First Steps to Lease Accounting Preparation
The deadline for the new global lease accounting standards’ preparation phase is fast approaching.
Businesses who want to ensure full compliance together with comparative accounting figures by the official implementation dates, realistically need to have completed their planning by the end of 2016.
As we settle into Q2 of 2016, many organisations are still at risk of underestimating the preparatory work needed for compliance, assured by the seemingly distant 15th December 2018 implementation date (1st January 2019 for IFRS 16).
As many of the leading accountancy professionals have warned, businesses who have yet to begin planning are already running behind. So what exactly are the first stages of implementing the biggest change to lease accounting in at least 30 years?
The first steps revolve around two key themes:
- Education – ensuring everyone who needs to know about the transition is aware of its impact.
- Centralisation – beginning the process of collating and reviewing your businesses complete lease portfolio onto one unified platform.
See our timeline of the upcoming milestones leading up to the implementation of IFRS 16, FASB ASC 842 and beyond
One of the biggest problems with the lease accounting transition has little to do with the required reports. Stage one is actually making sure your business is aware of what exactly is about to happen. A decade in the making, a vast majority of entities have become desensitised to the “announcement of updates to IFRS 16 and FASB ASC Topic 842 followed by a delay” cycle of the new lease accounting announcements.
Understanding the impacts of the new global lease accounting standards of your organisation is critical. The effect on financial statements, how internal processes will be altered and your reliance on how operating leases currently appear on the balance sheet; all of these need to be considered in order to see what your company needs to do to achieve compliance.
“There is much work for companies to do to understand and implement the changes, not least in the area of data collection, and this work should be started sooner rather than later.“
Nigel Sleigh-Johnson, Head of Financial Reporting Faculty at ICAEW
The more information available on the global lease accounting changes, the better placed you will be to establish your case when discussing aspects such as the project budget. The transition will involve collaboration between multiple departments, so it is important that everyone who needs to know about the changes is educated accordingly.
Knowledge is power and it is important that you have a strong understanding of the new standard’s implications in these early stages to ensure you are well prepared and organised to achieve full compliance, clear communication and maximum efficiency.
IFRS 16 and FASB ASC Topic 842 will have a global impact on the leasing industry. Likewise, they will have a company-wide effect on your finance and procurement departments. Alongside understanding what these standards will and could do to your business, it is important that you establish a central point for the organisation and management of this transition.
With lease agreements and leased assets spread across departments, subsidiaries and even separate countries, it is vital that you have a unified database for the required information to collate, store and manage the reporting aspects of the switch to the new global lease accounting standards.
Although most companies have a strong idea of what assets they have under lease, few actually have a full view or access to all their active leases and the associated data and documentation.
“Many companies have disparate systems for tracking, monitoring, and housing lease agreements.“
Sheri Wyatt, PwC
Full visibility and control of your lease portfolio is needed to ensure a consistent and accurate transition. Many current methods businesses use to manage their existing lease accounting requirement are becoming fast outdated. Spreadsheet based accounting does not have the capability to store and manage all of a business’s leases and efficiently facilitate the transition to new lease accounting standards.
Leading accounting professionals are advising entities to update their lease management software to ensure they have the correct features needed to ease the burden of transition.
The truth is that businesses with a clear indication and easy access to their leases are able to make significant savings on their agreements and avoid unnecessary charges that may occur at the end of a lease. A central database cannot be disregarded as the most useful and efficient way to not only ensure compliance to the new lease accounting standards, but to also ensure long term management optimisation and savings through better leasing decisions.
Although there is still a minimal amount of breathing room for entities to complete their planning and data gathering processes, these first two elements need to be considered sooner rather than later. It is all too easy to underestimate the time and resources required to ensure all leases are collected, all information is complete, budget and internal teams are agreed and assigned as well as the numerous other tasks created by the transition. However, businesses that fail to educate and evaluate in these early stages risk non-compliance and problematic disorganisation as the implementation date encroaches ever closer.
More information on the lease accounting standards can be found here. Innervision’s leasing experts are constantly producing content to provide businesses suitable and comprehensive resources so you can be confident in your understanding of the new lease accounting standards.
Similarly, Innervision have developed numerous lease accounting software solutions to give businesses an edge in making the transition to either IFRS 16 or FASB ASC Topic 842 as seamless and cost-effective as possible. Innervision’s intuitive and specialist software, LOIS, provides lessees with one unified platform to oversee and manage the entire transition and can even produce clear comparative reports of the new standards’ effects on your leasing portfolio. More information on LOIS can be found here.