Applying IFRS 16 – Operating Lease Compliance made easy, impact minimised, benefits optimised!

IFRS 16 specifies how a business reporting under IFRS will recognise, measure, present and disclose leases in its financial statements.

The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value in which cases exemptions are an option.

For accounting periods beginning on or after 01/01/2019 compliance with IFRS 16 is necessary whatever the size of the business and whatever the volume of leases. However, the task of transitioning a lease portfolio to this new world whilst challenging can be not only beneficial to a business with improved forecasting, managing and reporting but also have a positive impact on how a business is viewed by lenders, stakeholders and investors against other enterprises of its size in its sector through improved transparency and defined reporting standards.

This article will introduce the reader to a software solution (LOIS Lease Accounting) that has proven itself across the world able to meet the challenge of compliance with IFRS 16, to generate the business efficiencies that are available, to utilise the exemptions and expedients offered and to allow impact modelling of the options.

The Challenge

To successfully comply the business will need to:

• locate all of its extant lease agreements
• centralise the portfolio of leases
• identify all assets subject to lease agreements
• reclassify all operating leases, unless specifically exempted, under the single lease accounting model
• understand the new lease standard
• prepare perhaps using EXCEL a file of assets with their costs, leases and liabilities
• interest rate applicable to a lease or internal borrowing rates to be applied
• use all of the above to generate the journals from amortisation of the assets

The Solution

The business that successfully transitions to IFRS 16 and complies with the new lease accounting standard will be best served by a system:

• utilising a cloud based proven software solution such as LOIS Lease Accounting
• which allows multiple users with specific levels of authority
• that allows spreadsheet uploads of lease data and equally capable of generating excel type downloads as well as reports
• able to generate the entries for the ERP general ledger employed by a business
• that can perform impact modelling of how compliance will affect the P&L and balance sheet as different options, exemptions and expedients are employed
• that keeps a full audit trail right through the life an asset as well as a lease agreement of extensions, returns, upgrades and modifications
• that holds details of lease documents and generates alerts for lease expiries and reminders for return conditions
• designed to manage lease components and non-lease components of an agreement
• with built in functionality to handle “right of use”, liabilities and amortization
• built for fully retrospective and for modified retrospective approaches
• that allows searches by lease, by asset, by date or by any other recorded key.

The Benefits

The spin offs will be myriad even for companies with a sizeable well managed lease portfolio as post compliance a business will have:

• centralised lease management through authorised users located anywhere by use of LOIS Lease Accounting
• a cloud-based centre for documentation, history and reports
• a system capable of automatically classifying and recording lease agreements together with the associated non-lease elements, right of use asset, liability, interest rate and indirect costs.
• a one stop repository for all your lease data and your leases assets
• a home for all your lease documentation
• a transparent and clear view of your lease liabilities & commitments for internal and interested external parties
• improved forecasting of liabilities, expiries and returns

The Final Step

• appoint a team to or take ownership of the compliance challenge
• Explore deploying purpose-built and proven lease accounting software such as LOIS Lease Accounting
• speak with other businesses that have accomplished compliance
• consult with leasing consultancies such as Innervision Management

Today, the LLA solution is relied upon by over 150 global corporates many of which are listed on the FTSE and other international stock markets. These entities depend on LLA to help ensure compliance with the new accounting standards. To discover how the system will help with your organisation's compliance project clicking on this link for a free consultation and demo.

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.