IFRS 16 & ASC 842: Compliant but where are those benefits?
Many businesses will now be 2 years or more compliant with the new lease accounting standards IFRS 16 and ASC 842 and would have filed multiple year end accounts.
But your business will not be alone if you feel that the transition program, resource heavy implementation and subsequent compliance have failed to deliver the hoped-for benefits and spin offs.
A PwC survey focusing on the key challenges and lessons learned from implementing ASC 842 and IFRS 16 highlighted, that of the 72% of the 900 or more finance professionals who participated who “had implemented new or modified existing systems”, more than 30% of them were now looking at system enhancements or replacements. As disturbing was the statistic that, post implementation, 70% had needed to resort to manual interventions and workarounds to remain compliant.
Experiences & lessons learned
The transition to IFRS 16 and ASC 842 and the ongoing compliance by many Public Listed Companies is now well documented.
Even with 20/20 vision hindsight it is now too late to start earlier. Building the right team and allocating adequate resource was something difficult to accurately plan at the start of transition and as a result there may be areas that remain unfinished. So, what have we learned rather than failed to do? Are the spreadsheets proving inadequate?
The business had complex leases that aren’t easily catered for
Multi-currency – dollar, sterling, euro etc.
Different payment periods – not all monthly, quarterly or annual
Differing payment profiles – in arrears as well as in advance
Embedded leases in service contracts and vice versa
Need for an IBR were too difficult to establish
The business must report as a lessor as well as a lessee
With many property leases in the portfolio and the business sometimes acting as sub-lessor, a chosen solution needs to be able to cater for both lessee and lessor accounting.
Accounting for lessor obligations requires compliance with IFRS15/ASC606 revenue recognition as well as IFRS16/ASC842.
The required disclosures and management reporting are an issue
Holding and updating data at an “asset” level will enhance the generation and accuracy of disclosure reporting. Post compliance you and your interested parties now appreciate the value of the disclosure requirements and you should now look to harness a system that declares them.
Controls and audit trails are inadequate
Strong process controls, secure data, built-in audit trails and consistent accounting treatments will help in meeting the reporting requirements of regulators and auditors alike. Are your auditors asking questions?
Compliancy itself has failed to deliver that hoped for additional business value
The goal behind the setting of the new lease standards was to engender a more transparent declaration of leased assets and associated lease liabilities. Does the business now feel that it has?
- A complete, continually up to date, secure, single version lease database available 24/7 for all interested parties.
- A software solution being continually developed internally or better externally to cater for reinterpretation or interventions such as “lease payment” holidays declared or negotiated as part of the response to the COVID 19 pandemic.
- The ERP general ledger being automatically fed journals from the lease accounting system.
- Control over the timely raising of termination notices as leases expire.
- Automated processes that recalculate the depreciation and outstanding liabilities relating to the life of an RoU asset as it is updated, changed, returned, bought out or extended.
- A system that can handle property as well as equipment leases.
- Improved and clearer management reporting for financial accounting and auditor approval
On top of the value that comes with the transparency resulting from compliance, improved financial statements, informed lease versus buy decision making, and improved governance of the leasing process are the very least you should be enjoying. If you feel there is more that your business could benefit from then request a demo of IRIS Lease Accounting today - a software solution that does deliver.