Having strong systems and processes in place for your company’s leases along with an accurate incremental borrowing rate (IBR) is critical in ensuring your business is compliant with the IFRS 16 guidelines. These systems and processes also mitigate the risk of balance sheet inaccuracies and problems at audit time. Quadrent recently presented on these topics in a webinar hosted by CPA Australia in partnership with Deloitte. The webinar focused on the importance of having a current and correct IBR, the accounting treatment of lease modifications, and how businesses across Australia manage their leases and IBR calculations. The panel also discussed the commercial impacts of IBR changes, especially when inaccuracies exist.
Throughout the webinar, we surveyed the webinar attendees to understand how they manage their leases and IBR calculations. In this article, we provide an overview of the survey results so you can see how your business stacks up.
You can view the webinar recording here (Password: CPAAustralia2021) and download the slides here.
The widespread commercial impacts of leasing, including how an IBR affects a business’s balance sheet, highlights the importance of IFRS 16 compliance year-round, not just at year-end. Two of the survey questions asked in the webinar look at how confident businesses are in their IBR and their calculation methodology.
According to the survey results, only 19 per cent of attendees are confident that their IBR is correct. The lack of confidence in IBR accuracy amongst businesses has arisen due to the lack of tools available to check their calculation processes and rates until audit time. Even at audit time, a company’s auditors don’t have objective data to benchmark their client’s IBRs. The longer a business proceeds with an incorrect IBR, the larger the potential commercial impacts.
Some of the key challenges that businesses have with calculating their IBR include:
Attendees were also asked how they calculate their IBR. The different ways that attendee’s organisations approach their IBR calculations include:
Not surprisingly, a third of attendees use an internal process or methodology to calculate their IBR. There are several reasons businesses may adopt this approach, but it typically comes down to the culture and mentality of “making do” with current systems and processes that seem to be working currently. While this may seem like an efficient and straightforward approach, the commercial impacts of lease debt, especially when lease debt is often higher than a company’s other debts combined, means the risk profile of a company’s IBR is high.
Businesses can reduce their risk and ensure strong commercial decision making by establishing thorough lease accounting systems and processes. Further, with the IFRS 16 guidelines in place since 2019, auditors are less likely to be accommodative and forgiving of errors now that businesses have had a couple of years to adjust.
Companies can reduce their risk of having errors and ensure their leases are managed effectively by using software to manage their lease accounting needs. LOIS, for example, helps businesses to extract, validate and report on critical lease data.
The final question we asked attendees was which IFRS 16 solution they use. Just over a third of attendees say their company uses spreadsheets, 16 per cent of attendees use a lease accounting Software as a Service (SaaS), 6 per cent of attendees use an enterprise resource planning add on, and 2 per cent of attendees engage a Big Four firm to manage their lease accounting.
Again, it wasn’t surprising that a third of attendees said their companies use spreadsheets for their lease accounting needs. Spreadsheets are often a legacy solution in an organisation. It typically doesn’t directly cost the business and employees, especially if people have worked with an organisation for some time and are very familiar with each spreadsheet and workbook. While a business may not have a direct financial outlay for using spreadsheets for lease accounting, the costs and risks are important for organisations to consider and address. These include the:
A centralised SaaS solution for a company’s lease data addresses the costs and risks outlined above while providing a business with the data it needs to calculate and adjust its IFRS16 accurately.
The IFRS 16 guidelines have now been in place for two years. At this stage, it’s reasonable to expect that auditors won’t be as accommodative with errors now that businesses have had adequate time to adjust and get effective lease accounting systems and processes in place. If your company is still using spreadsheets to manage its leases and you’re unsure about the accuracy of your IBR calculation methodology, taking the time now to implement the right solutions will reduce your risk, save your employee’s time and ensure your balance sheet is accurate now and into the future.
At Quadrent, we can help your business establish the systems you need to accurately record your lease data and extract valuable insights for your business. Click here for more information. Our partners at Deloitte can also offer simple online tools for the calculation of your IBR.