Over the past couple of years, there has been greater co-operation between the International Accounting Standards Board (IASB) and their American counterparts, the Financial Accounting Standards Board (FASB) with the aim of implementing a set of major changes to international lease accounting standards.
This is a process that has been advancing for nearly a decade and only now is approaching fruition, with both boards announcing their new standards earlier this year.
The IASB’s IFRS 16 Leases and FASB’s ASC Topic 842 will have significant ramifications on every organisation that leases its assets and as such, businesses must prepare in advance for the impending changes.
If you’ve had your head buried in the sand for the past 10 years and are unaware of the developments, fear not; all is not lost. We are here to provide useful insight and help you prepare.
Let's take a look at the broader landscape:
What are the expected changes? The biggest impact of IFRS 16 and FASB ASC 842 is the change in accounting treatment for operating leases. In a bid to increase transparency and comparability on financial statements, the new accounting standards will remove the “off-balance sheet” accounting treatment for operating leases and require them to recognise arising liabilities and assets within their financial statements.
This will have a knock on effect on various financial metrics as the IASB anticipate up to $2.8 trillion worth of lease commitments coming onto balance sheet globally. Organisations will likely see an increase in EBITDA as well as changes to reported liabilities, profit measures and various other key metrics that will impact stakeholder agreements, covenants and even incentive compensation payment assessment.
The key features of the new lease accounting standards are:
- Virtually all leases on balance sheet - lessees will be required to recognise assets and liabilities arising from all but short term and small ticket leases.
- Definition of a lease to exclude service components, focusing more on right to control use of asset.
- Lease liability measurements to be simplified
- Links between balance sheet, income and cash flow statements retained
- Lessor accounting to remain mostly unchanged
These are just a few direct impacts of new lease accounting standards; various other secondary and operational effects will mean businesses need to be organised and prepared for IFRS 16 and Topic 842 implementation.
So how can you prepare for the changes?
As of now, there’s still time for companies to get on top of their implementation preparations, however, with the arduous task of collecting and validating lease data, on top of other pressures from the new IFRS 15 and IFRS 9 standards, businesses need to formulate a cohesive strategy to tackle the changes fairly soon.
The first step is to identify every lease within your company. Large organisations that have a vast array of leased assets must scrutinise each lease contract to identify the key data that will enable them to bring the lease on balance sheet and, if necessary, make changes to the income statement. This is a process that will take time, resources and a lot of planning. Alternatively, to reduce the occurrence of errors and to ensure complete and accurate compliance, many organisations may choose to outsource this process to specialised leasing experts.
Another alternative is for organisations to invest in lease management software that will allow them to centralise their lease portfolio into one secure and manageable platform. From here, companies will be able to easily identify leases that will be affected and plan for the changes by making the relevant accounting adjustments.
Whatever the chosen method, it’s reasonable to expect that there’ll be a 1-2 year period of transition for companies to adjust to the new accounting standard. However, before this period is upon us, it’s advisable that companies prepare for the changes and the associated transition requirements in advance. It’s imperative that organisations understand the new legislation to determine compliance requirements, implement internal processes/procedures, prepare a transition contingency plan and review internal leasing policies in response to the new rules.
If this all seems too overwhelming or confusing; don’t worry! Innervision are here to help and can offer assurance, knowledge and expertise with any approach and are perfectly placed to guide any company through the transition to the new standard and aid them in becoming fully compliant.
If you want a more comprehensive understanding on how your organisation will be affected by the changes or get advice/assistance on how to prepare accordingly and reform your leasing procedures; don’t hesitate in contacting us on +44 (0)20 7283 9422
Furthermore, if you’re interested in discovering how our unique and powerful lease portfolio management software LOIS can help ease the transition and aid you in becoming fully compliant, CLICK HERE.
For more on the IFRS new lease accounting, download our leasing e-book for a detailed summary. Just CLICK HERE.
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