As you undoubtedly know by now, IFRS 16 will come into full effect as of January 2019. In order to meet the transition requirements, companies will need to allow enough time to prepare their lease portfolios.
This will include identifying, collecting and centralising all relevant data, conducting initial impact assessments, and implementing new control measure processes and software.
In this article, we’ll look at the lease data required for IFRS 16, and where you’ll be able to find it.
An Overview Of The Lease Data Required For IFRS 16
Under IFRS 16, businesses will be required to include all lease accounting information on balance sheets. Essentially, this will eliminate all off-balance sheet lease accounting for the lessee, which in turn will redefine common financial metrics like gearing ratio and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). This will apply to any equipment, real estate or software that you’re leasing, which means that the impact of IFRS 16 compliance will be significant across the entire organisation.
Common Places To Find The Lease Data Required For IFRS 16
In an ideal world, your organisation would have all the relevant lease data on hand and collating it should be no big deal. Unfortunately, the reality is often a lot less convenient. Here’s a list of common places that your accounting lease data might be hiding:
Procurement And Sourcing Systems
It’s common for businesses to implement financial controls on purchase orders above a certain expense threshold, which means that any large leases (such as leases for real estate, vehicles, IT infrastructure, etc.) originated as purchase orders. Your procurement or sourcing organisation should be able to provide, at your request a report on all open purchase orders that resemble leases. Even though they may not have access to the original lease agreement documentation, they will be able to provide you with the PO, which includes important data such as the lessor’s name, a description of the asset and the name of the stakeholder and business unit that requested the lease.
Contract Management Systems
With the ever-increasing number of customer and vendor agreements that most companies are subject to, it’s becoming common practice to implement Contract Management Systems. These will automate everything from the initial authoring and negotiation of an agreement, to the expiration and renewal of contracts. If you use a Contract Management System, there’s a good chance your master leases and schedules will be stored here. Request a report of any relevant contracts from your legal team, and additionally make sure that you investigate any service and outsourcing contracts to uncover any potential embedded leases in these.
Financial Reporting Spreadsheets
Most organisations keep lease accounting data in spreadsheets, which are typically specific to business units or geographic locations and included in a consolidated report. Current leasing standards require capital leases to be reported on the balance sheet and operating leases recorded in disclosure notes. Your SEC or Technical Accounts partner should be able to tell you whether capital and operating lease data is being collected for your reports and provide you with any relevant information.
IT Asset Management Systems
If your organisation depends on large numbers of IT assets or a complex IT infrastructure, it’s likely that you’re leasing a significant portion of your equipment. IT asset lease information is often stored in an IT asset management system, which includes a comprehensive record of each device’s serial number, MAC address, warranty, service contract and more. Again, the original lease documentation may not exist within your IT asset management system, but the information stored in it should point you in the right direction to find it. Ask your IT organisation to provide you with a list of all IT assets that are being leased.
Fleet Management Systems
For organisations who manage large numbers of vehicles, a fleet management system is essential. These systems contain all information pertaining to the vehicle fleet, including registration numbers, driver assignments and service records. Additionally, your fleet management system might hold copies of the master lease agreements associated with leased vehicles. If the actual agreements aren’t found within the system, the information it provides should give you a good idea of where to find them.
Real Estate Building Owners And Landlords
Real estate is a significant source of lease accounting information for many businesses. Medium and large businesses often employ centralised corporate real estate teams to manage their properties, while others may outsource the management of their real estate assets to dedicated property management companies. These are both valuable points of contact for extracting real estate lease information, but for smaller firms without this infrastructure, the best alternative is to make contact with real estate building owners and landlords directly. You can get information on landlord names from lease administration, accounts payable, procurement, or other systems that may have the data on hand. Even if you keep copies of your real estate leases, it’s a good idea to get in touch with owners and landlords to ensure you have the latest documentation.
Equipment Leasing Companies
Your business will most likely have a longer list of leases for equipment, fleet, material handling and so forth than it does for real estate. Remember, commercial banks, vendor captives and leasing companies are all involved in the equipment financing sector. If you’ve identified the lessor name but are unable to find the original documentation, make contact with your equipment leasing companies and request this information from them. While you’re at it, you might as well request copies of all your leases to ensure you have the correct payment schedules and end-of-contract information to perform the accounting under IFRS 16 accurately and adequately.
Further Helpful Reading
Obtaining all the accounting lease data you need to be IFRS 16 compliant is no small feat, but it’s by no means an impossible task. If you’re looking for some more advice about becoming compliant under IFRS 16, download our free guide here, or make contact with us directly.