IFRS 16 was issued in January 2016 and is effective for annual reporting periods starting on or after 1 January 2019. It replaces IAS 17 Leases and related Interpretations. If you are one of those companies who is affected by this, then you’ll have been looking into (or will be now!) a pathway towards becoming compliant in the most effective way possible. You can read more about IFRS 16 in this article, ‘IFRS 16 compliance is now in play, are you ready?’.
There are many systems in the market to choose from, so the time can be very daunting for you and your business. At HAYNE we have close partnerships with leading Financial Performance Management software vendors, such as IBM and Tagetik, who offer IFRS 16 solutions. This puts us in prime position to offer a rounded view on the solutions most suited to our clients. We are both Gold IBM Business Partners and official CCH Tagetik Partners, and therefore want to share with you our thoughts on each solution. To get a full rounded view, take a look at our other post, ‘What is CCH Tagetik’s solution for IFRS 16 Compliance management?’ where we delve into CCH Tagetik – Lease Accounting: ASC 842 & IFRS 16 solution.
In this post we will delve briefly into the IBM FPM Solution for IFRS 16, which is …
IBM Planning Analytics Solution Accelerator for IFRS 16
The IBM Planning Analytics Solution Accelerator for IFRS 16 is a pre-packaged framework that helps you accelerate your compliance with IFRS 16.
The Solution Accelerator uses a customised IFRS 16 model built in IBM Planning Analytics, the planning, budgeting, forecasting, reporting and analysis solution powered by the multidimensional calculation engine of IBM TM1. Designed to help organisations manage the entire lease administration and lease accounting workflow, from contract creation to expiration – It retrospectively analyses data, and perform calculations for current and future costs, all while presenting compliant data to the office of Finance. The Solution Accelerator can receive data manually (keyed in or imported from a Microsoft Excel spreadsheet) or by automatic feed from a data warehouse.
The Solution Accelerator is designed with specific rules to calculate the correct right-of-use asset value and lease liability, including future payments, interest expenses and depreciation for the full contract term. A contract can easily be created either by import from a source system or by manual input. An intuitive three-step process starts at the IFRS 16 Portal.
Highlights of the Solution Accelerator for IFRS 16 are:
- Manages the complete lease accounting workflow, from contract creation to expiration
- Includes rules to calculate right-of-use (ROU) assets and lease liabilities, including future payments, interest and depreciation
- Features built-in IFRS 16 Qualifier
- Integrates IFRS 16 into ERP and the close, consolidate, and report process
- Provides flexible modeling, planning, reporting and analysis for all contract types
- Deployable on cloud or on-premise
Solution Accelerator three-step process
To cover all aspects of the regulation, many different parameters must be covered, for example, from a simple car lease to a complex property lease agreement with many different options.
Step 1 – Contract Creation
All data necessary for the calculation of the right-of-use asset value and corresponding lease liability is collected, such as the type of lease, contract start and end dates, asset value, lease payments and so on. A contract ID (specific identification number) is created and mapped to the correct company and other measure dimensions. Dimensions used in the reporting can be connected to the data in order to ensure the correct level for calculation and analysis.
Step 2 –Time
Data is collected as to contract commencement date and end date, extension or termination options, whether those options are likely to be exercised, and if so, the new contract end date.
Step 3 – Amount
In order to calculate the net present value of the lease liability, the user needs to enter information such as monthly/yearly lease payments, the value of the right-of-use asset, if any lease components should be split, applicable discount rates (depending on currency/country, contract basis, portfolio basis, etc.), any residual value guaranteed, initial direct cost and more. (Leases of under 12 months and leases of low value are exempt from IFRS 16.
The calculation engine of the system calculates all future cash flow payments, calculated at net present value, interest payments and so on. Finally, it creates booking material for import into your general ledger (GL) or consolidation system.
IFRS 16 Qualifier
An IFRS 16 Qualifier is built in, to ensure that the contract in question qualifies as a lease under IFRS 16. It can determine whether or not the contract includes: 1) an identified asset, 2) the right to obtain substantially all of the economic benefits from using the identified asset, and 3) the right to direct the use of the identified asset.
Additional Contract Information
Necessary contract information is entered, such as lessor, internal or external contract, asset type (such as buildings, machinery, vehicles, etc.) and contract type (such as a head or sublease, joint arrangement, or sale and leaseback). There are also open dimensions that can be connected to operating units such as company, operational/management function, cost centre etc.
Analysis
All data is stored in multidimensional cubes, giving the user the ability to slice and dice through different views for analysis and forecasting. Data can be viewed by group/company and down to individual contract level, using the solution’s drill-down capabilities.
Easier compliance and smarter decision making for IFRS 16
Using the Solution Accelerator, users can easily get an overview of the movement of lease liability, including lease payments (cash), interest payments (PL), depreciation (PL) and other services (PL) received during the life of the contract. All data is stored in multidimensional cubes, giving users the ability to slice and dice through different views for analysis, forecasting and what-if scenario modeling which can be useful for calculating the effect that different leasing options can have on the balance sheet.
IFRS 16 is certain to drive many changes in how, when and where companies use leases as part of their business strategy. But with the help of IBM Planning Analytics Solution Accelerator for IFRS 16, compliance tasks can be performed more efficiently, leaving your finance and accounting teams the time and the accurate data—to drive smarter, more informed decision making.
What next?
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 a demo of IBM Planning Analytics Solution Accelerator for IFRS 16