Enforcing IFRS 16 falls to the European Union and the private non-governmental sector such as the Financial Reporting Council in the UK, and the International Accounting Standards Board, but, mostly, it’s a system that is self-enforcing and to an extent self-regulating.
It will be a generally accepted policy, demonstrating professionalism when adopted rather than a world full of businesses being penalised with direct fines or tangible consequences. So, if there are no direct consequences, what happens if you ignore IFRS 16?
The most tangible consequence is that if your business fails to adopt the new standards then you may be in danger of non-compliance. And, how will you look compared to your competitors? If you know someone is coming to your business for services, they may base their assessment on balance sheet financials, and, if you don’t comply with the standards it could harm you. You may have in place credit agreements, lending covenants or investment agreements that could be impacted or even broken if you’re non-compliant. It may also impact your future ability to source credit lines. You can’t pick and choose which bits you comply with, so it’s either all or nothing - but the best choice is all. It will take your accounting team a long time to become compliant so it’s best to start now. When it becomes the norm, you don’t want to be one of the few left behind.
Here are some considerations:
The Deadline Is Getting Closer And Time Is Running Out
Delaying and underestimating implementation could be fatal to your business. Transitioning to the new standards will take time, planning, and resources. If you wait too long, you’ll find that 2018 is here already, and you’ll run the risk of non-compliance at the implementation deadline date of 1st January 2019 because there’s a lot of work involved to get up to scratch.
Implementation Is A Time-Consuming Exercise
Since some agreements that may be classed as leases under IAS 17 will no longer be classed as leases, and others will qualify or be reclassified under IFRS 16, it’ll take your accounting and compliance team a long time to sort through each and every lease agreement and the associated paperwork. You’ll need to sift through the agreements that will end before the new standards roll out, and those that will not. Once you find the ones that will be affected, you’ll need to know what to do with them, what will change, how you need to report the findings, and so forth. It won’t be quick. If you don’t have lease accounting software or an analysis of your leasing portfolio, now might be a good time to sign-up. There are some companies that will help you through the process to remove some of the burdens of compliance from you.
Collecting and validating lease data is challenging and should be started early. Once you begin, you may find you have data gaps that need to be remedied. There may also, in many organisations, be issues with any lease data that has been devolved or passed on.
IFRS 16 Requires Complex Modelling
Because the data is complex, complete and accurate data is a requirement to be compliant. If you’re having to dig up data from two and three years ago, then that may be time-consuming - and filling in those data gaps will also take time. There will be several complex technical accounting judgements that need to be made, and modelling the impacts of each is challenging - and requires that complete data set to be accurate and compliant.
Delaying Could Mean You Have To Apply The Modified Retrospective Approach
If you delay the process for too long (i.e. any later than December 2017), then you may be forced to apply for certain optional accounting judgements such as a modified retrospective approach since you will not have enough time to apply for the fully retrospective approach. The fully retrospective approach requires all necessary historical information and that can be time-consuming to collect and process. When you delay, you’ll be left without the ability to make a comparison of the effects of each alternate methodology, which means you cannot then make an informed business decision as to which method is in your business’s best interest. At the end of the day, your business wants to do what’s best for business, and if you are looking at compliance too late, then you will be in check-mate before you get a chance to look at the chess board.
New Processes Could Cost Your Business
When you’re transitioning to the new standard, you may find you’ll have to implement new processes and additionally business controls may have to be developed - both of which are time-consuming, resource hungry and costly. Any unplanned work or processes delay your normal business functions. It’s best that you plan and budget ahead since many companies often lease in order to manage cash flow and have defined expenses. Waiting too long to be compliant can mean you’ll have unexpected expenses. And, if your accounting and compliance teams have to work overtime or work around the clock to become compliant, you’re paying them to do work that’s outside of normal business - which may or may not be easy to accomplish. If you start early, you can do the process more slowly in a measured and calculated way - and budget each month to handle the additional workload. Plus, if you decide to pay an outside team and implement new accounting software, for example, you need the time to calculate and approve the budget for that too.
You Can't Make An Informed Decision About Your Business
As mentioned before, if you wait too long, you won’t give yourself enough time to evaluate certain accounting options as in the fully retrospective option. Any smart accountant won’t be the type to make rash decisions. Your accountants will want to make measured, thoroughly analysed, and weighed-out options, but if you don’t give them time to see all angles, then they will be making decisions as a knee-jerk reaction instead of deciding what’s best for your business overall.
Suppliers And Auditors Will Be Overrun If You Delay
Specialist IFRS 16 experts will be in short supply, and working on other IFRS 16 projects if you wait too long. They’ll already be overrun and working with clients on complex and lengthy implementation projects. You don’t want to begin the process too late, find out that it’s too much for your own team, decide to outsource, and find out that all potential suppliers and auditors are too busy to help.
Lease Accounting Solutions Take Time And Resources
Implementing any lease accounting solution takes time as well as resources, and you’ll have to plan accordingly. Some vendors have products that aren’t yet ready or aren’t yet fully functional, there are also others that take months to fully implement. The best solution is to begin early and find lease accounting software that’s ready to go now.
Non-compliance Can Affect Your Finances
If you aren’t compliant with the lease accounting standards, your ability to source credit lines and find investors will be slim to none. Companies may not always love the new accounting standards, but investors certainly do. For them, it’s like a cheat sheet of the company’s financial health, and since most companies will comply, they can see which companies are worthwhile investments for them. In the past, companies could hide operational liabilities off the balance sheet, so it may have looked like they were well financed, but they were really in the overborrowed. Now, it evens everything out from an investor and creditor standpoint. If you don’t want financial sources to run dry, it’s best that you make sure that non-compliance isn’t hurting your pocketbook.
There are several other considerations for companies such as potential effects on: key performance indicators, bonus targets, executive remuneration schemes, tax, debt covenants, and regulatory capital requirements.
Furthermore, any EU publicly listed company is required to comply. Non-compliance could cause problems with company audits. Any comparative disclosure information between pre-adoption and IFRS 16 disclosures will need to know the status of your lease portfolio “as is” for 2017 statistics. If you haven’t begun to prepare, you may be empty-handed when it comes to these important metrics.
How Can I Start Now To Comply With The New Leasing Standards?
If you’re ready to get going on your way to compliance, you can download our FREE 7 step guide to lease accounting compliance now. It’ll give you a step-by-step guide on how to get your accounts up to standard before 2018 rolls around. Don’t delay! It’s just around the corner.