Why IFRS 16 and ASC 842 are a great opportunity for Equipment Leasing
Implementing the new IFRS 16 and ASC 842 standards can be a lot of work, but they also represent a unique opportunity for the Equipment Leasing sector.
Without stating the obvious, the changes to lease accounting required by IFRS 16 and ASC 842 have created a huge amount of work for finance teams, especially in the Equipment Leasing sector where effective lease management is central to business success.
Compliance with the new standards is likely to involve input from all parts of the business, a lot of planning and possibly the implementation of specialist lease accounting software. When this is added to an ever-growing list of priorities, it is easy to see the changes as just one more box that needs ticking.
It is easy to miss the real opportunity for equipment leasing companies that IFRS 16 and ASC 842 represent. Compliance with the new standards is going to be disruptive for many businesses, but it is that disruption that offers the potential to save time, improve visibility and over time, even to reduce the costs of managing your equipment leases.
The potential impact to balance sheets means that businesses are taking lease accounting and management more seriously and this means investing in the right tools. In this case, it means replacing that creaking spreadsheet with specialist equipment leasing software or a lease accounting system.
One client recently came to us with a spreadsheet using over 80 separate tabs to manage their IFRS 16 calculations. The company had planned to use Excel to track all their leases and it had taken a senior finance manager several weeks to compile the spreadsheet. In the end, the manual process was just too complex and the risk of errors on the balance sheet was too great. They decided to implement FMIS Lease Accounting to do the same job in a fraction of the time.
One of the common issues that project managers come up against with the new standards is a lack of consistent record keeping across the business. Different subsidiaries within a group and even different sites or departments within the same company often develop their own processes for recording and tracking leases over time.
This fractured approach makes it difficult to get an accurate view of leases at a macro level. Improving the accuracy and availability of lease information can have a significant impact on the final cost of equipment leases to the business.
Fixed asset depreciation, tax calculations, obligations, insurance and equipment maintenance are all dependent in part on the accuracy of lease records.
In his book The Lean Startup, Eric Ries makes the point that even big businesses need to know when to pivot (change direction) and when to persevere with established processes. The trouble with pivoting in an established business is that it requires a lot of commitment from the top down in order to overcome the organisational inertia that creeps in over time.
Enforced change can be a great tool to do just that. Taking a closer look at leasing practices across the business is likely to highlight areas where there is the potential to do things differently. In some cases it may even be the catalyst for a complete overhaul of the business approach to leasing.
One of the big objections to adopting lease accounting software is the cost of a specialist system. If you are dealing with a relatively small number of leases that do not change regularly, then it is unlikely that you will need more than a basic solution or spreadsheet.
In the Equipment Leasing Sector, lease agreements are often varied and can change several times over the life of the lease. Having the right controls in place can significantly reduce leasing costs for example:
FMIS Lease Accounting Software can help to ensure that you are compliant with IFRS 16, ASC 842 and all relevant standards. If you would like to find out more about implementing the solution, please email us at email@example.com or call the offices on +44 (0) 1227 773003.
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