Make light work of compliance with lease accounting software

IFRS 16 is an International Financial Reporting Standard (IFRS) that provides guidance on leasing accounting. Before IFRS 16, lessees were required to distinguish between a finance lease (which was capitalised) and an operating lease (which was not capitalised).

IFRS 16 requires all leases to be treated similarly to finance leases under IAS 17. In other words, at the commencement date of the lease, the lessee will recognise a liability for its obligation to make future lease payments and an asset representing its right to use the leased asset during the lease term.

IFRS 16 has significant impacts on the financial statements of lessees. It can significantly increase the amount of debt that must be recognised on a lessee’s balance sheet, which can significantly impact key financial ratios.

The IASB required improved transparency of financial statements so that stakeholders have a clearer picture of an entity’s financials. The changes achieve this by eliminating one of the largest forms of off-balance sheet accounting.

Under IFRS 16, both finance and operating leases are brought onto the balance sheet. Essentially, the lease liability and the corresponding right-of-use asset must be recorded on the balance sheet for leases of property, plant or equipment.

Some notable exceptions are short term leases (generally with lease terms less than 12 months) and leases for low-value assets. The new rules apply to all lease contracts that are in place on the effective date and not only to leases that begin after the new rules come into effect.

Whilst the transition to IFRS 16 involves a lot of work and has presented many challenges, it should also be viewed as an opportunity and in the long term, organisations will be able to improve its lease portfolio efficiency by:

• Enhancing processes
• Identifying data and system gaps
• Increasing portfolio visibility
• More proactive lease management
• Driving portfolio savings
• Complying with the new standards

Gathering and validating lease data is crucial in the IFRS 16 implementation process to ensure the completeness and accuracy of financials and reporting. This process however, has proved time consuming and has introduced various roadblocks such as:

• Don’t know where the data is located
• Decentralised processes – data is housed in various locations and systems
• Lease agreements aren’t electronic
• Cleansing of existing and collected data
• High volume of data fields
• Multiple currencies
• Lease contracts in various languages

It is important to allow sufficient time to undertake this process as in most cases, the time required is often under-estimated.

IFRS 16 is not just a standard that impacts Finance – it’s a fundamental change to the way an organisation manages and treats its leases. In most instances, where businesses have a leased portfolio, many different people will be responsible for signing those leases, with no one department having visibility over arrangements. Without a company-wide collaborative approach where all lease data is stored within a centralised repository and is accurate and in a suitable format, achieving compliance will be very difficult.

Investing in a specialist lease accounting solution does not only ensure compliance with IFRS 16 requirements but makes life considerably easier as organisations can automate calculations and tasks that are otherwise time-consuming, prone to error and difficult to audit in a spreadsheet or separate software approach.