How To Update Your Team Or Boss On IFRS 16 Progress
For businesses that use leasing as a method to finance their assets, they are going to feel the impact of the upcoming implementation of IFRS 16.
Considering the size of the task and how long it will take to prepare for the impending changes as well as getting together the lease portfolio, companies can no longer afford to wait. Preparation needs to begin now with the changes taking effect on January 1st, 2019.
While it’s important to discuss at length about how IFRS 16 is going to impact your company’s internal structure, financial statements and leasing processes - as well as how technology is going to play a big part in facilitating compliance - it’s equally as crucial for organisations to educate, communicate and update the impact of the standard to relevant bodies within the company. These people include investors, internal and external stakeholders, as well as those with a vested interest in the company’s performance, such as finance teams.
Because of how complex the new standard is, it’s highly unlikely that investors and corporate stakeholders are going to have the practical knowledge or a comprehensive understanding of just how the new standard is going to impact the organisation from an accounting or a technical standpoint.
So, it’s clear to see that the team in charge of handling the transition strategy needs to have a plan for when and how to update their team or boss with a IFRS 16 progress report.
With stakeholders and investors putting a lot of their money into the business, it’s crucial that they are made aware of the process at every stage of the transition, including the financial impact updates. As they have put money into the company, they will want to know what the changes mean for their investments, as some might not want to continue investing in a company because the changing lease accounting standard means there could be a financial fallout which will make them reluctant to invest further.
Stakeholders and investors will need a great deal of assistance in truly evaluating the impact of IFRS 16 in the first place. This means an equal amount of importance needs to be given to helping them understand the progress of the implementation and the impact the changes will have on almost all of the critical performance metrics and financial ratios, such as current ratio, gearing ratio, interest cover, operating profit, asset turnover, cash flow, net income and so on.
You should look to update stakeholders and investors on how these ratios and metrics have already been affected or how they will impact the company’s performance, as this enables somebody in the team to proactively plan and continue engaging with stakeholders and investors where appropriate so they are never left out of the loop. If you fail to update them on the progress at this stage, then they may choose not to invest further as they would be left in the dark over what the changes could mean in the long-term, so stakeholder communication is imperative.
To complete this type of assessment, you would need to ensure you perform it well in advance of the effective date of application on January 1st, 2019. This is because you would have enough time to update both internal and external stakeholders of the financial progress as they would want to have a full understanding of the impact well ahead of time, and it allows contingency plans to be put in place. As the changes are going to have a significant on critical performance indicators, it’s crucial to update stakeholders on the progress of these changes and how it could affect the way they view an entity's financial performance.
The progress of the implementation and transition also needs to be taken into account, especially if you are having to educate stakeholders and investors on key performance indicators under both the new IFRS 16 standard, as well as the current IAS 17 accounting standard.
Once you and the dedicated transition team have decided what needs to be communicated to stakeholders and investors to update them on progress, a beneficial method could be face to face meetings. In the meeting, you could hand out regular copies of a full progress report, so everyone is up to date with where the IFRS 16 implementation is currently at and such a meeting also helps other parties such as lease accounting teams see whether documentation is in order.
Although the lease accounting changes come into effect on January 1st 2019, businesses do have the option of an early transaction, so stakeholders, investors and others should have already been made aware of the transition options available to them when adopting IFRS 16.
Depending on the type of transition method the stakeholders and investors agreed on, you will then be able to update them on the significant implications on the cost of implementation and the comparability of financial information following the transition.
The transition progress should also be discussed with the IFRS 16 project team who are helping with the transition, as well as the current lease accounting project team as they too need to be made aware of how the transition is going.
Collecting all of the data can take a long time and it’s a very big task for your team, so they would need IFRS 16 progress reports on how much time they have to meet the deadline if stakeholders and investors have opted not to agree on an early transition. This early adoption is something that needs to be discussed with stakeholders and the finance teams beforehand, so you can all sit down and decide whether it’s the best route to achieving compliance, or if it’s more appropriate for your company to work towards the official timeline.
Without progress updates from you, your company will be in danger of missing the deadline and not achieving compliance, so regular communication is vital even if early adoption of the standards hasn’t been agreed. If your business chooses to work towards the official timeline instead, it’s still important to continue communicating with the relevant bodies on the progress of IFRS 16 implementation as the quicker you centralise your lease portfolio, the easier it will be to evaluate the sort of impact the standards will have on your financial statements.
Without the regular progress reports, you could be digging yourself into a much deeper hole as nobody will be aware of which stage they are at and which tasks need to be done and which have already been completed. Likewise, you will also be in danger of not achieving compliance in time because your documentation is not in order and nobody has been updated of the progress - or lack of it.
Current Operations Progress
While it’s crucial that you update stakeholders and investors on the progress of IFRS 16, the lease accounting team as well as the IFRS 16 project team also need to be communicated with regularly. There is obviously a lot of emphasis and importance going into the changes to lease accounting, but all of the relevant bodies need to be constantly updated on their current operation, as too much focus on the future leasing strategy can result in the need to scrutinise existing plans and processes and end up hindering your progress, rather than making the transition much easier.
Again, regular progress reports sent to stakeholders, investors, lease accounting teams and the IFRS 16 dedicated project team will help to keep everyone aware of the changes that are about to come, to highlight the type of reforms you might need to make to save time and money, to provide a renewed consistency across your lease portfolio, and to ensure that the current operation you have in place doesn’t suffer because of negligence.
What Else Should You Include?
When you consider the size of the task at hand, it’s pivotal that your progress reports are as thorough as they can possibly be. Leaving out crucial information can be detrimental to your company and it needs to be targeted at all of the relevant bodies - the stakeholders, the investors, the dedicated IFRS 16 project team you should have put in place to help with the transition, as well as the current lease accounting project team you will already have on board.
Your progress report should also thoroughly highlight the results, updates and progress of the assessments you’re undergoing on every single lease agreement your company has, as well as highlighting how reliant they are on each other and the relationship between each item.
Your progress report should also highlight the achievement of a closer management of lease agreements so that it shows you have gone to great lengths to assess every lease agreement, whilst updating the relevant bodies of any digital systems you have in place will also be beneficial.
What You Can Do To Prepare?
If you’re not at the progress report stage yet, then you need quickly to begin the preparation so that you are compliant well before the deadline, especially since the level of working that goes into assessing the impact of IFRS 16.
Take a look at this free seven-step guide to help achieve compliance: