Stakeholder Communication: Educating Investors and Stakeholders on the Impact of IFRS 16
We’ve talked at length about how IFRS 16 will impact a company’s internal structures, processes and financial statements, and how technology is likely to play a significant role in facilitating compliance; but we have yet to speak about the need for organisations to educate and communicate the impact of the standard to investors, internal / external stakeholders and those with a vested interest in the company’s performance.
Due to the complexity of the new standard, it is unlikely that corporate stakeholders and investors will have the practical knowledge or comprehensive understanding of how the new standard will impact an organisation from a technical or accounting standpoint. Therefore, it’s critical that the project team charged with handling the transition strategy have a clear plan for when and how to communicate the effects to corporate stakeholders.
Understanding the new standard
The first phase in educating your organisations key internal and external stakeholders begins with your own knowledge surrounding the new standard. It is imperative that you develop a comprehensive understanding of the new guidelines before you even consider communicating the organisational impact to stakeholders. As part of this educational process, you should seek the advice and expertise of lease accounting consultants or financial auditors to ensure you have a full understanding and to fill in any knowledge gaps that may be present.
The more knowledgeable you are concerning the changes to IFRS 16; the stronger the position you’ll be in preparing for future challenges and to confidently communicate / educate your stakeholders as to the upcoming implications.
For an Overview of IFRS 16 - Follow this Link
View the 7 Step Guide to Lease Accounting Compliance
Stakeholder awareness - financial impact
What’s clear is that the majority of stakeholders will need a great deal of assistance in truly understanding the impact of IFRS 16, specially in understanding the impact the changes will have on almost all critical performance metrics and financial ratios such as; current ratio, gearing ratio, interest cover, asset turnover, operating profit, net income, cash flow, EBIT, EPS, ROCE and ROE. Appropriate assessment of how these ratios and metrics will impact a company’s performance enables an entity to proactively plan and engage with the relevant stakeholders where appropriate. Such an assessment should be performed well in advance of the effective date of application on 1st January 2019 as it’s extremely likely that both internal and external stakeholders will want to have a full understanding of the impact ahead of time so the relevant contingency plans and readiness assessments can be conducted.
With such a significant impact on critical performance indicators, it’s important to determine how these changes could affect the way in which stakeholders view an entities’ financial performance.
It is also worth considering if your organisation anticipates the need to educate stakeholders on key performance indicators under both the current accounting standard, IAS 17, and under the new standard IFRS 16 when determining the overall impact of the transition. Ultimately, this is something a transition / project team should consider when defining what needs to be communicated to stakeholders.
Stakeholder awareness – transition options
Beyond the impact the standard will have upon financial performance indicators, stakeholders should also be educated on the transition options available to them when adopting IFRS 16. An important decision to consider here is which transition method to implement (Full Retrospective or Cumulative Catch-up) as well as which practical expedient to apply; as such decisions, will have significant implications on the cost of implementation and the comparability of financial information following the transition.
Although the date of initial application is not effective until January 2019, companies must decide whether they wish to simply comply with the new standard on the official deadline or to adopt the new standard earlier. This is something that should be discussed with stakeholders to ascertain if early adoption is the best route to compliance, or if it is more appropriate for the organisation to work to the official timeline set out by the official date of application.
Whether you choose early adoption or the official deadline, there are certain decisions you can make today that will help you prepare, such as the implementation of specialised lease accounting software, the enhancement of leasing procedures and processes or the evaluation and upgrade of existing IT infrastructure.
It’s important that all stakeholders are aware that even if early adoption is not in the best interests of your business, the quicker you centralise your lease portfolio, the easier it will be to evaluate what impact the standards will have on your financial statements and KPIs. Taking early preliminary action will also provide businesses with ample time to develop a cohesive implementation strategy and perform vital impact / what-if assessments and scenario modelling. All of which will improve the likeliness of compliance.
Stakeholder awareness – operations infrastructure
Although the changes to lease accounting may seem like a hindrance for many companies, it is important that both internal and external stakeholders are made aware that an opportunity exists to use the transition to the new accounting standard to drive organisational improvements and savings in lease activity.
With the focus and emphasis firmly on a company’s leasing strategy, an entity can scrutinise existing controls, processes, leasing policies and software in the effort to make the required operational reforms that will yield time and cost savings as well as a renewed consistency across an entire portfolio of leases.
The requirement for software
Following the evaluation of whether the internal infrastructure is capable of effectively handling the transition, a decision should also be made with stakeholders whether specialised lease accounting software should be deployed to help transition to the new standard. When deciding, it is important that any system requirements and expectations are clearly defined and communicated to the relevant stakeholders prior to selecting a vendor.
The employment of specialised lease accounting software will allow you to centralise all your lease data on one unified data repository, whilst enabling you to track, report and manage the entire transition period from one platform. Any good lease management and accounting software should allow for stakeholder collaboration through the use of integrated user dashboards, notifications and BI (Business Intelligences) reporting. It should also help facilitate compliance with the new standard though improved accuracy of data validation, the ability to track a lease over the course of its entire life cycle and through the utilisation of specialised lease accounting reports.
The implementation of lease accounting software ahead of the official date of application will enable companies to begin the evaluation process sooner, affording them sufficient time to determine what impact the standards will have financial statements, internal processes and to develop an appropriate strategy for compliance.
An innovative solution
Innervision has developed a powerful lease accounting solution (LOIS), that delivers all the transition tools and functionality needed to extract, validate and report on all the critical data within a lease portfolio that is required for full compliance with both IFRS 16 and FASB ASC 842. By loading all your lease data onto LOIS you’re easily able to analyse your entire portfolio to identify what leases are impacted by the new standard.
Companies that use LOIS to manage and enhance their lease portfolio can produce all the accounting information required to accurately complete the financial statements obligatory for compliance; including income statement, cash flow and balance sheet. LOIS will even create the right of use asset schedules and liability amortisations as well as journals for you.
Innervision and LOIS will provide users with all the necessary tools, features and reporting capabilities so that users can effectively communicate and collaborate with the key stakeholders of their organisation. Whether that’s by receiving automated alerts and notifications, running reports that form part of a readiness or impact assessments, or identifying areas within a portfolio that can be improved – we believe that LOIS is the perfect partner for compliance.
Preparing for the new lease accounting standards (IFRS 16 or FASB ASC 842) will require significant time, resources and extensive planning. But, with the deadline for implementation fast approaching, companies must act soon if they are to meet compliance requirements.
To help assist businesses with their early preparations and provide valuable insight as to what should be included within any implementation strategy, we’ve put together this comprehensive guide to transitioning to either IFRS 16 or FASB ASC 842. Just click the link below to access your copy.