Lease Accounting Is Changing for the Public Sector, What Can They Learn From the IFRS 16 Implementation?
After the failed attempt of ED64 on lease accounting, ED75 is almost ready to be verified to replace IPSA 13. The key takeaway is that for public benefit entities, the rules around lease accounting will be substantially the same as IFRS 16. This publication from PwC shows clearly the key facts and the importance to NZ Government entities - https://www.pwc.co.nz/publications/subscribed-publications/pbe-news/pbe-news-jan-2021.pdf.
Although the final timeframe has not been confirmed, it is likely to be mid-way through 2022. This will cause a relatively short implementation time frame for public benefit entities, therefore they should be looking to learn from the challenges of the IFRS 16 implementation now. By preparing in advance and using the learnings from the “for profit” sector there is the chance to not only implement a timely cost-effective compliance model but also achieve a number of the benefits that have been challenging from an IFRS 16 perspective. These include a truly efficient centralised database and process that garner an even better ROI over your leasing portfolio.
IFRS 16 became mandatory in January 2019 and like most accounting standard changes the expectation was that it would be done within a couple of years. However, there has been much uncertainty and a massive amount of resource in obtaining compliance for “profit entities”. Even now, many companies are struggling with the day-to-day business as usual IFRS 16 compliance process, and projects have been costly to implement and slow to realise many of the identified benefits.
Essentially the distinction between operating leases and finance leases disappeared, and almost all leases now appear on balance sheet as a right of use asset and corresponding liability. Consequently, the operating cost moved below the line, as entities now incurred depreciation and interest costs. The whole undertaking, whilst somewhat simple on transition, has proved time consuming and difficult especially for those who did not obtain relevant skilled resources and implement a proven lease accounting software system.
In PwC’s 2019 Global IFRS 16 Post-Implementation Survey, although many had achieved IFRS 16 compliance for transition, Day 2 compliance had been poor and the perceived return on investment from a centralised database had not been achieved. Companies had struggled with completeness of information, judgement of key drivers (rates, lease terms etc.) and ironically poor systems and implementation. An astounding 55% of respondents indicated that the challenges brought about by implementation were unexpected.
Given the scarcity of resources in the public sector and conflicting objectives, now is the time to talk to an expert. With Quadrent’s ongoing expertise in leasing, supported by our lease accounting software, LOIS, as both an asset management and IFRS 16 compliance system, now is the time to ensure you are capturing complete lease data to roll into transition with ease.
If you need any advice on how to approach this, get in touch today, or check out the benefits of using LOIS lease accounting software here.