Recently, Innervision had the privilege of presenting at an IFRS 16 breakfast seminar hosted by one of the ‘Big 4’ auditors.
One of our senior solution specialists was lucky enough to take part in a vendor panel session sharing insight on transitioning to IFRS 16 and the lessons we’ve learnt from over 150+ implementation projects globally.
Lucky for two reasons – first because the coffee and pastries were so welcome and secondly because of the way that the audience, which consisted of interested parties from many well-known FTSE listed companies was the prime input into where, when and how IFRS 16 implementation was progressing. This gave a picture of not just the rationale behind and the impact of IFRS 16 but more importantly a glimpse of the experiences of those engaged to transition their organisations to the new lease accounting standard. This article seeks to use this input and feedback to highlight for you the project planning, progress, potential pluses and pitfalls reported by these IFRS 16 “pioneers”.
Where are organisations in the implementation cycle?
Your own organisation will undoubtedly fit into one or other of the categories below. Take succour from the fact that you are not alone but read on to appreciate the lessons that are out there and being learned by those in each category.
- 25% of attendees were now in the “post-implementation” stage having reported at least one accounting period under the new standard
- 25% were “post-transition” but yet to report under the new standard
- 38% of those polled advised that they had entered the “transitioning period”
- The residue remained in the “planning” stage
Lesson 1 - What is the driver for implementation?
Decide before you begin to plan. It may be one all of the following but ensure that includes “COMPLIANCE” as a failure to achieve this negates the whole exercise. Do not mistake positive and potential spin-offs for the holy grail of compliance. The other drivers will have existed prior to the implementation requirement but were never perhaps considered desirable enough to tie up resource in achieving.
- Compliance was the 100% driver of the audience
- P&L benefits may follow
- Improved management and control of lease contracts and leased assets
- Ease of lease classification and accounting – achievable
Lesson 2 - What is the greatest challenge met or still to be tackled?
Presented with a number of options which included choosing the Discount Rate Calculation and the Treatment Approach as well as the issues associated with multi-currency and multi-entity lease accounting the audience answered with just three resounding challenges all of which need to be tackled head-on in order to progress to the stage of worrying about the others.
- Sourcing Data
- Inputting Data
- Disclosure Reporting
Ask any lease consultancy, lease solution developer or audit firm and they will likely cite the same 3 issues as their opening gambit together with how to overcome them.
Lesson 3 - Which if any software aids or solutions are being used?
Undoubtedly, prior to the publishing of the new standard, many organisations will have largely ignored lease management software, audit trails for contract updates, lease reclassification when necessary and relied on custom, previous experience and spreadsheets to determine and govern lease management and lease accounting. At this briefing, the audience were able to promote :–
- None followed the path of relying on their ERP system alone
- Likewise, none ignored the benefits to be attained from using available software
- Of the panel more than 40% had invested in a 3rd party purpose developed software solution which was not built on Excel, choosing a dedicated, proven and supported system such as LOIS Lease Accounting by Innervision.
- A further 25% or so had engaged the services of an “Excel” solution developed by a 3rd Party. Where does the expertise lie?
- A little over 30% continued with their homegrown “Excel” solution which can be assumed meant developing and honing an existing platform. Previous blogs have looked at the problems of a spreadsheet-based company-wide system discussing the issues of documentation, support, audit trails, updates, versions and multi-users when relying on such a solution. Again, where does the expertise lie? Who wrote it, can update it and still understands it?
Lesson 4 - Looking back what could have been done better?
Those who have transitioned successfully are a font of knowledge, know-how and experience for all of us. They clearly identified wrong paths taken, poor prioritising and how to do it properly next time! To paraphrase -
- Make available the budget the project needs
- Start earlier
- You cannot exaggerate the work required
- Get an internal sponsor
- Speak with others who have transitioned businesses
- Find people who understand leases and leasing
- Like IFRS 15, the new standard involves tax, real estate, accounting, treasury, asset users and others – it touches everyone so involve them.
- The need was for a purpose-built solution not a cobbled together spreadsheet
- Finance needed to be involved when the solution was chosen
- Don’t go straight into complex calculations
- Don’t underestimate the time needed to capture everything
A final lesson - If you haven't transitioned then face your greatest fears and those of others
- Data collation
- Data completeness
- Time-frame to act
- If you could just start again
- How to explain the need for the changes and to how to navigate the business through them
- Is there a complexity missed that will involve much work?
There will be further blogs tackling the issues and lessons drawn from implementation but it is plain for all to see that complexity, time-frame and need for compliance dictate that an organisation take transition seriously and make available internal resource, engage 3rd party expertise, learn from others the pitfalls that lie ahead and enjoy the benefits to be had from success.
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.