How To Make The Lease Accounting Data Collation Process A Success
Lease accounting data collation is the most time consuming and labour intensive aspect of IFRS 16.
The fact is, before your business can even begin to assess the lease portfolio for accounting purposes and in order to begin compliance, all of your lease data needs to be sourced which may mean it needs still to be discovered!
For companies with a large portfolio, the lease accounting data collection and sourcing process is a major challenge.
The Challenges You Face Under IFRS 16
Given that the difference between operating and finance leases will effectively cease to exist, and all leases will be accounted for “on balance sheet”, the new standards outlined under IFRS 16 present a serious audit challenge.
Achieving compliance is one reason to gather all of your lease portfolio information and data, but you will also need to assess the impact on many key financial reporting areas. Asset turnover, interest cover, key ratios, operating profit, net income and cash flows will all be affected.
The size of the challenge at hand is increased by some of the more intricate aspects of IFRS 16’s changes to existing standards. For example, there are certain exemption rules which may be applied to certain lease agreements if an entity so wishes. But the impact of doing so will need to be ascertained beforehand by you and your business.
There are also decisions to be made when it comes to employing early adoption of IFRS 16 or pursuing comparative reporting methods. Some companies are taking the attitude that reporting in line with the new standards has to be done some time so it may as well be done now – they are early adopters. Others are waiting for the standards to come into force and will then provide comparative reports of the company books before and after the standards change.
The important thing to note is that either method is a matter of urgency if work hasn’t already begun.
Don’t Underestimate The Size Of The Task: Start Now
With the final ins and outs of the lease accounting changes taking a decade to complete, it’s impossible to overestimate the amount of intricate changes to how companies will have to report their lease-related financial information.
Besides the much discussed changes, such as all types of leases being accounted for on balance sheet, the actual definition of a lease is being changed. This new definition will cause seemingly no-end of work as you and your team assess existing agreements to see what should be treated as a lease under the directives and what should be treated as a service perhaps.
There are other more nuanced changes too. Make sure that the responsible parties at your company are fully briefed on what’s changing and what your potential exposure is. If you need some easily shared explanatory documents, use these:
Create A Project Team
Deloitte have found that only 15% of companies feel the transition to the new lease accounting standards will be easy to implement. What’s more, only 9.8% of financial and accounting professionals say their companies are prepared for the change.
The first thing to do is create a dedicated team of skilled and suitable employees from inside your business.
This team needs to be able to get a grasp of the changes, understand the impact on your financial position and ensure proper compliance.
There is likely to be a bottleneck or snagging point when it comes to collating and sourcing all of the required information from across the entire lease portfolio. To be specific, this sourcing is the task of actually uncovering all of the leases or potential leases and then gathering all of the information needed for reporting: finding paperwork, checking agreement details, assessing the information against possible exemptions and new lease definitions.
The people in the team responsible need to be thorough and efficient.
Identify Your KPIs For Success
With the IFRS 16 full implementation deadline being 1st of January 2019, we are already well into the two year transitional period suggested by the IASB for companies to get their internal processes ready.
A good KPI at this stage would be to set some lines in the sand for particular compliance goals. Working back from the 1st of January 2019 implementation date, create target dates for completing the following:
- Producing the final required reports and fiscal statements which comply with IFRS 16
- Conducting an assessment of lease portfolio to see which exemptions to apply and ascertain the impact on 2018/19 financial reports
- Gathering all lease information needed from across the entire business, including legacy/historical agreements
- Creating an effective lease management process for new and existing lease agreements to make tracking and analysing of them easier
Produce The Reports Before Implementation
Your internal reports will need to be completed before the implementation and compliance date so that you can assess just what the impact will be on your figures.
Not doing so will run the risk of incorrect forecasting of the financial impact of the new standards. There will likely be changes to many of your key financial metrics: EBITDAR, outstanding liabilities, operating cash flows and, of course, balance sheet.
Knowing the impact of the change will allow you to develop an effective management strategy.
Plan Your Long Term Lease Management Strategy & Make Data Collation Simple
We have mentioned how underprepared many businesses are for the lease accounting changes. The data collation process itself could easily become an uncontrollable beast if you use traditional methods.
Hopefully the point has been driven home: you need to gather all lease information and data. Having found it then where are you going to store it?
A centralised, electronic and secure storage system is best. Whilst a shared server is good, an online cloud-based storage system is better. A cloud-based system can be added to by any user with an authorised login, but there is no risk of accidental deletion, misplacing of folders or working with out of date reports.
A cloud-based software lets staff work on “live” files, so all parties know that information stored on the system is current and correct.
These live files make sourcing and storing data easy and it makes managing the lease portfolio smoother too – for the company and for its auditors
Intelligent lease management software will not only store all of your lease portfolio data but will also analyse and assess it for you. It can formulate common reports automatically, straight out the box, or you can create your own bespoke reports.
The software includes comparing lease agreements to similar types across the leasing industry, so that you can identify potential savings when the time comes to renegotiate agreements.
Once you have the tools in place to gather and store all of your lease portfolio information and data, managing your lease agreements and achieving compliance will be much easier.
If you want some further reading about achieving compliance, take a look at this guide we’ve put together: