As we near the end of 2019, it is time to look at just what IFRS 16 has meant to you and to other businesses.
Was the transition easier than expected, does compliance still raise challenges, have unforeseen benefits been realised, have promised spin-offs failed to materialise, has the effects been understood by and communicated to all interested parties?
A recent survey conducted by PwC (their 2019 Global IFRS 16 Post-Implementation Survey) “sought to understand how IFRS 16 implementations progressed in the context of the considerations above and where challenges continue to reside post-transition”.
Conducted across 50 countries during August thru September 2019, 400 companies, 57% of which had revenues in excess of $1billion, responded to the survey. Among the findings:
- 55% of respondents indicated that the challenges brought about by the implementation were unexpected.
- 72% believe that their current solution does not provide full functionality to cope with their lease accounting and reporting requirements.
- 92% indicated that business benefits have not yet been explored or that the implementation process resulted in little to no benefits to date.
- 32% felt that standard setters did not provide sufficient guidance and transition reliefs to enable an efficient and cost-effective transition process.
- 87% have not restated historical financial information and performance measure
Analysing the results of the survey 4 main themes stood out said PwC.
1. Race to Implement
Having underestimated the effort required to transition to and then comply with IFRS 16 many companies had failed to utilise the entire 3-year implementation period. Embarking then on an IT solution they “encountered significant issues with implementation of IT solutions, partially due to the lack of functionalities, immaturity of lease IT systems and vendors in the market, and partially due to the often diverse IT landscapes and business processes within a company”.
As a result of these unplanned implementations, companies are using workarounds and spreadsheets where the requirement going forward is to streamline reporting processes, integrate IT solutions and automate lease classification. Proven cloud-based IT solutions are available, and they do not necessarily require anything other than a web browser.
Amazingly, the analysis of the survey indicated that more than 50% of respondents rely on spreadsheets to maintain their lease reporting to at least some extent, yet just 19% indicate a spreadsheet model is adequate for their needs. Four-fifths add or update contract data manually, which can be both time consuming and error-prone resulting in hidden costs. Others are still awaiting the release of critical functionalities from their IT vendor, and over a third of respondents, according to the PwC survey, say they are still likely to implement a new IT solution in the coming 24 months.
You may now wish to speak with Innervision whose proven LOIS Lease Accounting (LLA) cloud-based solution is available and fully functional.
2. More Guidance Needed
The new leasing standard caught many companies out as they had not had to account for leases on their balance sheet prior to FY2019. As a result, the widespread transition to IFRS 16 created significant application complexity. Companies felt that they would have benefitted from and might still benefit from more guidance from IASB with regard to such challenges in areas of judgment such as determining lease term and appropriate discount rates, lease modifications and the interaction with other standards such as impairments post IFRS 16 and tax accounting.
3. Benefits to Come
One of the expected spin-offs from compliance with IFRS 16 was that companies would enjoy increased governance over their leases and implement more robust lease versus buy decisions. Teams were formed to gather all of the leases data, collate it and load it. Despite the additional data and added transparency over existing leases, many companies have not yet identified or experienced any benefits from IFRS 16 beyond compliance.
Having concentrated on achieving compliance, companies are just now turning their attention to using their centralised data and added transparency over lease data to achieve business benefits beyond those resulting from compliance. With the available data centrally collected and the right tools in hand, companies need to understand and analyse this data as they now have the opportunity to reduce risks and achieve cost savings during the procurement of their leases and over the life of their lease terms.
However, the PwC survey goes on to report that more than nine in 10 respondents (92%) indicated that “such benefits have not yet been explored or that the implementation process resulted in little to no benefits to date”.
There is reason to be optimistic though as respondents anticipate greater lease portfolio visibility and optimisation, improved governance and controls over leases, including more robust lease versus buy decisions, cost savings due to improved procurement of leases across the company and reduced risks from leases.
Just 8% of businesses polled have actually experienced some of the benefits highlighted above but with the added transparency and central availability of lease data, finance teams are greatly positioned to use Data & Analytics to deliver insights and benefits which can be actioned by the business to create value beyond compliance.
An alternative to internal centralisation could be to outsource lease administration under a managed service arrangement with a third-party service provider. This is a relatively new concept, yet 23% believe it could be a top method of reducing the cost of leasing operations and reporting. One call to Innervision could help you identify the tool to centralise the data, report on it and make strategic leasing decisions based on it.
4. Complex Investor Communications
Across every business it is safe to say that there have always existed leases that were not necessarily written or recorded centrally. Indeed, they may have just been accounted for as an operating expense from a departmental budget.
This historically decentralised nature of lease obligations and liabilities has now with the transition to IFRS 16 and the pursuant limited corporate insight into leases across the business, resulted in half of companies identifying additional leases or longer lease terms. The on-balance sheet accounting and added robustness of processes and controls over leases within businesses has contributed to the completeness of lease obligations now reported to investors. With the correct modelling and reporting tools, this could have been forecast and the interested parties might have been more aware of the implications on the financial reporting and status of their investments prior to complete compliance. 87% of respondents have chosen not to restate historical periods by adopting the more straightforward “modified retrospective” approach. How now will a business be compared to its peers in a comparable method if previously they have had different leasing philosophies – this is a real challenge for investors as they try to understand a company’s performance post IFRS 16.
The survey and its results can be seen in more detail at - https://www.pwc.com/gx/en/audit-services/assets/pdf/pwc-ifrs-16-beyond-the-implementation.pdf
Implementing IFRS 16 has obviously come with some unexpected challenges but they can be overcome, and it is not necessary for any business to invent the wheel because fully automated IT solutions do exist and are in use across the globe complying with both IFRS 16 and FASB 842. It is now time for businesses and their stakeholders, lenders and investors to reap the benefits that can accrue from the internal centralisation of lease data, the improved management of lease portfolios, accurate reporting and digitisation of the whole lease management function.
Get in touch to discover how Innervision and its lease accounting solution can help you achieve the obtainable benefits of IFRS 16 or ASC 842.
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.