The effective date of new leases standards is less than 20 months away. The new Lease Accounting Standards IFRS 16 / FASB ASC 842 requires companies to bring most leases on-balance sheet, providing a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases. The new standard will significantly change the accounting for lessees’ leases and with far-reaching implications for a company’s financial KPIs, reporting, business model, systems and business processes
Latest news and developments
The EU is currently in the process of deciding whether to endorse the lease accounting standard which will come into effect on 1 January 2019. Under Regulation 1606/2002, it must be proven before IFRS 16 can be adopted that it is “conducive to the European public good”. As part of this process, the European Commission sought advice from EFRAG to determine whether IFRS 16 would be “conducive to the European public good”. On 27th March, the European Financial Reporting Advisory Group (EFRAG) issued a positive endorsement advice on IFRS 16, stating that: “… IFRS 16 is conducive to the European public good. Therefore, we recommend IFRS 16 for endorsement.”
Following this approval, Leaseurope submitted on 28th March an analysis on the effects of the IFRS 16 on the European public good, with the intention to supplement the EFRAG endorsement covering additional factors that had been omitted. In their analysis, Leaseurope listed the areas affected by IFRS 16 which include Small and Medium-Sized Enterprises (SMEs), European banks and insurers, European collaborative economy and circular economy and VAT and corporate tax. Additional, it recommends that European companies are given an extra year to implement the new standard.
Getting ready for the transition
The effective date of IFRS 16 / FASB ASC 842 Leases is 1 January 2019. Although the effective date seems to be far away, because of its complexity and scope, early preparation is highly recommended.
Critical to this transition is understanding what impact the new standard may have on your organisation and address potential compliance risks as well as reduce implementation costs. Beyond the specific changes on an accounting level, organisations will need to undertake an in-depth review of the proposed changes, implementation issues and assess its impact on operations, systems, data, business processes and controls.
For many, the priority challenge will be at system environment and business process level. Based on our experience working with leading companies in the leasing sector and leveraging on our proprietary AMOBI methodology, we highlight a checklist of the strategic considerations for a successful transition plan:
Create a multi-disciplinary project team, ensuring the participation from finance, accounting, operations, procurement, IT, tax and treasury departments. Develop a high-level readiness assessment plan taking a cross-functional approach to implementation, departing from the tasks like contract reviewing, analysis of accounting gaps and tax evaluation. Thinking strategically about the current business processes and how to improve and optimise them, including controls and systems policies needed for the transition success. The complexity may call for additional resources and controls, monitor lease activity throughout the life of leases, re-design cross-departmental business processes and systems integration.
As historically the lease data have been off-balance sheet, during the implementation process gathering, validating and standardising lease data across the organisation can be time-consuming. Management judgement will be a key component of the transition planning, as IFRS 16 / FASB ASC 842 requires separating lease and non-lease components for accounting, policy should be agreed with the organisations auditors to ensure data collection is complete and accurate. Depending on the size of the entities, the data collection process may need some technology assistance to extract the information from the lease contract
Implementing comprehensive and sustainable lease software solutions, capable of supporting this new information and enable the portfolio management under the new lease accounting standards, supported by robust business processes and controls. Plan to allow time for testing and reconciliation. The complexity may require additional resources for organisations less familiar with lease accounting concepts
Both internal stakeholder and investors will need to understand the standard’s impact on the business as many key performance indicators will be affected such as the EBITDA, the statement cash flows, the tax treatment of leasing transactions, implementation costs, etc.
VIP Apps Consulting team has extensive experience within the leasing financial services industry with the knowledge, capabilities and operational experience, to help organisations assess and implement the required process changes.
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