: postponing any longer is not really an option, as 1 January 2019 is approaching faster than you think!

David Stillebroer
Director Product Management