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Applying ASC 842 & IFRS 16: Prepare for Compliance During COVID-19 Lockdown

Posted by Ryan Hendrie on 28/07/20 13:47

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Would it not have been a godsend had your business been in compliance with the new leasing standards as lockdown was enforced and working from home became such a norm?

The trials and tribulations of trying to manage myriad leases with many lessors is tough at the best of times when:

  • You can access the documentation
  • Easily arrange the return of equipment
  • Be sure of contact with lessors

But now you are having to manage these things remotely you will appreciate the potential benefits of –

  • Having documentation online
  • Understanding the service element of any contract
  • Being able to easily account for lease run-ons or extensions
  • Having termination notices generated automatically and punctually
  • All lease information being available online to all relevant parties within the business
  • A secure and 24/7 available cloud-based database
  • Automatic lease classification
  • No more spreadsheets!

 

Many papers and blogs have been posted on the subject of moving to compliance, transitioning the business and implementing new processes and systems but their relevance remains and a visit to the Innervision resource centre or the like will bring these and the associated ideas and solutions to you.

 

Prepare in Advance

While you may not be able to achieve compliance today you can prepare for when the time and resource is available. You should

  • Understand the new leasing standard that is applicable to your business or businesses.
  • Appoint a project leader to own and implement the compliance program.
  • Consult with experienced lease expertise by calling on lease consultancies or auditors.
  • Invest in the program – not just time and internal personnel but budget expenditure to allow adoption of a proven, referenceable software solution – invest in the future!
  • Impact model - it will soften the surprises that adoption may throw up for your investors, potential stakeholders and lenders in the form of adjusted financial metrics, gearing, ratios and EBITDA. Full or modified retrospective approach?
  • Alert the whole business of the priority of compliance and the part to be played by everyone in identifying assets, locating lease documentation and pooling or centralizing near future expiry options.
  • Set the IBR or understand the implicit rates in each of your operating leases – have a policy, have it agreed with auditors and try and stick to it.
  • Familiarising the relevant personnel with the new standard and its impact
  • Gather together details of all assets on lease and the respective lease contracts
  • Communicate with all interested parties – senior management, auditors, lenders, stakeholders
  • Contact the users of the assets as to whether they are still in use
  • Contact lessors for clarification on returns, discount rates and notice requirements
  • Investigate software solutions that will best suit the business
    • Cloud-based
    • Secure access and updates
    • Robust, proven and trusted
    • ASC 842 and IFRS 16 compliant
    • A fit with the internal new systems and processes necessary for compliance
    • Able to handle right of use asset and non-lease elements of contracts
    • Optional IBR or actual discount rate
    • Caters for and accounts for direct, indirect, upfront and back-end costs
    • Operating, Finance or Sales Type lease capable
    • Sale and leaseback
    • Management reporting and finance reporting
    • General Ledger journals generating
    • Able to handle expedients and exemptions
    • Impact modelling capability
    • COVID-19 Rental holiday or reduction option handling

 

The list for preparation is endless, but in this time of pandemic, you will find your business has a real opportunity to accelerate the transition to the new lease accounting standard. Act now and ensure that in the “new norm” your lease portfolio is polished, managed and available.

 

Enjoy the Pluses

Although you may view the transition as an unwanted and complex hindrance, it is important to understand that there are several advantages and benefits that can be achieved if a business approaches the project in the correct manner. Some of these headline benefits include - Improved lease portfolio visibility, the ability to develop enhanced processes and controls, help in identifying data and systems gaps, provide an opportunity for enhanced proactive lease management and driving savings and compliance. Below we consider the advantages that can be enjoyed when a company uses the transition to its benefit:

  • Single accounting treatment of all lease types going forward – simplicity
  • Improved lease portfolio management will inevitably lead to
    • Improved end of lease term management
    • Greater returns performance
    • Better lessor management and relations
    • Potentially improved terms and conditions going forward through leverage
    • Centralized, accessible pool of lease data available to all authorised to view
  • Renegotiate leases, challenge lessors, redeploy underutilised assets
  • Cancel all of those long running leases on equipment no longer in use
  • Fixed extension rentals for new leases (finance or operating need no differentiation)
  • Chance to assess and compare the interest charges being levied by lenders
  • Use the exemptions available on short term leases and low value assets
  • With the right software solution, you will have
    • The journals generated for your general ledger
    • A full audit trail covering the history of each asset and lease (acquisition, updates, returns, refresh and buy-out)
    • Privileged password access to one cloud-based centralised lease database for all concerned personnel within the organisation
    • Global view of assets across the entire company
    • Asset location, lease liability and lease expiry reports amongst others
    • Automatic generation of termination notices and extension options
    • Uploads and downloads from and to Excel.
  • Transparency and clarity of financial liabilities which is apparent to potential investors, shareholders, lenders and other interested parties understanding the performance of your business and how it compares to others in your sector.

 

Act now

There will always be unforeseen pitfalls and some even we have yet to come across. Likewise, there will be pluses that are unique to your business but to realise the very best of outcomes it is necessary to step off with the right foot.

Take the issue seriously and appoint an owner, allocate a sufficient budget, set realistic milestones and explore, identify and acquire a proven and trusted software solution.

Keep your internal staff, management, auditors, lenders, stakeholders and even your lessors happy, informed and able to experience pain-free compliance with minimum surprises and maximum pluses by following the well-trodden path of so many Innervision clients.

Request a free demonstration of LOIS Lease Accounting today and discover why over 160 entities worldwide rely on the solution to simplify and deliver their critical compliance objectives.

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