With an adoption date of 1 January 2019 looming there is increasing pressure for companies to understand and model the impact of IAS 17 vs. IFRS16 sooner rather than later.
WHAT CHANGES UNDER IFRS 16
In short, all leases (including operating leases) will be presented on balance sheet to provide a fairer representation of the firm’s operations.
The deadline for IFRS 16 compliance is the first reporting date on or after 1 January 2019. However, firms that choose to adopt early will be required to include retrospective reporting in the prior financial year.
TIME IS RUNNING OUT
It may seem that over 13 months is ample time to consolidate all of the relevant leasing information and meet the compliance deadline. However, companies are advised to run impact assessments and model what-if scenarios to determine the best approach for the adoption of the new standards. The impact of the change also needs to be communicated to stakeholders and allowed for in terms of forecasting and long-term planning.
The lengthy data gathering and analysis phase will mean businesses will be pressed for time (particularly if they need to prepare for disclosure in the year prior to adoption).
The sooner firms begin, the better.
LEASE DATA GAPS
As firms prepare to transition from IAS 17 they will be required to (1) apply the new lease definition to their (current and future) portfolio, (2) apply lease recognition exceptions, and (3) select a retrospective or modified transition method. Before these assessments can be made the challenge is to collate existing lease information.
A considerable number of lessees may be missing key information as they prepare for asessment. identifying, sourcing, validating and applying figures, dates and descriptors can be a lengthy process that will involve considered research, negotiation and calculation, all delaying implementation.
The fact that many businesses are yet to start their implementation project or gain an adequate grasp of all their global lease data only makes the challenge more daunting.
WHAT ARE THE BIGGEST LEASE ACCOUNITING IMPLEMENTATION CHALLENGES?
Several challenges exist as firms gear up to meet the IFRS 16 requirements. From collating the lease information required for compliance to identifying gaps in IT systems through to the implementation of the necessary lease accounting software. This is made all the more complex for large organisations, whose lease information is often disjointed and dispersed both geographically and departmentally.
All of this equates to a new approach and attitude towards lease management, lease accounting and lease reporting. Manual spreadsheets require close and constant management, errors are difficult to identify and they struggle with in life changes. It may be better to evaluate and implement a software solution that takes the time and hassle out of managing and reporting on your lease portfolio.
A SYSTEMS UPDATE IS LIKELY REQUIRED
To make the transition process as smooth as possible, firms should look to deploy sophisticated but simple software that will enable them to create a centralised database of their lease accounting information.
Quadrents lease accounting solution, LOIS – Lease Accounting (“LOIS”), is an advanced application that supports both lease accounting standards, IFRS 16 & FASB ASC 842.The solution allows users to account for and manage all lease asset types, ranging from IT, plant & machinery to material handling equipment, vehicles and property. LOIS provides users with all the tools necessary to produce the accounting information required to accurately complete the financial statements obligatory for compliance; including income statement, cash flow and balance sheet.
LOIS, will even run the before and after impact of new and old standards, the critical amortisation schedules, journal entries and disclosure summaries.
Getting Prepared: A 7 Steps Guide To Lease Accounting Compliance
If you are interested in getting more of a grasp of how the changes to lease accounting will impact your company and what steps you can take to help ensure full compliance with the new standards, you should checkout our free 7 Steps to Compliance PDF