Companies need to start preparing for the lease accounting changes that IFRS 16 will bring in January 2019. Organisations with large lease portfolios will see a bigger impact on their key reporting metrics.
You may already know that you have to bring most leases on balance sheet but working out which is the best transition option can be challenging. Under current accounting rules, an operating lease is not required to be recorded on a lessee’s balance sheet. This all has to change, and companies need to adopt the right strategies to comply with the new standards. Implementing the new standard will require time, resources and plenty of planning.
According to a Deloitte survey, about 23.6% of public companies and 36.4% of private companies are adopting the lease accounting standard on schedule as the regulators have mandated. Since all companies are different, the amount of time and effort required to implement the new lease accounting standard will vary. It all depends on how many leases a company holds, the state of the lease portfolio, and what systems are already in place. It could take around three to 18 months to collect the data and establish the electronic repository. Companies should get ready for the transition as soon as possible.
With the new requirements, the expectations for lessees will be (according to Deloitte):
- an increase in assets and liabilities
- more lease expenses recognised in the early periods of a lease
- a change in lease expense classification from operating costs to financing expenses (with a few exceptions)
- a shift of the payments previously associated with operating leases to the financing category for organisations that present cash flows related to interest on leases as financing flows.
Here are some tips to help companies implement the new standard:
Start As Soon As Possible
The process of getting ready for the changes could take up to 12 months, so it would be wise to have a transition timeline and action plan in place to help you prepare. Finding all the necessary lease documentation can be challenging and time-consuming, especially when the documentation is spread across different locations. Companies often have thousands of leases, so getting a head start is essential in order to achieve compliance in time. The more you postpone, the more you’re at risk from potential noncompliance issues.
Set Clear Goals
The transition will require investment in time, resources and staff to ensure a smooth and compliant conversion to the new standard. In order to ensure a successful transition, it’s important that you set objectives and control measures. Make sure you have a long-term strategy that will help you manage your existing and new lease agreements and develop a process to identify and analyse historical data for all active leases.
Invest In Lease Accounting Software
Many companies underestimate the scope of the transition to a new lease accounting process – it’s often a costly and lengthy task. Lease management and accounting software will allow you to centralise your lease portfolio into a secure and manageable platform. This will make it easier for companies to identify leases that will be affected and plan for the changes by letting the right software solution generate the necessary accounting changes. Most companies don’t have a system in place for managing their active lease agreements, which makes it complicated to collect the lease data required for accurate reports.
Review Your Current Leases And Reports
With a clear plan and a centralised management process in place, it’s time to gather and analyse your current leasing activities. It’s important to define a contingency plan in the early stages of transition and understand how your business will be impacted. To ensure a successful transition, you must collate all active leases and assess how it will impact your financial statements. This is a time-consuming task as you’ll need to collect information on every lease you currently have or are in the process of confirming.
Ask A Specialist Leasing Expert
Implementing new standards can be overwhelming without the necessary knowledge and preparations. Outsourcing to a leasing expert helps companies reduce the occurrence of errors, stay on schedule for the transition and ensures complete and accurate accounting compliance.
Is your company ready for IFRS 16 compliance?
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