IFRS 16: Putting your house in order

For accounting periods from 1st January 2019 compliance with IFRS 16 is mandatory yet a significant number of companies still haven’t deployed adequate solutions and controls that will enable a seamless and timely transition to the new standard. Whether due to existing financial commitments, prevailing economic conditions, other compliance projects taking precedence or Brexit contingency planning getting in the way. Whatever the reason, it is now time for organisations to get their IFRS 16 house in order.

But with time now in short supply and considering the level of complexity involved in adopting the standard, it is increasingly important that FDs and finance professionals look towards solutions that accelerate compliance.

Commenting on the new leasing standards’, Martin Kennard, director of Innervision Management Limited (Innervision) the market leading lease accounting solutions provider, succinctly describes the issue:

“Analysing a 4Q18 published survey regarding the readiness of some 480 companies for IFRS16/ASC842, we at Innervision found that too many companies were finding themselves behind the curve with regard to transition to and compliance with the new leasing standards with just 5% of the listed companies polled having attained full compliance.”

“Of real interest”, he added, “is the fact that of the publicly listed companies surveyed 58% were planning to adopt a new lease management system”.

A quick recap

In February 2016, the IASB, in conjunction with the FASB (which itself issued ASC 842 to FAS 13), published an Accounting Standard to replace IAS 17 with the intention of improving how businesses report lease transactions on financial statements.

Effective for accounting periods starting on or after 1st January 2019, the new standard is designed to bring greater clarity and comparability of companies’ financial statements by recognising a right of use asset and the associated liabilities arising from leases on balance sheet (with some possible exemptions for short-term leases and low-valued items).

The changes are set to have far-reaching implications for organisations that lease and is likely to impact business systems, controls and processes. FDs must be aware that the financial representation of a business to investors, board members and external stakeholders will all be affected, as will credit lines. IFRS 16 has a direct impact on the balance sheet, gearing and current ratios, asset turnover, interest cover, EBIT and EBITDA, operating profit, net income, EPS ROCE and ROE; as well as operating cash flows.

“The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities,” stated FASB Chair Russell G. Golden.

It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting while requiring more disclosures related to leasing transactions

According to the research, what are the challenges to implementation?

• Ensuring completeness of lease population – 78%
• Identifying embedded lease – 72%
• Data collection, collation and validation – 69%
• Human and capital resource – 66%

The biggest single change ever in the way that leases are accounted for has already been addressed by Accountancy Firms and Lease Consultancy Practices but now it is time for lessees to grasp the nettle.

The need for a solution

When addressing the adoption of the new accounting standards, it is imperative that companies have the correct systems in place to enable a streamlined transition and help simplify compliance, according to Innervision – providers of specialist lease accounting software whose solution, LOIS Lease Accounting (LLA) is trusted and relied upon by 3,000 users in over 100 countries.

With the requirement that, for future accounting periods, all companies filing their financial statements now report existing, as well as, new leases under the new standards, there is as little as a few months to achieve compliance. With time in mind a speedy transition is paramount but of equal importance is the need for a proven and referenceable solution.

Maeve O’Connell, Innervision’s Commercial & Finance Director points out that:

 “For many companies, it may well be too late for a full ERP solution and therefore the path to take is one that encompasses simplicity, avoids the potential perils and delays associated with arduous software solutions, demonstrates security and resilience and ensures a speedy deployment”.

What to look for in a lease accounting solution?

With over 100 businesses across the globe currently using its LLA solution, Martin Kennard feels well placed to advise Finance Directors and CFOs on the key features to look for in a lease accounting solution:

“The feedback we get from our clients is that the enormity of the data collection process and the resource required to complete it successfully is too often underestimated. Additional issues revolve around modelling, agreement of IBR with auditors and transition options.

To successfully address the IFRS 16 requirements, companies require financial reporting mechanisms that help ease the burdens of compliance, accommodate the consolidation of lease data, whilst delivering the core accounting and reporting functionality required to accurately complete the financial statements – including income statement, cash flow and balance sheet.”

Core functionality to look for includes:

• A cloud-based proven solution that allows accommodates a swift implementation
• Provide a consolidated overview of all the active leases within your organisation.
• The ability to upload lease information for data migration
• The capability to classify and where necessary reclassify leases and identify non-lease elements from “right of use” assets and embedded leases in service contracts.
• Built-in functionality that records and reports on all updates and refreshes regarding any leased asset.
• Reporting that can provide impact forecasting for stakeholders, investors, lenders and management
• The capacity to run multiple lease accounting reports for numerous accounting standards (IAS 17, IFRS 16 and FASB ASC 842)
• Full suite of reports that enable improved leasing decisions
• Secure cloud-based platform
• Generation of journal entries for general ledger systems which may well be part of ERP
• Provision of a full audit trail

In essence, to achieve a quick and hassle-free transition businesses will have to consider a mature and proven software solution that delivers the transition tools and functionality needed to extract, validate and report on all the lease data required for full compliance.

To find out more about LLA by Innervision – follow the link.

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