The new standard for lease accounting IFRS 16 was announced back in 2016. The deadline for organizations to be compliant is January 1, 2019. Not only is the deadline daunting, but organizations are finding out how much work is necessary to become compliant, having severely underestimated the implications. With their current software, it is often impossible to become compliant in the short amount of time remaining. What to do, now that the deadline is quickly approaching?
White Paper – Getting from here to there: The steps to transition from IAS 17 to IFRS 16
Becoming compliant with IFRS 16 needs a robust project plan. This requires the Finance, Real Estate, and IT departments to get organized, to understand the impact, and to make some important decisions.
As I explained in a previous blog, organizations that lease assets (such as equipment and office space) are currently not required to report such leases on their balance sheets if it is an operating lease. IFRS 16 forces lessees to report almost all leased assets. Consequently, balance sheets will become longer and leverage ratios (total assets divided by own equity) will increase.
Three reasons why Excel does not solve the problem
The new standard means that organizations must change the way contracts are reported and managed to provide the right financial information. Most of you now manage your contracts by using relatively simple tools such as Microsoft Excel to calculate the lease costs. Costs over the term of a contract are basically divided by straight lining. As changes with impact do not often occur, it is therefore relatively easy to amend a contract at renewal or termination.
However, IFRS 16 causes a major challenge for organizations that use Excel for their contract management. There are three reasons for that:
- Calculations become much more complex because of the financial lease character of most leases and the data that must be taken into account for the calculations.
- All changes and reasonable changes in a contract must be considered, establishing more active contract management and urgent need for disclosure of information beyond the figures.
- The results of the calculation have direct impact on the balance sheet. Beginning next year, there will be more attention focused on the new assets and liabilities for leases and the process of calculation and publication.
Organizations need to look for another solution that supports this new way of contract management. Financial reporting for IFRS 16 is an end-to-end process that includes technology, data collection, IFRS 16 interpretation and change management. This means that the software solution must be able to perform outside of Excel’s capabilities which increases demands from the software supplier.
What you may expect from your supplier
A supplier not only needs to understand the new standard, but also must be able to explain how organizations can become compliant. Additionally, the supplier must supply software that is capable of managing financial numbers while actively managing the leases of the assets and the information for disclosure. When the system calculates changes, it must also be able to determine the reason for that change with a direct link to the business. That requires a supplier who understands accountancy and the business of real estate and asset management.
Finally, the supplier must also be able to switch quickly to the new standard considering that there are only a few months to go. Organizations must take steps immediately to become compliant. Fortunately, the IFRS 16 standard offers several options for a pragmatic implementation to be compliant in time. These options are not only useful for faster implementation this year, but will provide benefits in the years to follow too.
Therefore, if your organization has only recently started working on IFRS 16 implementation (and there are many of them) it is advisable that you keep it simple and choose a pragmatic interpretation. In order to avoid not being compliant before the deadline, avoid being overly detailed and selecting complex options. When time is running out, keep it simple while remaining compliant.
Read more about the steps to move from IAS 17 to IFRS 16 in this white paper that we have written together with our partner Accenture.
Director Product Management