IFRS 16 – The final countdown to 2019
With a little over a year to go before the deadline to implement the biggest change to lease accounting in years, how ready are you?
The IFRS 16 Leases standard was issued by the IASB two years ago in January 2016 and comes into effect fully from January 2019. IFRS 16 impacts the recognition, measurement, presentation and disclosure of leases and is expected to add as much as two trillion pounds worth of fixed assets to balance sheets. Early adoption has been possible under IFRS 15 but is effective for all periods starting from the first of January 2019. Adoption of the new standard can easily take up to a year from start to finish, so if you haven’t started the process yet, then you need to act now.
By late 2017 you should have formed a project team and completed the initial data collection and impact assessment. Experience of early adopters has shown that the data collection phase can be surprisingly time intensive, so this needs completing as soon as possible.
1) Project team – Form a project team with the necessary support from senior management and relevant stakeholders within the business. Clarify project governance and scope.
2) Data collection – Complete an audit of all leases held across the business. Lessees may want to record additional information on the new right of use assets created from the leases, so they have the same level of detail as other assets on the balance sheet.
3) Impact assessment – Assess the overall impact of the changes on the business and establish new accounting policy required by the new standard. With this information plan out the remainder of the project. Impact analysis will also involve making decisions on discount/interest rates to be used. Not all lessors will provide these rates so allow time to consult other parties, such as your bank and your auditors, to discuss suitable rates to use.
Once you understand the impact of the new standard on the business, it is time to research and select the different tools you will require to manage the adoption process.
1) Software – Current lease management may consist of spreadsheets, legacy software, an ERP module or specialist leasing software. Firstly, establish if there are gaps in your existing processes and then draw up a complete requirements specification. Not all vendors have released IFRS 16 compliant versions of their software yet, so be careful to check that all your requirements are covered.
2) Implementation – Your vendor should be able to suggest an effective implementation timetable based on their experience. The implementation may range from a few weeks to several months depending on the resource you have available and the complexity of your leases. As we progress through 2018, there is likely to be increased pressure to get projects completed, so be clear about the timeframes you are working to from the outset.
Your aim should be to run at least one accounting period in parallel once User Acceptance Testing is complete. Running both processes side by side will allow you to identify variances between the different methods and also against existing forecasts before they need reporting formally.
Inevitably, the scale of changes involved with IFRS will have an impact on future leasing strategy. The sooner you can quantify the impact of these changes, the better placed you will be to plan for and to mitigate their future impact.
Key considerations for future leases may include renegotiating key lease terms including duration, rent review on renewals, re‑gears and reviewing the cost‑benefit analysis for capital release projects, including sale and leasebacks.
FMIS Lease Accounting is fully compliant with IFRS 16 and ASC 842. For more information on the FMIS Lease Accounting software or to discuss your adoption of the new standard, please email us at email@example.com or call the offices on +44 (0) 1227 773003.
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