IFRS 16 will significantly impact lessees in 2019

The International Accounting Standards Board (IASB) estimates that more than US $2 trillion in leased assets were left off the balance sheet of listed companies applying International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (GAAP).

The new international financial reporting standard on leasing, IFRS 16 – effective for accounting periods beginning on or after 1 January 2019 – brings previously off-balance sheet arrangements onto the balance sheet. This standard fundamentally changes the way lessees account for leases by eliminating the dual model which previously classified leases as operating or finance. This means, with the exception of low-level and short-term leases, all right-of-use and lease liabilities must be recognised on the balance sheet.

Companies operating in the transportation, infrastructure, telecommunications, mining, retail, hospitality, education, corporate and government sectors – to name a few – are generally prolific lessees. A typical company operating in any one of the above industries leases between 50 to 5000 (or even up to 10,000) assets of various types, ranging from property, office space, printers and office equipment to outlet stores, medical centres, fleets of vehicles, machinery, electrical junctions, fibre optic cables and transponders. the list goes on.

Many companies significantly underestimate the size and complexity of their lease portfolios. This is because their assets are often spread across multiple office locations, warehouses and factories are managed by teams ranging from legal, property, and business support to IT, finance or operations – all of which have traditionally taken a soiled approach to lease strategy and management. It’s also likely there are leases embedded in contacts that at first glance, seem unrelated to leasing, for example, mobile phone contracts.

Reporting under IFRS 16 is exceptionally complex

For many finance teams, month end is already a daunting process that is hindered by missing, inaccurate or duplicate lease data. On top of that, IFRS 16 requires companies to change how they account for leasing – resulting in complex calculations to recognise the right-of-use (ROU) asset and lease liability. It also means there will be a gross-up of the balance sheet which is likely to impact many companies’ financial statements and financial performance ratios.

Before finance teams can start reporting under the new standard, they must find and analyse all their leases, select a transition method and practical expedients that will best meet the needs of their company, and work through the transition process. IFRS 16 is extremely complex and to implement if effectively finance teams must make a number of assumptions and use considerable judgment. Their choice of transition methods will also impact the level of effort requirement. Calculations are complex at commencement but also throughout the entire life of each lease.

A blueprint to  navigate implementation – IFRS 16 resources

The Institute of Chartered Accountants Australia and New Zealand has developed a detailed blueprint that outlines the requirements of the standard for those still struggling with implementation. You can access it here.

The team at Nomos One has developed an IFRS 16 transition checklist and  14 critical milestones printable to help you plan/prioritise your entire implementation project from finding and assessing leases, understanding the standard, and stakeholder analysis right through to selecting a software provider and signing the contract. We also have a number of other helpful IFRS 16 resources such as choosing a transition method and selecting a software provider. See a full collection of our resources and blogs here.

Spreadsheets are not the solution

Despite mounting complexity, some companies plan to use spreadsheets to manage both the transition and ongoing reporting requirements. Big Four accounting firms warn that for companies with 50 or more leases, spreadsheets are unlikely to support compliance. Nor will they do finance teams any favours come audit time.

Making changes to complicated formula can introduce a multitude of unnoticed errors. When even on simple spreadsheet error can dramatically alter a company’s financial position, automation should be seriously considered. Lessees operating in this new landscape require fit-for-purpose software that will give them confidence in their IFRS 16 compliance and transform the management of their lease portfolios.

Enter Nomos One

Nomos One has taken a revolutionary approach to automating lease accounting that means finance teams never have to do credits or debits for lease accounting again.

The software automatically calculates the present value of the future minimum lease payments (PVFMLP) and includes everything finance teams need for subsequent remeasurement. Reporting is completely covered, with IFRS 16 journals (monthly, weekly, annual or customisable, eg, 4-4-5 reporting), draft balance sheets, end-to-end historic and forecast reports, depreciation and interest schedules and more. Nomos One also supports all three IFRS 16 transition approaches and generates reports that compare financial impacts under all transition methods. Complete with a unique IFRS 16 wizard that walks users through IFR S16 compliance, Nomos One helps ensure nothing is overlooked.

The all-in-one lease management and lease accounting software, with document repository, full portfolio view, and lease event reminders,  provides an opportunity to transform the management of entire lease portfolios, creating efficiencies and reducing risk across companies.

Read more about Nomos One’s end-to-end features here, or schedule a personalised demo with one of our IFRS 16 experts.