The Post-Adoption Impacts of IFRS 16: Act Now for Stronger Commercial Decision Making
Quadrent recently hosted a webinar focused on the post-adoption impacts of IFRS 16. The webinar covered what companies should be looking out for now that it’s been over two years since the new standard became effective. The team discussed several important factors that businesses should be aware of to remain compliant and maximise the return on investment (ROI) opportunities in their leasing arrangements.
You can view the webinar recording here. Keep reading for a summary of what was discussed in the webinar.
The biggest changes for companies from IFRS 16
Since IFRS 16 came into effect on 1 January 2019, many companies have continued to view the standard as “a change for accountants”. However, as one of the few accounting standards that impact whole businesses, along with the complexity of lease accounting, many businesses are still working through the practicalities of the impact on the business. As outlined in the webinar, some companies were organised and systemised their lease management straight away. For those companies that didn’t scope out the work and determine their organisational needs prior to implementation, it didn’t provide the most effective or efficient outcome.
With compliance in place for most organisations, the focus should now turn to how IFRS 16 impacts organisational decision making, given the standard's impacts on a company’s balance sheet, profit and loss, and cash flow.
By only focusing on the reporting compliance component of IFRS 16, businesses miss out on ROI opportunities to strengthen their operations and take advantage of new avenues for growth.
Market impacts of IFRS 16
Interestingly, IFRS 16 hasn’t changed the amount of leasing that businesses do. In the webinar, the audience was asked whether IFRS 16 changes have driven their organisation to do more or less leasing. Over two-thirds of the audience said they haven’t changed their leasing activity since IFRS 16 came into effect. To date, the sole focus for most companies has been ensuring the organisation’s lease accounting practices and reporting are compliant with the standard.
Surprisingly, even after more than two years since the standard came into effect, some businesses still use frozen GAAP at a management reporting level and overlay IFRS 16 for external reporting. The inconsistency of reporting methods and disclosures throughout the market makes it more difficult for banks and analysts to agree on how best to view the disclosures, which has seen banks revert to frozen GAAP for covenant purposes. PWC Partner Sean Rugers confirmed in the webinar that, in his opinion, this had to change, and banks needed to update covenant parameters to align with the standard.
As stakeholders, such as investor relations teams, investors, analysts, and financiers learn more about IFRS 16, companies need to ensure they have an in-depth understanding of the standard as it impacts a business beyond its finance and accounting team. Companies that have a lease management and reporting system in place have an opportunity to produce accurate data and ensure it communicates what these external stakeholders need to understand. It also provides a proactive strategy to help guide these stakeholders, especially as banks and credit agencies change to align with the IFRS 16 standards.
How will banking and credit covenant changes impact your business’s decisions?
When banks and credit agencies change their covenants, it will impact every part of a business. To date, credit rating agencies have adapted their metrics based on the statutory balance sheet while banking covenants typically focus on frozen GAAP. However, these metrics and covenants are changing, given the IFRS 16 standards have been in place for some time now, and more data is becoming available.
Ideally, changes to a company’s financials because of IFRS 16 should not adversely affect its current and future financial stability, but the importance of making strong commercial decisions based on the most accurate data remains critical. Key factors businesses should be thinking about include:
- Management incentives for making the “right decisions” that consider the whole business
- Stakeholder education initiatives
- Significant changes to leasing versus buying
- Potential forecasting issues, particularly accuracy
The benefits of leasing and a centralised lease accounting system
Leasing still has a strong place in organisations today. For the right assets, it’s a smart choice to reduce balance sheet exposure and maximise cash flow. In addition, the “as a service” culture continues to grow rapidly. As a result, asset-light companies will be in a strong position to perform well, now and into the future. Outside property, companies should be looking to lease assets with high obsolescence curves such as IT equipment or other assets that require regular maintenance that the business would rather not own.
For example, the growing impacts of environmental, social and corporate governance (ESG) on organisations can be addressed through leasing as it forms a key factor in the circular economy. It also provides opportunities for companies to access new and high-value financial products. Quadrent is currently working with a major Australasian bank to create the first “green lease”, which will allow companies to access lower rates while proactively addressing their ESG needs.
Leasing is an effective use of capital without unnecessarily expanding your balance sheet. In short, businesses should look beyond simple balance sheet outcomes to make strong and holistic commercial decisions.
Maximise the ROI of IFRS 16 with Quadrent
Lease accounting doesn’t need to be an administrative burden. With the functionality to account for a range of lease types and values, our software solution, LOIS, gives businesses a powerful tool to build the systems and processes they need to optimise their lease accounting and management practices.
Quadrent’s team has in-depth leasing knowledge and specialised accounting backgrounds to help you throughout the entire asset lifecycle. We work with businesses helping them to accurately manage their leases and improve the data inputs used in calculating your business’s IFRS 16 impacts. This is particularly important as companies move to a post-adoption world where reporting requirements will continue to evolve.
At Quadrent, we can help you establish the systems you need to accurately record your lease data and maximise the ROI of IFRS 16 for your business. Click here for more information.
If you're interested in understanding more about IFRS 16 Compliance and LOIS, here are a couple of resources we can provide:
- Read more about IFRS 16 considerations and COVID19.
- Read about LOIS features and benefits
- Explore the pros and cons of using spreadsheet applications such as Excel for the transition to IFRS 16 with this short whitepaper (15 minute read).
- Let our recent survey results from LOIS customers demonstrate the value of the product (3 minute read)
- Understand the pros and cons of leasing business assets with our whitepaper (15 minute read).
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