Counting down to IFRS 16 complianceRebecca Dagostino
The new IFRS 16 accounting rules will come into effect on 1 January 2019, requiring publicly traded companies to include leases on their balance sheets. After years of clever schemes to deliver ‘off-balance sheet’ financing, the authorities have issued IFRS 16 and ASC 842 standards focusing on transparency of lease obligations.
How can technology help ease the pain of compliance? Nick Nesbitt, Managing Director at HAYNE business partner CCH Tagetik UK explains.
If you haven’t started to prepare for IFRS 16, the next few months ahead are going to be tough going. Preparation is labour-intensive and demands extremely high attention to detail. Locating all your lease data is the first half of the battle. It involves not only finding but going through all your agreements with a fine-toothed comb to pull data on things like subletting, break clauses, expiry dates and whether lease payments vary depending on index rates.
The other half of the battle is logging all this data into a system, assessing IFRS 16’s impact and, ideally, taking remedial action. These new rules are expected to radically alter company’s financial statements for many years to come. Yes, the value of assets will go up significantly, but as noted earlier, liabilities will as well. This is one reason why it’s so important to know in advance what IFRS 16’s impact will be before the implementation deadline.
In an ideal world, a business would build in ample time to deal with unexpected hurdles in the process, look at the ‘before and after’ IFRS 16 picture and adjust leasing strategies and agreements. This may include deciding to exit certain leasing agreements.
The vast majority, however, are having to make up for lost time. Many finance teams are evaluating a range of technologies to accelerate the process of mining data from the lease agreements and assessing IFRS 16’s impact on corporate performance. Spreadsheets, which many companies think they can use to capture IFRS 16 data, are categorically not fit for this purpose. Not only are they chronically prone to human error, but they are also very difficult to tie in with your financial systems. Nor are Legacy ERP applications the answer. They will take more time and expense to tailor than you have at this stage.
Lease accounting solutions
Fortunately there are more suitable options designed to handle IFRS 16 compliance. One is lease management software. Beware, however of standalone systems that aren’t tied into corporate performance management software. These won’t be able to provide that crucial impact analysis.
The best option for companies just getting started now are corporate performance management software packages that provide an IFRS 16 module such as CCH Tagetik. Look for a cloud-based system that requires minimal setup and training so you and your team can hit the ground running.
A $23 billion global services company, operating in 39 countries uses the cloud version of the CCH Tagetik software for IFRS 16 compliance reporting and as a centralised repository for more than 14,000 property and automotive lease contracts. This level of lease volume would be incredibly difficult and risky to manage using spreadsheets or other legacy systems not designed for this purpose.