The new IFRS 16 (AASB 16) Leases standard requires lessees to account for leases on their balance sheet by recognising most right-of-use assets and lease liability. Implementation can be a minefield, and it’s not just limited to financial reporting.
With less than six months to go before the standard becomes effective, your preparation should be well underway. We know, that with other priorities like IFRS 15 taking up much of your resources, IFRS 16 may, understandably, have barely made it off the to-do-list.
There are some key milestones that are likely to take up far more time than you’re anticipating. We’ve put together a list of the top five things you MUST be doing now so you’re not blind-sighted later on.
We’ve also created this free printable outlining some of the milestones we think should be in your IFRS 16 project plan.
#1 Find your leases & supporting documentation
Finding your leases is a job in-and-of-itself and its likely to take up to double the time you’re anticipating. On top of that you’ll need to review contracts for embedded leases.
A good way to ensure you don’t miss anything is to map out the lifecycle of a lease from when it’s created until the end of its days. This will help you to locate the original documents, variations and any spreadsheets being used to track important dates and rates.
It will also help you get a feel for the scale of the job ahead, and to identify all of your stakeholders.
Read our blog IFRS 16 tips: 7 places to look for your leases
#2 Know the standard & what’s required of you
You already know the basics:
- Leases will no longer be classified as operating or finance
- With the exception of low-level and short-term leases all right-of-use assets and lease liabilities will be recognised on the balance sheet
- Depreciation on right-of-use assets and interest on lease liabilities will be included on the income statement over the lease term
- On the cash flow statement, the total amount of cash paid will be separated into principal and interest.
If you’ve already started looking at IFRS 16 in more detail, you’ll be well aware that you’ll need to make a considerable number of judgments and estimations to implement it successfully.
Just some of the things you’ll need to take decisions on are which transition approach to take, whether to apply any of the expedients, whether to apply exemptions, use of hindsight, whether to separate out non-lease components, which discount rate to apply and assumptions on renewals.
You’ll run into significant delays if you haven’t made these decisions before you onboard your data into your chosen lease accounting solution.
#3 Engage your stakeholders
When mapping out the lifecycle of your leases, you’ll find they cross the path of many other teams before they arrive on your desk. These teams are likely to be some of your key stakeholders.
The procurement, legal, property, maintenance, finance and business support teams are some of the likely ones – but there could be others. For example, IT might get involved when it comes to choosing a lease accounting solution.
Here’s some questions that will help you with stakeholder analysis:
- Who will load leases and variations into the system?
- Who will maintain the data?
- Who needs access to generate and review reports?
- Which team will be the business owner?
- Does the IT team need to assess and approve your choice of software provider?
Stakeholder engagement might seem like a ‘nice to-do’ that can be skipped to save time, but in our view it’s one of the most important milestones.
#4 Define your requirements
IFRS 16 may feel like a compliance burden – but it presents a significant business opportunity. Almost all of your stakeholders would benefit, by way of time and money saved and significant reduction of risk, from selecting an end-to-end lease management and lease accounting solution.
Gathering requirements from all of your stakeholders will bolster your own business case for a fully compliant IFRS 16 lease management and lease accounting solution. It’s also imperative if you want to be certain you’re making the right choice when it comes to selecting software.
#5 Select lease accounting software
We strongly recommend any organisation with more than a handful of leases invest in lease management and lease accounting software.
Selecting a provider will take longer than you’re anticipating. You’ll need to set aside enough time to review software, watch demos, engage with internal stakeholders and negotiate the contract – this in itself can take months!
Here’s our suggestions on some important questions to ask when selecting a provider:
- Is the solution truly IFRS 16 compliant? Make sure the claims stack up and that the product has been tested against scenarios provided by international accounting firms. Some software is compliant when it comes to basic leases, but not for complex ones.
- Does the company employ chartered accountants who understand the IFRS 16 requirements?
- Can you create custom fields and reports?
- Can you give your auditor access?
- Are users, storage and support unlimited or are there hidden costs?
- Is it intuitive enough that people will actually use it?
- Does the provider offer training, support and onboarding?
- Does the solution provide for both lease management and lease accounting?
Nomos One has worked with some of the best charted accountants in the world to design a fully IFRS 16 compliant module that encompasses all criteria. It provides a full range of transition methods, everything you need for initial and subsequent measurement, and we’ve got reporting covered.
We’ve outlined the five things you need to be doing right now – but other are tasks are just over the horizon and ideally you should address them with a matter of urgency. We recommend you make sure everyone involved in IFRS 16 implementation has a full overview of all project milestones.
Don’t forget to download our free printable that outlines some of the key milestones we think you should include in your project plan.