It’s estimated that the new lease accounting standards will bring £1.7 TRILLION onto balance sheets around the world.
These changes will affect company asset turnover, interest, operating profit, cash flow, declared outstanding liabilities, asset pool, depreciation and other financial factors. Having an “even” playing field is excellent for investors, but a bit of a headache for companies.
Once you understand how your business will be impacted by the IFRS 16 lease accounting changes, then you will need to consider how you go about preparing. IFRS 16 comes into effect on the first day of January in 2019. If you haven’t started preparing over the last two years - or even if you have - what needs doing for IFRS 16 in 2018?
- Understand the changes to operating leases
- Know how much more work you have left to become compliant
- Separate out your short-term leases
- Know which contracts contain a lease
- Adopt early and apply retrospective reports
- Consider a unified platform for lease information and processes
- Make sure your team and/or your boss are up to date
Understand The Changes To Operating Leases
If you have operating leases that used to be hidden off the balance sheet, this change will have the biggest impact on your company, since in the new standards operating leases will be non-existent. Instead of being able to write off operating leases as operating expense payments you will now have an asset with associated liabilities in the form of committed payments. All leased assets will be presented together on balance sheet, and, to keep investors happy, you may have to consider the running costs as changes are implemented. If your business has tight cash flow margins, then you’ll need to optimise the financial performance of your lease portfolio.
Know How Much Work You Have Left To Become Compliant
Don’t underestimate how long it’ll take your teams to get ready for the changes. You’ll need to gather all lease portfolio data for leases that will continue through 2019. You’ll need to ensure these leases are financially optimised, decide if any agreements meet the exemptions. If you do not have a dedicated team working on compliance, then you need to make one and have them work through your agreements and accounts until everything is in order.
Separate Out Your Short-Term And Low-Value Leases
Your compliance team should separate your short-term leases from those that will be impacted by IFRS 16. If your lease is short-term, or a low-value asset (under $5,000 approximately) then you can exclude it from the balance sheet. This measure was put in place to ease the administration processes of compliance.
Know Which Contracts Contain A Lease
If you answer yes to any of the following, then IFRS 16 will apply to the lease if you answer no to any of them, the contract does not contain a lease.
- Is there an identified asset?
- Can the customer obtain all of the economic benefits from using the asset for a period of time?
- Can the customer determine where the asset is used for a period of time (i.e. the leasing body has no right to the asset for a specified period)?
If you answered yes to one or more, then your contract does contain a lease. Service contracts do not have to be put on the balance sheet, but a lessee can choose not to separate service components negotiated in the lease. This option, however, should only be chosen if the service components are small and values cannot easily be differentiated.
Adopt Early And Apply Retrospective Reports
Your business may qualify for early adoption. Your deadline will be brought forward, but you’ll be compliant and ready for when the changes hit. Early adoption is only available alongside “Revenue from Contracts with Customer.” This early adoption allows companies to ease the financial burden of becoming compliant.
Consider A Unified Platform For Lease Information And Processes
Your business may not be aware that there’s dedicated software to help with lease accounting information and processes. A traditional spreadsheet or paper system will not allow you to understand the full scope of becoming compliant. Specialised software will allow you to manage all of your leases, visualise the impact on your finances, automate reports, and keep data at your fingertips. Software like LOIS - trusted by companies like Biffa, PHS, GE, and more - automatically adheres to lease accounting and agreement changes. Adding a lease to the system is easy and you can glance at your portfolio from an interactive, consolidated dashboard.
Make Sure Your Team And/Or Your Boss Are Up To Date
You cannot keep your employees out of the loop when such big changes are happening, so make sure that the accounting team informs their bosses, other employees, and their team members, on just how the new changes will affect them.
All lease agreements will move on balance sheet, so misunderstanding what that means and what constitutes a lease and a service agreement under the new terms could affect how the business operates. Cash flow and credit lines will be impacted as well, so make sure that all employees who deal with or need open credit lines to operate are aware of what’s affected.
And, of course, who manages and negotiates with credit providers should be centrally involved from here on in.
Stakeholders and investors, especially, will want to know how changes impact them and to this end, you will want to warn them that financial metrics will be impacted and the way they view the health of the business will change. Keep them up to date on every single stage of the process to keep them happy, and they will continue to invest if they feel aware of with rather than duped by any sudden changes.
Still Worried About Transitioning To The New Standard?
Download your FREE copy of our 7 Step Guide to Lease Accounting Compliance, which will help you get on track for the upcoming changes. Make sure you’re prepared before the end of next year.