With the enormous work involved in becoming compliant with the lease accounting changes arising from IFRS 16 - and that is after the monumentally intricate task of assessing what does and does not form a lease agreement under the revised regulations - it makes sense that you are evaluating automation options.
It will become vital to the performance of the company balance sheet that the lease portfolio is fully and closely managed in order to optimise costs whilst producing a true representation of assets and liabilities. This means the need to produce in-depth reports and quality analysis will become more and more pressing.
The Changes To Regulation Which Make Automation Needed
After years of intensive consultation and drafting, the way that businesses need to report their expenditure on leases is changing. In short and in case you are unaware; all leases will have to be reported on balance sheet - barring those which are of low value (under approx $5,000), short terms (less than 12 months) or aren’t a vital part of operating a larger asset (in terms of value or duration of agreement).
The changes brought about by IFRS 16 - which replaces current rules outlined by IAS 17 - have been brought about in light of a growing and ever more popular leasing industry. And the fact that businesses rely on leased assets in order to function - yet they do not need to be accounted for on balance sheets. This causes companies to be difficult to value for investment, takeover and performance assessment purposes.
IFRS 16 has been designed to leave High Volume Low-Value assets untouched (mobile phones, laptops, office furniture), whilst changing the reporting of Low Volume High-Value assets (property, infrastructure equipment, certain vehicles, large equipment).
A great quote which sums up the spirit and raison d’etre of IFRS 16 comes from Sir David Tweedie, Chairman of the IASB, who said, “One of my great ambitions, before I die, is to fly in an aircraft that is on an airline’s balance sheet.” The point being that the expenditure on the core piece of equipment for Hypothetical Airlines being able to function and create profit does not have to appear on the balance sheet. Remove or alter the cost of the asset and you remove the profitability of the business, but this is reported in a far from transparent way.
Given the reclassification of what forms a lease, businesses like yours need to make sure that they are fully aware of, firstly, what will form a lease once the changes come into effect, but, secondly, will need to closely manage the lease portfolio in order to minimise the impact and the effect on the financial performance of the company. As well as minimising the labour element required in doing so.
The Advantages Of Lease Management Automation - Driving Operational, Time and Cost Savings
On a practical level, digitising your lease documentation and all related data will reduce the amount of physical storage space required at your offices. Though this is the smallest of benefits.
More importantly, it will also improve administration speed and ease of finding relevant documents or other information. A central, digitised storage place will make analysis and report compilation easier, especially for those operating across multiple sites and locations.
“Inbuilt tests in the software also mean that a lot of the critical thinking is done on your behalf when deciding if a lease agreement is exempt from IFRS 16 rules.”
All companies who use leases, not just those with larger portfolios, need to keep a close eye on their agreements in order to avoid unnecessary spend. Monitoring for auto-renewals, increased rates or invalidation of service agreements can be a laborious task when data and information are stored across multiple platforms - a lever arch here, a spreadsheet there, for example. But one central piece of software with its database takes the legwork out of doing this. Inbuilt tests and innovative functionality in the software also mean that a lot of the critical reporting is done on your behalf when accounting for your leases under IFRS 16 or FASB ASC 842. The most advanced solutions will incorporate reporting functionality that runs all the critical calculations required for the amortisation schedules, journal entries and disclosure summaries for you.
A central piece of software is always accessible and will make it clear when and where attention is needed.
Aside from ease of analysis and reporting, an intelligent piece of software will also help to ease the process of becoming compliant with new legislation and create a full audit trail. Given that some businesses will have to provide retrospective reports for periods leading up to the January 2019 implementation of IFRS 16, this will be extremely useful, though it does mean it is vital you evaluate and implement a software solution sooner rather than later.
From a lease management perspective, having total visibility of your lease information is critical. Software provides users with an accurate record of every active lease within a lease portfolio providing users with a comprehensive view of your leasing obligations – including lease terms, expenditure and renewal dates. What’s more, automated notifications allow users to remain on top of any critical lease actions that may be upcoming, overdue or require immediate attention. By having complete control of this information, companies are able to avoid any unwanted auto renewals, over payments of end of lease penalties whilst also identifying opportunities for time and cost saving through portfolio optimisation.
The more secure, thorough and well organised your entire lease portfolio data is, the stronger your negotiating position is for being able to manage renewals or returns and sourcing new agreements. The full picture can be presented to the business and your whole procurement department can be fully aware of the state of the lease portfolio and budget.
Further Reading About Digitising Lease Management
Innervision supplies a cloud based software system, LOIS – Lease Accounting (“LOIS”), where businesses can migrate their lease information and receive all of the benefits outlined above. But they will also be able to utilise our critical analysis and advice, as well as being able to use our knowledge of the leasing industry to negotiate improved deals.
This will help you reduce spend and maximise the performance of your lease portfolio. There will be no more wondering if the quoted agreement is the best available and there will be far less time spent sourcing and comparing other quotes. The beauty of any automated software such as LOIS is that it will take the time and effort out of your lease accounting and lease management.
If you would like to see a more in depth look at just how much automated lease accounting software can do your job for you and leave you being able to concentrate on other more pressing issues, check out our free guide to the benefits. Press the button and open your free copy.