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April 05, 2018

IFRS 16 is quickly approaching! Is your organization ready?

For organizations that lease, January 1st, 2019 is rapidly approaching meaning limited time to integrate the new IFRS 16 standard. This has created a de facto race to the finish line in the area of lease accounting.

In order to meet this standard, organizations often have to examine thousands of pages of lease contracts, choose new software to organize this arsenal of complex figures, and expertly implement these new systems within the organization. Only then can correct numbers be published.

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Therefore, it is fair to assume that this is a tremendous task. That is why organizations 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 organizations made any progress? Also, what lessons can we learn from the findings so far?

Organizations are jumping on the IFRS 16 boat

Now that the start date for the new standard is merely months away, we are on the cusp of an implementation wave. Most affected organizations 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 organizations to start working on IFRS 16. However, if you put the scale of the job into perspective, this is quite a late start for such an important project. There are a lot of risks involved: employees who have to work behind the scenes using IFRS 16 are under 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 can 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 organization 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, however, one last group of organizations that has not started - only addressing IFRS 16 in a piecemeal fashion and not giving enough consideration to the consequences.

Establishing preconditions

For these organizations especially, it is important to start immediately. A very important first step to consider is to: 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. Difficulties also arise when the organizations originate from different countries and therefore have been designed differently.

Additionally, you should decide on the right direction for your organization. An accountant often says “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 therefore influence the complexity of the implementation. By determining the next steps in consultation with the auditor, you can better prepare and thereby reduce risks before the actual implementation.

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. Organizations that have not made much headway will have to follow quickly and are hopefully able to replicate the success of the pioneers who preceded them.

Let me ring the alarm one more time: postponing any longer is not an option, as January 1st, 2019 will be here before you know it!

David Stillebroer
Director Product Management