Many companies are only just starting to encounter difficulties as they submit their first set of financials for which IFRS 16 applies.
The International Accounting Standards Board's IFRS 16 standard was introduced on 1 January 2019 to enhance transparency for lessees, eliminating the distinction between finance and operating leases. If you're experiencing any of the below challenges while preparing your 2019 lease accounting, get in touch with our global experts.
1. Collecting lease data – is the underlying data complete and accurate?
There is far more to implementing IFRS 16 than moving operating lease commitment disclosures that were previously off balance sheet onto the balance sheet. For example, as the definition of a lease has changed, service and energy supply contracts not previously accounted for as 'leases' may now be caught up in the IFRS 16 net. Leasing contracts must be separated into lease and non-lease components – the latter may include items that were commonly bundled into rental expenses under IAS 17 and may prove difficult to carve out if the relevant data has not already been extracted.
The challenge of collecting lease data is even greater for multinational corporations whose oversight of real estate and other leases is not centralised, especially where a large volume of leasing documents is maintained in different systems by local management. Many companies do not have standard contractual terms in their lease contracts. If they are denominated in various foreign languages, it becomes even more complicated.
The availability of the relevant lease data for current and comparative periods not only affects the accuracy of companies' lease accounting, but the choice of relevant transition options. Companies should start collecting and evaluating data as soon as possible. The table on page 12 of this TMF Group report outlines the options.
2. Cross-functional involvement - you need more than accountants in your team
Some companies believe that IFRS 16 implementation concerns accountants only. The task of reviewing a contract against the definition of a 'lease' under IFRS 16 often requires input from procurement and operational teams, particularly for companies with a large, multinational and complex lease portfolio. IT personnel may need to assess system requirements for financial reporting with the finance team.
A formal and comprehensive implementation timetable should be set once all stakeholders have been identified.
3. Identifying resource constraints – do it early
Some companies may lack the resources to tackle the new standard. Consider working with an external accounting and tax partner to ease a substantial burden.
4. Communication – lose the jargon
Using technical terms with IT, procurement and operations people will lead to confusion and delay. If finance teams are to succeed, IFRS 16 requirements must be translated into business language.
Regardless of the transition option applied, financials prepared under changing accounting regulations across two or more financial years will make it more difficult for investors to assess performance. It is critical that the impact of IFRS 16 is communicated to investors early. Don't get technical: when explaining the comparability of current and prior-year financials, use pro-formas in investor relations documents and the 'Management Discussion & Analysis' section of annual reports.
5. New lease accounting or management system – should you invest?
What is the scale and complexity of your company's lease portfolio? If you only have a handful of simple real estate leases, you may not need to invest heavily.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.