While the IASB published IFRS 16 Leases in January 2016 with an effective date of 1st of January 2019 very few companies are ready or understand the full implications for their business of implementing the standard.
In essence, the new standard removes the distinction between operating and finance leases. Now a new leased asset and its corresponding liability (the obligation to pay rentals) will now need to be included on the balance sheet. The new standard will increase transparency and comparability. Currently, analysts adjust financial statements to reflect lease transactions that companies hold off-balance sheet. The new standard means analysts can scrutinize a company’s own assessment of its lease liabilities, calculated using the prescribed methodology in the IFRS.
Excel provides ultimate flexibility but doesn’t naturally lend itself to manage and control a new lease reporting process. It can give the right answer if developed correctly – but is prone to all the normal excel risks and constraints.
However – this doesn’t mean Excel is not the right tool. If you have relatively few leases and these are low value and do not change frequently then probably this is a good option – but note…you may be reliant on the person who developed the model so do not hold back on model documentation, having a back-up person to administer and a good version control system in place.
Business Data and Processes
In addition to the changes required to the accounting and reporting systems the new standard may also impact other business operations, processes, systems and data. Companies need to take a holistic review of the requirements for IFRS 16 and assess the impact on its entire business and take a cross-functional approach to implementation.
Changes to the lease accounting standard will require lessees to have significantly more data on their leases given the on balance sheet accounting requirements. It is up to the finance director to prepare the business and understand what impact the new standard may have strategically so they can fully understand the issues and costs of complying with the new standard.
Who will be Affected
Companies in every industry sector use leasing as a means to obtain access to assets and the type and volume of leased assets and the terms and structures of the lease agreements can differ significantly. Big-ticket leases can include property, planes, trucks, and plant and equipment. Almost all businesses use leases for a variety of less expensive assets such as cars, computer equipment and fixtures and fittings.
PwC conducted a global lease capitalisation study to assess the impact of the new leases standard on reported debt, leverage, solvency, and EBITDA for a sample of more than 3,000 listed entities reporting under IFRS across a range of industries and jurisdictions. The research identifies the minimum impact of capitalising existing off-balance sheet operating leases based on commitments disclosures in entities’ published financial statements in 2014.
New IT systems and robust processes and controls needed
For those companies that do not already have an in-house lease information system the cost to implement and continue to comply with IFRS 16 could be significant. Many finance managers use spreadsheets to manage their leases. With the complexity of the new leases standard bringing all leases on balance sheet, using spreadsheets may no longer be cost-efficient or exacting enough. Given that operating leases have historically been off-balance sheet, the data requirements under the new regime will increase significantly. Furthermore, increased disclosure requirements for leases will also require additional data collection.
Extracting lease data from lease contracts or siloed operational or other ‘systems’, may prove difficult and time-consuming, particularly if an organisation is spread across global jurisdictions, meaning that gathering, validating and standardising lease data across the group could be a major effort.
Companies may now need to implement software solutions for lease data management and lease engines to perform the lease calculations required by the new leases standard. Finance directors need to consider sustainable lease software solutions that are capable of dealing with the new lease accounting requirements.
The CCH Tagetik solution for IFRS 16 is a financial and regulatory reporting tool that has been adapted for lease management. Over 200 global organisations already use the CCH Tagetik solution.
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CCH Tagetik is a financial and regulatory reporting tool that has been adapted for lease management. Over 200 global organisations already use the CCH Tagetik solution. It empowers decision makers and business users across all departments, helping them work smarter, streamline business collaboration, and make insight-based decisions with confidence.