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Compliance with IFRS 16 Lease Accounting Standard is now (for some lucky entities...)

IFRS 16 is here to stay and companies must implement for their first balance data after Jan 2019.

With such a tight deadline it is key that organisations understand the challenges and plan to meet and manage them to ensure on-time compliance. A recent survey was undertaken by KPMG of around 400 US companies, who were very representative of the sector most impacted by IFRS 16 (84% of these were primarily lessees as opposed to lessors). Similar surveys, including those conducted by our partner Innervision, have showed that the entire process is proving more complex and likely to be more expensive than originally anticipated at the date of IFRS 16 publication (Jan 2016). With a mix of public (75%) and private companies of which 66% had $1billion + turnovers, the respondents conceded that their portfolios were primarily operating type leases – all of which will need reclassifying under the new standard.  

However, the same survey indicates that decisions to conquer these challenges are now finally being taken:

  • 54% had now evaluated and selected a lease accounting software solution
  • 40% had now completed a lease inventory (assets, commitments & documentation)
  • 76% plan to internally estimate the Internal Borrowing Rate (IBR) – well it is a decision!

On the other hand, there were serious shortcomings highlighted and it appears that the work involved is still being underestimated:

  • Just 11% of those surveyed had collected and validated leasing data
  • An accounting assessment had been completed by less than 20%
  • 34% report no progress in designing a software solution
  • 24% were unable to confirm the development of system or process requirements

Getting away from statistics it is important to appreciate that to meet the deadlines companies need to:

  • Ensure skilled and authoritative internal staff resources are available to oversee the project
  • Allocate adequate funds to allow the utilisation of the most appropriate software solution
  • Compile an inventory of leases
  • Review lease reporting and leasing policies
  • Understand the practical expedients and transition relief options available under the new standard and whether they are appropriate for adoption by your business
  • Investigate external assistance – auditors or independent consultants
  • Understand the extent of embedded leases in any service agreements and vice versa
  • Perform an impact assessment – there is software available such as LOIS LLA to allow you to compare one approach with another
  • Engage all stakeholders (lenders, auditors, analysts, managers, shareholders and potential investors) in the business by publishing the impact assessment – no surprises on implementation
  • Set the IBR internally, lease by lease, for the portfolio or by contact with the lessor
  • Avoid workarounds by preparedness and tackling each challenge
  • Spend time and money to complete the transition to compliance – spend wisely as a staggering 33% plus of the companies polled felt that costs for them could now exceed $500,000

Luckily Quadrent and LOIS can help with all of these so give us a call or find out more here.