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IFRS 16 implementation – how well has it gone?

By April 2, 2020 No Comments

As we ramp into 2020, let’s take a look at what IFRS 16 has meant to you and other businesses.

Questions we should consider are:

  • Was the transition easier than expected?
  • Does compliance still raise challenges?
  • Have unforeseen benefits been realised or promised spin-offs failed to materialise?
  • Have the effects been understood by, and communicated to, all interested parties?

PWC’s  recent 2019 Global IFRS 16 Post-Implementation Survey “sought to understand how IFRS 16 implementations progressed in the context of the considerations above and where challenges continue to reside post-transition”. Quadrent is conducting a similar survey and we’ll be sharing the results from our LOIS (Lease Optimisation information System) customers who have made the transition to IFRS 16 in a subsequent blog once the data is collected.

Conducted across 50 countries, the PWC survey interviewed 400 companies, 57% of which had revenues in excess of $1 billion.  Among the findings:

  • 55% of respondents indicated that the challenges brought about by implementation were unexpected.
  • 72% believe that their current solution does not provide full functionality to cope with their lease accounting and reporting requirements, in particular “Day 2” requirements to effectively deal with modifications
  • 92% indicated that business benefits have not yet been explored or that the implementation process has resulted in little to no benefits to date
  • 32% felt that standard setters did not provide sufficient guidance and transition reliefs to enable an efficient and cost-effective transition process.
  • 87% have not restated historical financial information and performance measures

The results of the survey showed a few key themes:

Race to implement

Having underestimated the effort required to transition to and then comply with IFRS 16, many companies had failed to utilise the entire
3-year implementation period. Then, when embarking on an IT solution they “encountered significant issues with implementation of IT solutions, partially due to the lack of functionalities, immaturity of lease IT systems and vendors in the market, and partially due to the often diverse IT landscapes and business processes within a company”.

As a result of these implementation shortcomings, companies are using workarounds and spreadsheets, where the requirement going forward is to streamline reporting processes, integrate IT solutions and automate lease classification. However, cloud-based IT solutions are available, and they do not necessarily require anything other than a web browser.

 More guidance needed

IFRS 16 caught many companies out as they underestimated the complexity of correctly bringing leases on balance sheet and technical knowledge and effort required to do so . They felt that they would have benefited from (and might still benefit from) more guidance in areas of judgment such as determining lease term and appropriate discount rates, managing lease modifications and the interaction with other standards such as impairments-post IFRS 16 and tax accounting.

Benefits to come

One of the expected spin-offs  of IFRS 16 was that companies would enjoy increased governance over their leases and implement more robust lease versus buy decisions. Teams were formed to gather detailed lease data, collate it and load it. Despite the availability of more centralised and comprehensive lease data, many companies have not yet identified or experienced any benefits from IFRS 16 beyond compliance.

However, with the right tools in hand, there is now a clear opportunity to  analyse and better-understand lease portfolios to reduce risks and achieve cost savings through-out the entire lease lifecycle.

We’re here to help

If you’ve had similar experiences with IFRS 16 (or AASB 16), reach out to Quadrent. With 60+ clients using LOIS, we offer a fully functional, easy to implement Cloud solution for all “Day 1” and (more importantly) “Day 2” requirements. Furthermore, our team of specialist accounting consultants and a templated implementation process mean we can get LOIS up and running in under a month. And, with data centralised in LOIS, our experience as a lessor and full accounting compliance team we can be used to anaylse your real world lease portfolio for opportunities for reduce risk, reduce costs and increase productivity.

In summary, IFRS 16 has obviously come with some unexpected challenges. However as PWC notes, they can be overcome because fully automated IT solutions do exist and are  used successfully across the globe to comply with both IFRS 16  and AASB 16.

It is now time for businesses and their stakeholders, lenders and investors to reap the benefits that can be delivered by the internal centralisation of lease data, improved management of lease portfolios, accurate reporting and digitisation of the whole lease management function.

 Get in touch to discover how Quadrent and its world-leading lease accounting solution LOIS can help you achieve the obtainable benefits of IFRS 16 or AASB 16.