How a good lease accounting system solves common IFRS 16 mistakes

The IFRS 16 standard has been in effect for over three years now. Throughout this time, some companies made the transition purely for compliance, while others have used the time to gain strategic advantages from their leasing activities. Of those businesses that are ensuring they get a strong return on investment (ROI) from their leases, many have a lease accounting system. With a robust lease accounting system, the compliance requirements of IFRS 16 are not only faster and easier, but it can also solve a range of common IFRS 16 mistakes. This article outlines how a good lease accounting system can solve common IFRS 16 mistakes. Keep reading to learn more.

Inaccurate incremental borrowing rates (IBRs)

Getting the incremental borrowing rate (IBR) correct on a lease is critical. It’s the most important variable in lease accounting, as an inaccurate rate can increase a company’s liability and interest costs on its finance facilities. With Quadrent’s LOIS lease accounting analytics or Deloitte’s IBR calculator, decision-makers gain access to benchmarking and calculation tools that indicate whether its IBR should be adjusted. Having access to these tools allows for more informed and timely decision-making, which is especially important for companies that may have identified longstanding errors in their IBR. Further, when it’s audit time, having an accurate record of how and when IBRs were calculated makes it easier to complete the audit process on time while better managing relationships with auditors.

Incorrect and delayed lease modifications

When a lease modification occurs, a company should update its lease accounting system as soon as possible. To do this correctly, the lease change must be calculated by working out the difference between the rental payment and future asset value calculations. Further, if the asset changes for reasons such as equipment increase or decrease, the decrease in the value of the assets and the change in payment profile must be calculated. However, most companies calculate the change in payment value only, which can have significant profit and loss impacts. For example, if a mining company has nine large drills used at one of its sites, the payment profiles should change as the drills depreciate, break and require replacement. This ensures the liability and asset impacts of the changing scope of equipment are always correct. A lease accounting system makes the lease modification process accurate and efficient by automatically calculating the steps to ensure the required information is accurately reflected in the company’s balance sheet.

Manual lease accounting and reporting processes

Opting for manual lease accounting and reporting processes may seem like a financial saving as dedicated software requires investment. However, this saving is negated by the time and risk involved in manually accounting for leases. For example, a company that uses spreadsheets for a lease portfolio valued at over $100,000 is likely to spend up to five days per month on manual accounting and reporting processes. A system, by comparison, reduces this administration time by up to 75 per cent. Not only does this deliver efficiencies, but it makes time available for more strategic work, which can increase job satisfaction and make talent retention stronger. In short, the flow-on effects of investing in a good lease accounting system provide a significant operational, financial and strategic ROI.

Errors in spreadsheet in formulas

The other key problem with manual processes and spreadsheet-based systems is the likelihood of errors in formulas. To start, when a company uses a spreadsheet, it begins with its position, which can be prone to error, and these can subsequently carry forward errors unnoticed. 

In contrast, onboarding a lease accounting system can identify if there are already incorrect positions within the company’s leases and how to correct these errors. Further, when a formula error is identified by the lease accounting system, the new position can easily be updated, providing greater accuracy immediately and lowering risk.

Practically, common spreadsheet errors that a lease accounting system can address are those that are rife in spreadsheet-based systems such as inaccuracies in the asset’s net present value calculation (ie. NPV vs XNPV) and incorrect allocation from payment dates regarding in advance and arrears payments.

Ensure IFRS 16 accuracy with Quadrent’s LOIS

Whether a company is struggling with keeping its IBRs accurate and current or it’s having difficulty completing lease modifications correctly, a lease management system can help. Not only does a good system make IFRS 16 easier, but it provides a central hub of data from which to analyse and gain insights to drive stronger commercial decision-making. Further, with a quality provider that makes the transition process simple and efficient, a lease accounting system, such as Quadrent’s LOIS, can help companies address a range of IFRS 16 mistakes. And with tools such as Quadrent’s Analytics and Deloitte’s IBR calculator available to LOIS users, corporate decision-makers can benchmark or calculate their IBRs correctly, providing greater accuracy and peace of mind.

Join other companies who are managing their leases using LOIS, Quadrent’s lease accounting software, to gain greater control over the commercial terms of your leases and the data needed to make stronger commercial decisions.

Our team of CA-qualified accountants have in-depth specialised leasing knowledge and, therefore, can help you get the most value out of the system. Click here for more information.