The advent of IFRS 16 in 2019 required companies to take inventory of all the leases held across different locations and departments, especially for property leases that made up the bulk of the portfolio from a materiality perspective. The exercise of bringing information into one central location helped companies identify duplicate leases and expired contracts that may still be costing the business money. However, some companies still find it challenging to manage their leases efficiently. For those businesses that have established systems and processes to manage IFRS 16, a lack of cross-functional collaboration can cause inefficiencies in leasing, especially across finance and property teams.
Quadrent, in collaboration with Green Cross Health, recently hosted a webinar outlining why it’s important for property and finance teams to collaborate effectively on leasing their company’s assets.
View the webinar recording here and keep reading below for a summary of what was discussed.
Finance professionals focus on many things, from invoicing and payments to cash flow forecasting and other activities. When it comes time to complete the IFRS 16 compliance requirements, finance teams are typically involved in data entry and reporting tasks in the lead-up to deadlines. In contrast, a property team may be dealing with the company’s leases and assets every day, meaning they are closer to the factors that impact many of the key IFRS 16 inputs.
Differing remits and time horizons are the foundation of the disconnect between finance and property teams. While finance professionals may be concerned with the inputs and objectives of the current reporting cycle, property teams need to take a longer-term approach to ensure they’re addressing their commercial responsibilities. Learning how to collaborate effectively with these differing objectives in mind will help finance and property teams to achieve better financial and commercial outcomes.
IFRS 16 is an International Financial Reporting Standard (IFRS) that deals with leases. It was issued by the International Accounting Standards Board (IASB) and came into effect on January 1, 2019. The standard fundamentally changed how leases are accounted for in financial statements.
Under IFRS 16, lessees are required to recognise most leases on their balance sheets as assets and liabilities. This means that lessees must record a "right-of-use" asset, which represents their right to use the leased asset, and a corresponding lease liability, which reflects their obligation to make lease payments. In the majority of cases, property leases make up more than 80% of an organisation’s ‘right-of-use’ asset, which reinforces the need for closer collaboration.
In a finance team, people have a broad remit. Many roles serve a reporting and compliance function, and results need to be reported in a timely manner. Typically, finance teams follow a regular monthly cycle of reporting tasks and deadlines. A company’s leased property assets and liabilities form a part of the finance team’s overall reporting responsibilities.
A finance professional’s day-to-day tasks include gathering the right information, ensuring IFRS 16 compliance, delivering reporting to stakeholders, engaging with auditors, and understanding the materiality of key data points within each reporting cycle. In the early stages of IFRS 16 implementation, many finance teams used spreadsheets to manage their lease data. However, leases are often fluid, with key data points changing frequently, which can lead to errors when data and calculations are kept within a spreadsheet rather than a centralised, integrated system. The finance team should play a crucial role in ensuring data is accurate, particularly by implementing systems that provide a single source of truth on data points to the wider company.
Generally, a property team’s decision-making is driven by commercial and financial factors. For example, they may liaise with landlords, assess whether a lease is suitable for the business, and complete ongoing inspections and analysis of how the company’s properties are performing. Sometimes, consolidation may be required if the business has too many leases across too many sites. In these cases, a property team will often work with the operations team to ensure the company has the right number of leases and the structures are conducive to meeting the business’s objectives. Property teams may also work on a longer time horizon than finance teams, which are typically focused on the tasks required in the current reporting cycle.
Finance teams need the specific property data inputs required for their IFRS 16 and other reporting, while the property team manages the assets that impact these numbers on a day-to-day basis. Some of the day-to-day activities of a property team include building strong relationships with lessors, managing rental payments, moving into new leases, managing downsizing, consolidating properties and locations, ensuring key dates don’t get missed and negotiating lease terms.
In the current economic environment, businesses and their people are being asked to do more with less. Technology makes this possible by helping finance and property teams to make reporting, payments, notifications set up and information sharing more efficient. However, an automated process, such as financial reporting, isn’t worth implementing if the company doesn’t manage its data accuracy properly.
With specialised, purpose-built systems, different teams across a business can input and view the specific data that they need to monitor to uphold their roles and responsibilities. For example, a property team may include key dates and notifications around individual properties such as CPI changes, renewal periods and other compliance aspects like insurances. For a finance team, any changes to a lease payment or timeframe needs to be accurately reflected in the calculations for compliance purposes – and IFRS16 can be complex.
To that end, companies that proactively look to systemise how they collect, store and analyse lease data and ensure its accuracy at all touchpoints will be better prepared in the event of personnel changes, reporting changes, and the introduction of new regulatory requirements.
Just because a business has a system, it doesn’t mean it’s fit for purpose. For example, a spreadsheet is technically a system, but it’s not a long-term solution to manage the complexities of lease accounting and IFRS 16. Similarly, if a system is complicated to operate and only a small number of people use it, the company isn’t maximising its return on investment (ROI) for the software. Companies need to ensure any systems that they implement enable compliance, can integrate with existing systems, are easy to use, add value to the business’s processes, and drive real-time insights with intuitive dashboards and efficient reporting. If you can’t report on it, you can’t measure it, and then you can’t act on it.
Change management is critical, too. The technology vendor and key stakeholders within the company need to establish a plan for familiarising people with the new system, training them to use the technology, and demonstrating how extra functionality, such as automation, can help people save time.
The right system should have the capacity to be customised to address many needs through one data entry point. For example, many teams now need access to environmental, social and corporate governance (ESG) data, finding systems that can be updated to accommodate the dynamic reporting and regulatory requirements is critical. A property team, for example, may look at details such as electricity expenditure across locations to identify outliers and where efficiencies can be realised. And a finance team needs the high-level financial data that may be calculated based on the property team’s day-to-day work.
There are a number of metrics and key performance indicators (KPIs) that finance and property teams need to monitor. These metrics include lease occupancy rates, usage, lease renewal rates and the total lease costs. A business’s finance and property teams should analyse these metrics to identify cost-saving opportunities and performance improvements. This also opens up the ability for property and finance teams to establish shared KPIs and have regular cross-functional meetings to make sure shared objectives are being achieved.
Effective communication and monitoring metrics and KPIs will set the foundation for finance and property teams to work collaboratively. Some of the best practices for collaboration that cross-functional teams should implement are a regular communication cadence, joint planning sessions, identifying shared goals and having properly defined systems and processes where finance can hear from property what is important and key upcoming dates can be shared.
Including finance early in the process of establishing a new lease agreement can help with influencing negotiations and loading the lease information correctly so it can be measured properly. Further, using a lease management and accounting system where the property and finance teams can view shared dashboards ensures the necessary data is available at all times.
As businesses continue to change and requirements, such as ESG reporting, are mandated, companies will need to change the way they work. Some key trends emerging that will impact property and finance teams include greater cross-over of roles and responsibilities, wider financial ramifications as different teams work closer together, implementing AI and machine learning to make lease management more efficient, and managing macro changes such as rising interest rates.
Effective collaboration between finance and property teams is crucial for lease management in ensuring that the company’s commercial objectives and compliance requirements are met. By fostering open communication and implementing best practices, such as centralising data management and analysis, organisations can optimise their lease portfolio efficiency, making informed, data-driven decisions through a centralised system.
Quadrent's lease accounting and property management software, LOIS, can foster better collaboration between property and finance teams. Click here to contact our team for more information.