Identifying The KPIs Of A Successful Lease Accounting Transition
As you’ll be aware, the upcoming changes to lease accounting as a result of IFRS 16 are going to be huge. The shift of bringing all, barring some minor exceptions, of a company’s leased assets on to balance sheet will have an impact on everything from cash flow and key financial ratios, down to internal management processes.
It will create the need to more closely monitor, organise and analyse a company’s lease portfolio, in preparation for transitioning and implementing the new accounting guidelines.
And this is before the risk of falling foul of non-compliance with the changes is put into force.
Smart companies have already begun the work on becoming compliant with IFRS 16 and started to put structures and programmes in place to make sure their lease portfolio is fully optimised to work under the new legislation.
The smartest companies are also setting themselves internal KPIs to manage the preparation and implementation of IFRS 16 lease accounting changes, as well as planning realistic KPIs to ensure long term success, well after 1st January 2019 when IFRS 16 comes into force.
KPIs For: Preparation For IFRS 16 Lease Accounting Changes
This is the education phase. In essence, the aim of being prepared for IFRS 16 is to get ready to consolidate and organise all the data associated to your lease portfolio, and planning the restructuring of internal responsibilities to manage the process going forward.
The IASB has aimed to ensure that becoming compliant with IFRS 16 is not a costly burden, so has incorporated a number of reliefs. Entities must evaluate these reliefs to determine whether taking advantage of the exemptions is in the best interests of the organisation.
“As early as possible into 2017, the business needs to understand the lease accounting changes, what will and won’t be affected and assess the potential impact to the company”
For a sense of scale, it’s generally expected that there will be a 1-2 year transition period. Whilst this is welcome news, it pointedly highlights just how much work needs to be done. This is why setting KPIs for becoming prepared for the lease accounting transition is vital.
As early as possible into 2017, the business needs to understand the lease accounting changes, what will and won’t be affected and assess the potential impact to the company.
The main KPI, at this stage, will be to establish the systems to be able to implement the changes and ensure becoming compliant runs as smooth as possible. Also:
- Plan the internal structure of responsibilities and personnel who will manage this project.
- Research and educate the relevant parties on the team.
- Gather current and retrospective balance sheets and P&L reports in order to be able to create comparative balance sheets in the future (a requirement of IFRS 16).
An implementation team needs to be appointed and educated by, at the latest, the end of Q2 2017.
KPIs For: Implementing IFRS 16 Lease Accounting Changes
Designate an individual (they will also need a team, suitable for the size of the business) to be responsible for meeting the KPIs associated with implementing the lease accounting changes.
They need to complete all of the following during 2017, in order to leave a buffer to perform retrospective accounting and reporting in the final 12 months before the changes “go live”:
- Source and locate all historic lease data for your portfolio of active leases.
- Establish a central database of information, which is continually added to and can be used to generate snapshot reports.
- Update, maintain and monitor the lease portfolio data.
- Familiarise the rest of the business (procurement and the board) with the upcoming lease accounting changes.
It is expected that this could realistically take as long as 12 months. Progress checks should be made in each quarter of 2017.
The sourcing and replacing of key lease data, for the entire portfolio, is expected to be especially time consuming and laborious. It should not be underestimated how problematic this could turn out to be.
Finding or replacing lease data and paperwork when it is spread across different locations, both geographically and departmentally, is no easy task.
Moving on, lessees need to then use this data to analyse the full impact of IFRS 16:
- Which assets will be exempt?
- What is the value of the portfolio going on balance sheet?
- What will the impact be on financial statements?
- When considering future goals and strategy, forecast the impact in future years.
- Advise the relevant stakeholders and investors.
- Conduct retrospective accounting through 2018, producing the aforementioned comparative balance sheet and P&L reports for the preceding fiscal years.
The team will also need to take steps to ensure long term success when the lease accounting changes become normal practice.
KPIs For: Long Term Success Following IFRS 16 Lease Accounting Changes
The key to long term success will be keen organisation.
This will involve keeping an adequate grasp on the lease portfolio expenditure and terms. As the vast majority of leases will be affected and not be exempt, reducing costs on leased assets will be important.
As will the monitoring of what is and isn’t exempt from the accounting changes. This will ensure continued compliance without over inclusion (of exempt items) which would negatively impact balance sheet and P&L reports.
As lease accounting becomes a more pressing and time consuming task, the need to optimise the management of it becomes more pressing.
In order to ensure long term success, making the management of lease accounting as slight as possible is going to be key. An ideal KPI for long term success would be the enabling of automated lease accounting software, such as LOIS, which will take a lot of the leg-work out of managing a lease portfolio in light of IFRS 16.
Before That, Become Compliant In 7 Steps
Before implementing new software and management teams, you’ll first have to gain a total understanding of the new standards and what’s required to become fully compliant. Make this simple by reading our free document which outlines how to become compliant with the changes to lease accounting in 7 easy steps.
Download it below.