Leases have long been used and favoured by corporations as a type of off-balance sheet financing. IFRS 16, which will come into force on January 1st 2019, will change that and provide a more transparent means for investors to analyse the financial health of a company. This gives companies just months to be IFRS-ready and the time to take action is now.
What Should Have Already Been Achieved
There are various goals you should be aiming to achieve when preparing for IFRS 16 before the 1st January 2019 implementation deadline. But before you get to reaching these, there are a number of milestones you should have already passed.
It’s recommended that you adopt IFRS 15, which became effective earlier, to help your company implement IFRS 16 more smoothly when 2019 comes around. If you know your company will be affected by IFRS 16, then it’s paramount that you adopt these standards early on.
Naturally, the primary objective is to ensure your company understands and adheres to the new standard. And for that to happen, necessary adjustments must be made to past, present and future financial statements across each department in your business.
You should have already started the data collation process and your designated transition team should be keeping on top of this. It’s likely that many larger companies will take upwards of 12 months to collect all of the relevant lease data as the more complex the organisation is, the more lease data there will be and the less centralised the process of locating them will be. Given we are well inside this timeframe, considerable resources will need to be placed on the project if not already well underway.
Timing is key if you want a smooth compliance conversion process, so the earlier you start, the better.
What Still Needs To Be Achieved
Data Analysis and Assessment
You should be ready for or be nearly at the stage of analysing and assessing your data. This process of highlighting which financial metrics will be impacted by the new lease accounting standards should be swift. You should be conducting critical judgments and impact modelling with your auditor.
Because of the scope of this transition process, you need to have clearly defined measures of success and a proactive contingency plan put in place to ensure that your company’s leasing is appropriately optimised.
Analysing Internal Leasing Processes
As part of this analysis process, you need to also be reviewing your internal leasing processes and management, identifying inefficiencies and employing effective lease management software in their place. As well as giving you greater control over your leases, you can ensure your company is getting the most out of your leases and also save money in the long run.
Establishing a Unified Platform for Lease Data and Processes
Leading the transition to new lease accounting standards is a challenging task and to conduct it manually is not only costly but also a gross underestimation of the project’s complexity. Relying on paper based or spreadsheet storage will consume more time, staff and resources, further complicating and delaying the whole process.
Businesses should be using a centralised database for storage of their lease data from which they can track, identify and delegate the necessary actions. When there’s no standardised system and the lease data is dispersed across the different company departments or even across different offices, collating data becomes even more of a tedious task.
For that reason, your company should have or consider investing in lease accounting software to aid in optimising the transition process and ensure that the accounting of your leases is compliant with the new accounting standards.
Be Ready to Choose a Software Vendor
As well as being able to produce a proactive contingency plan and to analyse the scope and impact of the project efficiently, businesses also need to be able to access every lease that’s currently in active. In the above point, we highlighted the problems associated with not having a standardised system or using manual means such as spreadsheet storage.
A technological solution is arguably the best and most efficient approach to a smooth transition towards compliance.
Once you’ve reached this stage, you should be considering a variety of factors. For example, your lease accounting software should be doing more than just hosting your leases in one place. A worthwhile platform will allow you to:
- Access a complete view of your lease portfolio, old, current and new, so you can easily identify, track and review your individual leases and associated assets.
- Provide you with full scope of the transition project.
- Highlight how your finances will be impacted.
- Automatically create internal, external and mandatory reports.
- Forecast and enforce a lease accounting strategy.
LOIS is a powerful lease management software that has been developed with the changing lease accounting and compliance landscape in mind. The platform will provide you with the necessary tools you might need to ensure your company adheres to the new accounting standards - such as the IFRS 16. While the process of planning, gathering and analysing leasing activities is a complex task, software such as LOIS can help simplify what you need to do and make the transition much smoother.
Is Your Company Ready for the New IFRS 16 Standard?
Before your company can be fully prepared for the new lease accounting standard, there’s a lot that you need to know. Download a free copy of our 7 Step Guide to Lease Accounting Compliance to find out all you need to know about the new regulation, plus an in-depth explanation on what you need to do to achieve full accounting compliance.
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.