Over the last 3 or more years Innervision has consistently monitored and reported on polls from various sources that have addressed the progress or lack of it concerning to the transition to and compliance with IFRS 16 and ASC 842.
More recently we reported on the disclosures that would need to be included in any interim financial statements published post-IFRS 16 adoption.
It is quite surprising and somewhat disconcerting to discover when analysing the results of a survey conducted in June this year by one of the big 4 accountancy firms and posted on LinkedIn that of nearly 450 public companies polled only 43% declared that they were “prepared” for IFRS 16/ASC 842. Of more than 1,330 private companies asked the same question with regard to preparedness, less than 13% were “prepared” whilst more than 37% described themselves as “unprepared”.
Now let us remember that for those businesses subject to the new accounting regulations all financial periods after 1st January 2019 would be subject to IFRS 16/ASC 842 – something that we here at Innervision have been emphasizing for 3 years.
Looking at the work involved in becoming compliant 40% the 1,940+ businesses, asked the question, reported that the biggest task facing them was going to be the identification of all their leases and the gathering of the necessary data – that is the basic work that needs to be achieved before they can even begin to size the resources needed to move to compliance. If this has yet to be started, then it may be an idea to parachute in a third party that is experienced in the challenge and able to apply the necessary resource to achieve it. Additionally, if 40% of businesses really are staring at this challenge then get yours engaged with a third party before the available external resources become too scarce and too thinly spread for you to successfully utilise.
Managing necessary changes to business processes and controls was also cited by 14% as a major challenge together with the communication of any impacts to employees and stakeholders. This 14% we can assume have reached a state of preparedness in having gathered the data and documentation but now struggle to size and resource the next step. Again, a referenceable third-party software solution in this arena might be that next step. Look for security, ease of implementation and a proven product such as LOIS Lease Accounting by Innervision.
17% identified a major obstacle to compliance as being the effort being expended already in complying with other accounting standard changes and updates – particularly revenue recognition and current expected credit loss (CECL). Employment of more resource is the obvious conclusion to overcome this hurdle. Again, we say it is available and is prepared and experienced, but businesses need to look externally.
More than 27% of the public companies polled in the survey had in excess of 1,000 known real estate or equipment assets subject to leases on their portfolio with 18% having more than 2,500. That represents work enough to collate, upload, classify and where necessary reclassify, impact model, and manage – then you have the application of exemptions and expedients, judgements on interest rates and service elements as well generation of GL journals. Remember that under the new lease standards you are managing and accounting for each asset not leases – costing those assets and depreciating them. A cloud-based purpose developed non-spreadsheet software solution shouts out to be applied as the time ticks on.
The good news, if we can call it that, is of the 1,980 businesses who answered questions regarding the ease or difficulty of implementation 26% of the 518 public companies answered that they had accomplished the work. On the flip side, less than 6% of the private companies polled had finished. Why these figures? Maybe because just 8% of those surveyed thought implementations would be easy whilst more than 35% judged them difficult. And if you have a sizeable number of assets spread across leases, departments, branches and even countries then it is going to be difficult if left to your own devices.
If your business has judged it difficult then you are halfway to resolving the issue because that difficulty can be outsourced to the professionals who can size the problem, manage the transition and accomplish compliance based on proven solutions and experienced people. It won’t surprise you the more leases a company had the more difficult they envisaged the implementation – leases can hold multiple assets and going forward the lease accounting is going to be asset-based. Hence perhaps, therefore, the reticence in leaping into the dark. Perhaps, just perhaps, businesses are budgeting to apply outside resources – human and software.
If your business is tied up with other issues and needs that help to move to the next stage or would like to investigate an alternative path to compliance, then request a call back with one of our leasing specialist who will be on hand to answer your leasing queries.
Disclaimer: this article contains general information about the new lease accounting standards only and should NOT be viewed in any way as professional advice or service. The Publisher will not be responsible for any losses or damages of any kind incurred by the reader whether directly or indirectly arising from the use of the information found within this article.