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May 03, 2018

75% of all organizations are still at the start of implementing new lease accounting rules

With only nine months left until IFRS and US GAAP, organizations must include all leased assets on their balance sheets. The new standards, named IFRS 16 and ASC 842, will bring a fundamental change in financial statements. Almost every department within an organization has leases, but only a significant number of these contracts are recognized on the balance sheets for lessees.

FAQ - How new lease accounting standards will impact your business

Five frequently-asked questions about lease accounting and our answers to these questions.

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Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have decided that lease contracts should be included on the balance sheet from the beginning of 2019. This way, the figures of organizations will become more comparable and will increase financial transparency. As a result, financial liabilities will increase and solvency will decrease.

These are large adjustments for organizations. The important questions are: where do they currently stand and what difficulties are they facing?

Greatly shocked

Although these are intimidating changes, all leases must be reassessed and purchase new software - no less than 75% of all organizations are still at the start of the implementation, as concluded by my colleagues in Deloitte’s Risk Advisory department and myself. We are closely involved in the compliance solutions of IFRS 16 and ASC 842 with Planon playing an important role, as they are a software partner of Deloitte in this field.

There are several reasons why most organizations have not yet dealt with new lease accounting standards. Previously, the focus was on the annual figures for 2017 and the implementation of new revenue recognition standards and the GDPR privacy law. That work is now almost completed, so that organizations can mobilize sufficient resources to implement the new standards.

Customers regularly think they can complete the implementation in a few weeks, but it will take a take much lengthier amount of time, anywhere from six to nine months if they want to do it right

Careful with expenses

The reason why most financial professionals underestimate the duration of the implementation of IFRS 16 and ASC 842 is because they think it is very similar to the new revenue recognition standards, such as IFRS 15. In fact, these standards mainly affect the Finance and Accounting department, while IFRS 16 affects more diverse departments including IT, procurement and real estate management. As a result, financial professionals have less control, depending on the work of several sections of an organization.

Despite the growing economic market, many organizations are careful with their expenses. They want to do as much as possible themselves and prefer not to use external resources. However, this would be wise if you look at the scale of the operation.

In 95% of all cases, organizations know how to assess the new standards, but in the other 5% of cases, it is a bit more complicated because the focus of lease agreements has changed from “what type of lease is this agreement?” to “is this a lease or not?”For example, when a floor of an office building is leased by the organization, it is clear that it is a leased asset. A parking space that you share with other users, however, raises the question: is that also a leased asset or a service element, as service contracts are not required to be capitalized on the balance sheet?

Time and energy

Preparing for the new lease accounting rules takes a lot of time and energy, so it is important to use the right software to take some of the worries away. Most software solutions do not support IFRS 16 or ASC 842 which is why Deloitte is pleased with the partnership with Planon. In this context, Deloitte offers the advice and guidance for the implementation, while Planon provides the software.

Deloitte and Planon are complementary to each other: we know the market and customers well, while Planon has extensive experience and understanding with the right software. That is why we want to continue to shape this partnership to prepare our customers for the future.

Visit Deloitte’s web page to find out more about the International Financial Reporting Standards.

 

Anthony Maalste
Accounting Specialist Deloitte