Applying IFRS 16: Achieving compliance and still managing the day job

For accounting periods from 1st January 2019 compliance with IFRS16 is mandatory yet a significant number of companies still haven’t made available to their accounts department the personnel, time and budget to put in place the adequate solutions and controls that will enable a seamless and timely transition to the new standard.

For those charged with delivering compliance, they must weigh up their existing workload with the time scales and level of complexity involved.

Whatever the size of your accounts department, don’t feel that it is only your business lacking that internal resource – as Martin Kennard, director at leasing solution provider Innervision Management Limited (Innervision) recently evidenced with his comment;

“Analysing a Q4 2018 published survey regarding the readiness of some 480 companies for IFRS16/ASC842, we found 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”.

Now there’s a clue as to how to approach it! Worth a look is LOIS Lease Accounting from Innervision with more than 3,000 users across 100 companies utilising the functionality of the cloud-based software solution.

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, on adoption of the standard, the financial reporting of lease transactions.

Effective for accounting periods starting on or after 1st January 2019, the 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 all leases on balance sheet (with some possible exemptions for short-term leases and low-valued items).

The change is set to have far-reaching implications for organisations that lease and is likely to impact business systems, controls and processes. Finance professionals must be aware that the financial representation of a business to investors, lenders, board members, and credit agencies will be affected as IFRS 16 directly impacts the balance sheet, gearing and current ratios, asset turnover, interest cover, EBIT, EBITDA, operating profit, net income, EPS ROCE and ROE; as well as operating cash flows.

That equates to additional work for accounting departments as they perform impact modelling before selecting appropriate exemption options and adopting available expedients, agree IBRs with auditors and recalculate management bonuses now so many KPI’s may be affected – it may even affect the remuneration packages of you and your colleagues at the coal face of IFRS16 compliance.

It ends what the International Accounting Standards Board (IASB) chairman Hans Hoogervorst, and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.

“These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating company’s often-substantial lease obligations.

The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off-balance sheet lease financing is no longer lurking in the shadows.

It will also improve comparability between companies that lease and those that borrow to buy.”

The need for a solution

With the requirement that from today onwards all companies filing their financial statements must report existing as well as new leases under the new standards, there is little time and a mountain to climb to achieve compliance.

Maeve O’Connell, Innervision’s Commercial & Finance Director warns 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”.

Common lease accounting software implementation pitfalls?

Martin Kennard reflects – “With the referenceable and proven LLA solution being utilised by countless users around the world, we have been able to identify and learn from the common issues that arise and frequently lead to overly complex or convoluted software implementations. Feedback from our clients is that the data collection process and the resource required to complete it successfully is too often underestimated. Issues also revolve around modelling, system configuration, clarity on IBRs and transition options, so consider the following for a smooth and hassle-free software implementation avoiding the most common deployment issues.”

• Data collation – often takes longer than anticipated.
• Inaccurate/incomplete data – Not having all the critical lease information leads to delays due to data cleansing and re-upload requirements.
• Transition options – Modelling will indicate to businesses which options to adopt but modelling a retrospective scenario is impossible if historical data relating to the lease(s) of an asset are not available – if an asset has been subject to continuation leases then under the new standard that is considered a single lease from the day 1 “right of use” recognition.
• IBRs need to be agreed with auditors – an involved process so start now
• Lack of clearly defined outputs – planning enables users to benefit from generated reports and other desired outputs and in the case of GL, outputs that require little or no manipulation in order to post accurate journals.
• Failure of organisations to appreciate their unreadiness leads to the underestimating of the time & resource required for compliance.
• IT Sign-off – factor into the project timeline any internal requirement for IT sign-off
• Lack of internal IFRS 16 accounting policy affects judgement areas like recognition exemption.
• Organisations not taking ownership of a 3rd party tool and expecting a managed service
• Involvement of a 3rd party –appreciate how this will impact the project, both positively and negatively.
• Managing conflicting BAU (business as usual) priorities – deadline orientated processes and month end reporting can impact on project deadlines.

Finally, Innervision would encourage any business to look at cloud computing solutions available and take time to work out what tools and support they need to make the transition easier and for the business to run more smoothly in the long term.

Whilst change can be daunting, it is also important for businesses to factor the support they will get; not only during set up and implementation but ongoing and throughout the following financial years. Innervision offers inclusive ongoing support to our customers meaning that they can always call and speak to someone about their specific concerns both today and tomorrow.