How to Ensure Data Integrity for IFRS 16

The processes for capturing, maintaining and reporting lease information is key to not only maintaining compliance but also saving cost & time for organisations.

Best processes ensure finance is aligned with the business units directly involved with the source data acquisition and will drive a more streamlined approach to acquiring, maintaining and updating lease information.  Software solutions can be more advantageous for companies with large lease portfolios and can offer long-term benefits and cost-savings for clients. 

Below are key considerations in the lease compliance process:

How should we capture new leases?

Aligning this process with your procurement team should be fundamental when finalising this process as the procurement team will see all new leases as well as service agreements which may contain embedded leases. Procurement should be able to acquire new leases and include a step in the process to transfer this information to the finance department for capture. Treasury can also get involved here to analyse the procurement method and ensure the best use of capital and the lease vs buy assessment.

How can we track and monitor changes to leases?

Throughout the life of a lease, many changes can be required from modifications, terminations & reassessments. It’s important that software solutions can record these changes in line with our ERP systems, in a perfect world all changes would be made as and when they come through however in lease commercial teams there can be a delay in obtaining information from suppliers within a timely manner – software solutions should be able to handle this timing difference and automatically adjust the accounting. Periodically requesting plans for assets can help to pre-empt the delivery of the lease information changes.

How should we manage the End-of-Term?

Reporting end of lease decisions by asset users back to Finance is a key to saving costs & time. 

For example:

• If accounts payable is not informed that the lease term has ended, they could continue making payments on it.
• Finance also may continue to include the lease on our balance sheet. This could create a prior period adjustment for Finance.
• Incentives for asset owners to provide information on the end of term decisions can help drive more accuracy in the lease financial outputs.

Should we look into the implementation of software systems?

Lease accounting applications will usually require an upfront investment but may generate savings in the long-term with less human resources required. Along with the automated process for reporting and journal outputs, software solutions will also reduce the risk of manual errors. 

Below are 3 key benefits for your organisation regarding process updates:

1. Automation of accounting entries - No need for a reliance on technical expertise to ensure the correct accounting entries are generated in the correct timeframes. A proper system will automate all of this. Beware of those systems that only do amortisation schedules as you still need the journals. 
2. Notifications – you should be able to automate asset tracking processes and generate notifications to asset owners verifying the existence of assets.
3. Integration – you should be able to integrate the lease accounting application with the IT, Fleet & Real Estate asset management systems. The integration will allow uniformity between lease accounting applications and individual systems.

Will this generate cost-savings?

A well-maintained lease portfolio can generate savings. Notifications to asset users of critical dates can help to ensure timely & optimal decision-making on these assets. Clarifying the decision making at the end-of-term for assets can prevent accounts payable from continuing payments to the lessor. The improved tracking of your assets will allow you to analyse terms in more depth and compare to industry or market rates.

With your data in one place you can engage experts to benchmark and analyse your portfolio, this alone can pay for the subscription of the system with the ROI of improving the leasing process.

At Quadrent, we provide our clients with software solutions designed to manage and report on leased assets. We work to deliver long-term cost-savings across your organisation and assist with all facets of equipment finance needs, from providing operating leases to asset management, IFRS 16 compliance and reporting. Our world-leading LOIS solution is designed to assist in creating a robust process that effortlessly guides you in accounting for all leases to maintain compliance with IFRS 16 and uncover hidden ROI savings within Leasing.