IFRS 16 compliance is now in play, are you ready?Sarah Whitworth
Unless you’ve been living under a rock for the last year or more, you would have heard about IFRS 16 and the impact it has on the accounting process and requirements for Leases. 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 on the balance sheet. Issued in January 2016, it became effective for annual reporting periods starting on or after 1 January 2019. It replaces IAS 17 Leases and related Interpretations.
“IFRS 16 changes the accounting substantially for lessees. The new Standard eliminates a lessee’s classification of leases as either operating leases or finance leases. Instead, almost all leases are ‘capitalised’ by recognising a lease liability and right-of-use asset on the balance sheet. There is little change for lessors.
IFRS 16 is the new accounting standard for lease reporting under International Financial Reporting Standards (IFRS). It introduces a single accounting model that requires lessees to recognise assets and liabilities on the balance sheet for all leases with a term of more than 12 months (unless the underlying asset is of low value).
Under IFRS 16, lessees are required to record leases as assets, representing the right of use (ROU) of an underlying leased asset (for example, a floor in an office building), and as liabilities, representing the obligation to make lease payments. Lease liabilities are reported at the present value of future payments, with only depreciation and interest cost separated.” Excerpt from IFRS.org
How is this going to impact your organisation and what does this mean in practice?
Without going into too much accounting detail, we will look at some key considerations when implementing an IFRS 16 solution and how you can make the process as pain-free as possible. In our experience we always go through these six key steps (read in more detail in our IFRS 16 ebook) with our clients to help them build a roadmap towards compliance.
Six key steps to help you build a roadmap towards IFRS 16 compliance:
- Collect the raw data on each lease;
- Review each lease individually;
- Decide which methodology to adopt;
- Perform the calculations to determine the correct postings;
- Post IFRS 16 adjustments in underlying ERP(s) or consolidation system
- Report and disclose the result in statutory accounts.
Download our eBook to find out more about the key steps in detail.
What does this mean in practice?
IFRS 16 is a far more onerous calculation process than current regulations in that:
- Leases must be continually monitored and reviewed and accounted for accordingly
- Tracking/management of data/postings across the life of the lease(s) is more important than ever
What stage are you at in complying to IFRS 16?
We know that many companies are at different stages of complying to IFRS 16. For us, we are seeing three common scenarios;
- Those companies that already have a leasing software package. In this case, it is likely that this software package will be updated (if it has not already been done) to meet the requirements of IFRS 16;
- Those companies that have an ‘in-house’;
- Leasing database – In this case, it will need to be further developed to meet the requirements;
- Those that have no underlying solution in place. They will need to start from scratch, and finally
- Those who have been through the first audit and found flaws in their implemented systems
This is a major project to deliver and implement as live within the time-scales set. This will take a high level of expertise and require a huge commitment from both the finance and IT teams when both have limited resource. This will cause considerable pain and a high level of risk.
Take the pain and risk away
To reduce the pain and risk you need a solution which:
- Includes a data repository, calculation modelling functionality, reporting and disclosures in one easy-to-use solution.
- Helps you transition to the new leasing regulations quickly and effectively.
- Is automated and easily manages the large volumes of leasing data by providing data collection, calculations, reporting and disclosures.
Key IFRS 16 solution features:
- ETL process – to accelerate integration and data capture from any system
- Workflow – which guides users through steps to achieve IFRS 16 compliance
- Data Model and Scenario Analysis – The data model is compliant with the main requirements of IFRS 16. It includes the ability to capture lease information, different currencies, and to discount cash flows. It supports ‘Full Retrospective and Modified Retrospective A & B’.
- Accounting & Calculation engine – An ‘accounting rules engine’ to automate and map your IFRS 16 calculations & adjustments to your Chart of Accounts.
- Audit Trail – Full audit trail of all changes/updates
- Reporting & disclosure dashboards – to assist with reporting and disclosure requirements
What IFRS 16 solutions exist?
There are many solutions out there, at HAYNE we work closely with two leading financial performance management technology partners, IBM and CCH Tagetik. They have the following systems which we think are two of the best.
- CCH Tagetik – Lease Accounting: ASC 842 & IFRS 16
- IBM Planning Analytics Solution Accelerator for IFRS 16
Depending on your current set up, budget and requirements – will depend on which system is more suited to your business.
Whatever stage of the journey towards meeting IFRS 16 compliance you’re at, why not do one of the following;
- Contact us for an informal chat
- Arrange demo of IBM Planning Analytics Solution Accelerator for IFRS 16
- Arrange demo of CCH Tagetik – Lease Accounting: ASC 842 & IFRS 16
- Read – What is IBM’s solution for IFRS 16 Compliance management?
- Read – What is CCH Tagetik’s solution for IFRS 16 Compliance management?
- Download our eBook ‘Taking the pain out of IFRS 16’
- Watch CCH Tagetik IFRS 16 Demo video
- CCH Tagetik presentation on their IFRS 16 Solution from our HAYNE Spotlight event 2018