1st November, 2018
IFRS 16 tools – What is best?
As we move towards the 1st Jan 19 deadline, more organisations are considering their options: in house Excel models, lease management solutions with IFRS 16 bolt-on, finance solutions integrating IFRS 16.
What are the differences in these tools and the impact of using them?
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.
Lease management specialists with IFRS 16 bolt- on
If you have lease management systems, then the likelihood is that you have a fair few leases – and these may change frequently.
Bolt-ons with Lease management providers will be appropriate where leases are low value and not significantly impacting EBITDA and assets / liabilities on the balance sheet. There may be no need to provide justification and auditability and the sole objective is to churn out IFRS 16 journals.
As we can appreciate, IFRS 16 for some organisations will have a significant impact on financial statements and resulting performance KPIs – this will be an overnight change for many organisations…and what comes with that is scrutiny and an ability to answer questions on the new ROU asset composition and related new postings under IFRS.
Where there is limited exposure and transparency requirements, lease management systems can very well deliver what is required. The benefits are that you have existing relationships with software vendors, you don’t have a significant impact and so the system needs to just deliver IFRS postings – there’s no point in employing a sledgehammer to crack a nut.
Key points to consider are the audit and transparency requirements that may be required. Software providers tend to have expertise in their main area of operation – lease management systems will help you manage leases and decisions around this – IFRS reporting is a slightly different requirement. So be sure to understand your commitments in terms of controls and transparency.
Finance solutions integrating IFRS 16
IFRS 16 is a financial reporting standard – and finance solutions are typically more appropriate to deliver this.
Finance solutions over the decades have been built to provide those things that internally finance organisations find useful for regulatory reporting and that provide the correct level of transparency for external audit.
These sorts of solution normally provide
• Workflow – management and audit of the process – who does what and when they do it. Financial reporting tools are designed for multiple sites / entities to provide information. This is a generally accepted best practice – push responsibility and accountability to various organisational units in the long term.
• Controls – from security and data access, segregation of duties and data validations to improve accuracy
• Financial intelligence – being built on debit / credit data models, these tools naturally assimilate lease level information to provide financial IFRS 16 postings
• Integration – financial reporting tools typically have in built functionality to integrate information from operation tools (lease management systems) and this comes with already existing functions to manage this process.
Ultimately IFRS 16 is a statutory reporting requirement first and foremost – so there is a natural fit with regulatory reporting software.