Who Will Enforce IFRS 16?
IFRS 16 enforcement will ultimately lie with the European Union as it works with private sector bodies, such as the Financial Reporting Council in the UK and the International Accounting Standards Board around the world, to ensure companies are reporting in a consistent way.
Another way of looking at it is that IFRS 16 will enforce itself. Companies who do not comply will be doing themselves no favours in the eyes of onlooking auditors and investors as it will create and promote uncertainty about said business. Best practice will dictate that companies need to show compliance.
Like any “generally accepted” piece of legislation or standard, enforcement is more about professionalism than a fear of the consequences – in the same way as previously the classification of capital and operating leases was to a degree the result of good practice rather than strong armed auditing. There is no baton-wielding, IFRS 16 police force. Adherence to the standard should be viewed in a similar way to voluntary industry certificates like the Considerate Constructors Scheme and other Chartering bodies, for example. Or indeed how closely policed were the classification of operating lease commitments
Don’t Let This Cause You To Underestimate The Need To Become Compliant And The Size Of The Task At Hand
Even in the second half of 2017, the time of writing, it feels like the 1st January 2019 deadline is still too far away to be concerned with. But the data gathering process and analysis of data therein is an enormous task.
With so many changes forming part of IFRS 16 – the definition of what constitutes a lease and the accounting for leases on balance sheet being two primary examples – it will take considerable time, effort and expertise to ascertain how to enforce the new standards. There are possible exemptions which you may or may not wish to opt for on your lease agreements, depending on whether it’s materially financially beneficial to do so.
Also, there will be a series of other financial reports and metrics impacted, and not just all leases effectively being moved on to your balance sheet. Operating cash flow, net income and metrics such as EBITDA will be impacted. This policy will change how your overall financial performance will be viewed and another aspect of IFRS 16, that you’ll need to factor into how you manage compliance, is how to report the new lay of the land to investors, stakeholders and board members.
Before understanding how the metrics will affect your company, however, you need to gather all the required information. And gathering the required data for analysis is task enough. Data points can be spread across multiple points of contact and often multiple locations. That is, of course, assuming that your lease agreement data and information is actually still held.
Lost data or lost agreement documents are common and requesting the signed copies from your provider will only further slowdown the data gathering process. Likewise, extracting paper files out of archiving is expensive and a real time-sap.
How Popular Is IFRS 16?
Though it’s estimated that 120 countries have adopted IFRS accounting standards, IFRS 16 has taken so long to finalise and has undergone so many rounds of amendments and feedback that it’s no surprise to see that accounting groups, teams and boards are suffering from “consultation fatigue”.
The size of the task in becoming compliant and the amount of time passing from conception to implementation has meant that IFRS 16 has not necessarily been gratefully received or widely welcomed. Many companies have been putting off getting started with tackling transition and compliance though others have learned enough to realise the scale of the task.
Those factors have resulted in IFRS 16 not being too popular. There was backlash from consultant groups and professionals who were providing feedback to the IASB whilst they developed the new standard.
This backlash is what led to the inclusion of transitional reliefs, where entities can benefit from assistance in becoming compliant with the new legislation and may be able to enjoy other concessions. For example, the fact that the definition of what constitutes a “short term lease” was re-evaluated. This alteration meant that which of these could be exempt from the standard was moved more in the lessee’s favour.
A Golden Tip For Becoming Compliant With IFRS 16
Hopefully, what you’ll need to do to be compliant has now become clear, but it’s of paramount importance that you do not underestimate the length of time needed and work involved in attaining compliance.
Data relating to all of your lease agreements needs to be sourced, organised and then analysed.
Furthermore, this process needs to become continuous as IFRS 16 comes into effect as new agreements will be being formed. This continuous process will be doubly true because leasing is an ever more important part of how businesses like yours acquire the use of their assets. But, also, existing agreements will need to be extended or sourced anew, which could alter the way in which your company performs financially.
Given the greater financial impact of your lease portfolio, even if just on the basic level of dramatically altering the state of your balance sheet, it will need to perform at a continuously optimised level.
Ensuring you get an optimised lease portfolio is easier if you have some expert input into how your leases are performing. There is a range of tools available which can help you gather your data, analyse it, compare it to the general market and ensure that it’s well managed.
But before thinking about achieving ongoing optimisation of your lease portfolio, the first phase of IFRS 16 work to tackle is getting to grips with what changes are involved and how to become compliant.
If you’re interested in seeing a free, 7-step plan to achieving compliance, take a look at this download: