IFRS 16: it’s time to take action!

IFRS 16 rules require that all material operating leases to be reported on the balance sheet from 1 January 2019 but according to a report from KPMG, only 3% of global companies have fully completed their lease accounting compliance projects. IFRS 16: It’s time to take action!

The new standard requires that balance sheets reflect new assets and the corresponding liability for all leased equipment. Income statements will present a new profile of expenses and financial ratios will be reset. The new leases standard presents the most widespread change to lease accounting since 2005 and switching procedures and reporting systems is a complex and lengthy process.

Image source – KPMG

All companies with lease portfolios need to plan for a fundamental change to their reporting systems. If your company hasn’t started yet you are not alone – but now is the time to act.
The impact of the new rules will extend far beyond just the accounting function. Stakeholders from other areas of the business including IT, Treasury, Tax, Reward and Investor Relations need to be involved in the change solution and such a large scale project requires significant planning and resource allocation.

Impact

According to PwC, the retail industry is likely to be one of the most affected by the new standard, largely due to the over-reliance on rented premises for shops and warehouses. The PwC Global Lease Capitalisation study indicated that there would be a median debt increase of 98% for retailers, and 41% median increase in EBITDA.

The second most impacted industry is the Airline industry; it will see a median increase in on-balance sheet debt of +47%. About 50% of Airlines are expected to increase debts by more than 25% and the median increase in EBITDA is projected with some +33%.

Almost every company with leased assets will be impacted by IFRS 16 but as a recent survey by KPMG discovered many companies still have work to do even after the effective date of the standards. The KPMG report ‘Global Lease Accounting Survey – Lease Accounting is here: Are you ready?’ examined the key challenges businesses were and may still be facing when implementing the new standards.

The survey results present the latest picture prior to the effective date and the variations by region across the world with key findings are as follows:

  • Under half (44%) had completed a lease inventory, only a quarter had completed an accounting assessment
  • Although nearly half (45%) had selected their lease accounting software, only 16% had developed the system requirements and just 13% had designed their software solution
  • 83% of companies had not yet completed the data gathering and validation step
  • Overall, just 3% of companies had fully completed their lease accounting compliance projects. Of the remainder, over two-thirds (67%) indicated that they were not on track

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.

Systems

Projects are proving to be more difficult than expected and costing more than anticipated and according to research from KPMG, many companies have fallen behind with their implementation project.

Image source – KPMG

Less than half of companies have selected their lease accounting software, so what are the options for those still considering software solutions. The main options are: in house Excel models, lease management solutions with IFRS 16 bolt-on, finance solutions integrating IFRS 16.

If you are one of the many companies that haven’t started planning for systems to support IFRS 16 first consider the impact of the new rules on people and processes and technology across the entire organisation. The new rules will impact not only the accounting and financial reporting systems, but also a company’s processes, internal controls, procurement, taxes, and operational functions.

Some companies will rely on manual processes and excel reporting tools. However, starting with spreadsheets, then buying software solution later will end up costing you more. Spreadsheets are complex and time-consuming but a quick fix solution because choosing the right software for the long term can be a time consuming and complex process and time are short.


Image source – KPMG

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Technology options for IFRS 16 – It’s time to take action!

Excel models

Excel provides a cost-effective, flexible solution but is prone to the usual excel risks and constraints. For large businesses spread over global locations updates and synchronizing data could prove erroneous. For those businesses with only a few leases that do not change frequently then excel may be a good option, but CFOs need to ensure good model documentation and version control system is in place.

Lease management specialists with IFRS 16 bolt-on

Bolt-ons with Lease management providers will be appropriate where leases are low value and not significantly impacting EBITDA and the balance sheet. There may be no need to provide justification and auditability and the sole objective is to churn out IFRS 16 journals. Where there are limited exposure and transparency requirements, lease management systems can be sufficient. Key points to consider are the audit and transparency requirements that may be required.

Finance solutions integrating IFRS 16

IFRS 16 is a financial reporting standard and finance solutions are typically more appropriate to deliver this. This is because finance solutions have over time been built and designed to provide those things that internally finance organisations find useful for regulatory reporting and that provide the correct level of transparency for external audit.

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. The CCH Tagetik solution can be fully integrated with an existing reporting and management information system and provides a good level of functionality from a finance perspective, automation of data; controls and validations; auditability of lease and finance balance level information; workflow and process management; whilst still providing lease management information the required IFRS 16 output.

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ABOUT CCH Tagetik

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. 

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