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IFRS 16 – the Devil is in the Data

IFRS Leases – guiding principles for IFRS 16 projects, where the devil is in the Data!

SEE IFRS 16 SOLUTIONS

For some organisations the new IFRS 16 treatment of Leases will have a big impact on the balance sheet with big swings on assets and liabilities for those with significant operating leases. For the income statement, expenses and depreciation will be affected with potential knock-on tax effects. These organisations not only need to establish a new process to provide a compliant lease accounting, but also need to assess the impact of this change for their financial statements, KPIs and stakeholder communities.

Whilst the impact of IFRS 16 is far reaching, this guide focuses on the nitty gritty of what need to be done to get the right system in place to report under IFRS 16, analyse the financial impact and simulate contract and lease options and their outcomes.

For these projects – the devil is in the detail…or rather the devil is in the data. We can expect gaps in information, inconsistencies and decisions to be made (and managed) on how certain information is treated. Complexities will vary according to number of leases / contracts, degree of centralisation and effectiveness of existing lease management and reporting systems. The guidance below is good practice in any case for medium to large scale projects – there is a clear focus on the importance of data and this is reflected in the advice below…

1. Formally appoint a team to deliver – First things first, choose a team and agree commitment once the plan in in place. We’ll need stakeholders that manage leases, accounting policy guys, data architects and data integration people, a project manager and project sponsor. Its always good to formalise and agree roles – so many things fall through the gaps when this is not clear.

2. Agree your approach and create a plan – a standard requirement for any project. Its best to get the plan activities down in as much detail as possible and to allow for known risk areas (data gaps and known problem areas). Big ticket items like whether you will buy a system or develop one need to be addressed as early as possible. Certain key activities like collating and assessing lease and contract information should also be starting at the soonest. For larger projects with numerous remote stakeholders – include change management activity into the plan. This need not be onerous and can be managed with relatively low effort – but you need to be mindful that it is required and efficient in how you actively communicate, engage and educate. Its useful to have a project charter that agrees objectives, roles, responsibilities and timeframes. A charter need not be chapter and verse – a concise but specific account of what you want to achieve, how you plan to do this and by when – and who is responsible for what…this helps keep us clear and focused throughout the project and honest when times get tough.

3. Have a clear definition of requirements – Whilst this need not be lengthy document regurgitating the IFRS regulation, it should contain the regulatory and business requirements in detail. This should include a full scope of activity including: investigation and verification activities; collection, cataloging and categorisation of leases and contract information; processing / modeling of data and the end outputs. Whilst different organisations will have different levels of readiness and existing systems to support the project – the important thing here is to be clear on what you have and what you need.

4. Be detailed on data definitions and data management – IFRS 16 will be a data intensive project. Off the back of the requirements definition, a detailed data definition document should be created – the purpose of this document is to define each piece of data that will be requried and the format and basis on which it should be provided. Next a data management strategy – this aligns the sources of information to the required data formats to meet the reporting requirements. Decisions will also need to be made on approach to data management, depending on whether you have centralised or decentralised processes for managing leases and contracts . Data will need to be identified, cleaned, gaps filled and, in some cases, judgement applied on interpretation of the Standard – processes should be articulated to carry out these tasks so that a consistent approach is taken and is clearly auditable. Information will need to be modeled or calculations run – these should be detailed on paper so that there is a clear audit that the reporting systems are doing what they should do. That’s a lot of activity on the data side – so have appropriately detailed management tools in place to have a clear picture om all data aspects.

5. Design systems and processes – there is a choice here to develop in-house using existing tools or to buy a solution – or a combination of both. Any option you choose will likely have:
– ETL capability – this is the ability to Extract, Transform and Load lease and contract data into your main reporting system
– Detailed lease and contracts management – a consistent model that houses all your lease and contract information and allows the right people to review, analyse and amend as required
– Calculation and modeling capability – apply logic to consolidate information, apply adjustments, produce income statement and balance sheet postings and run simulations and sensitivities
– Reporting and disclosures – the ability to run reports providing the end state IFRS 16 compliant information and the ability to drill beneath the regulatory numbers to see how they are made up and what the key impacting factors are
– Provide auditability and controls
– Have a governance process to manage the process (required for more complex and decentralised structures)

Where in-house systems are being developed, the system blueprint will need to cover all the elements above and with sufficient detail to enable a build from scratch. Where solutions are being considered to buy-in, a fit gap process should be carried out to ensure the 3rd party system does what you require and any gaps are covered by other means. Also – be sure to ask any solution vendors for system and process documentation if it exists – if you are paying for a solution you should make sure to make use of all assets that come with it.

SEE IFRS 16 SOLUTIONS

6. Execute and monitor – a lot of the activities thus far have been about gettiing the detail agreed and clear on paper. You take the time to plan and design, and the implementation of the actual process will be lower risk. When its time to stop designing and start doing, you need to make sure you have a solid set of management systems in place to keep things on track and deal with issues as and when they come up. Depending on the level of complexity, data issues are likely to arise – create a data tracker. Have a process to monitor information as it goes through the cycle and clear actions when issues arise or decisions are required – time bind these mitigations and communicate expectations to stakeholders. As team members are likely to be spread across organisational functions, consider utilising an online project tracking and collaboration tools – this way there is a realtime update on performance, issues and risks…and mitigating actions that are required can be driven from issues as they arise…don’t wait for a weekly review to decide how to deal with issues – this wastes time and ultimately incurs more cost.

7. Have a structured approach to testing and tick off at the detailed level – When a structured and detailed requirements and design are in place – the testing process is easier. You have a framewiork against which you can validate from the detail up to the final output. Whist the IFRS lease reporting project has a finite output that is documented, it is driven from detailed information where data gaps are likely and in some cases, judgement will be required and decisions taken to agree treatment of contracts and leases. The review of decisions should also take place in the testing phase to ensure the judgement applied is consistent and appropriate

I hope the guidance above is useful…all comments welcome.

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