Accounting

Countdown to IFRS Doomsday: The Road to Lease Accounting

Business leaders need to prepare for the financial implications that complying to the new accounting standard will have on their business.

With the new regulatory changes for IFRS 15, 16 and 9 simultaneously approaching, it’s essential that finance organizations start preparing now. Each new standard represents its own challenge for finance departments and impacts financial reporting activities in different ways. IFRS 15 is changing the way organizations manage revenue recognition, IFRS 9 impacts the methods of accounting for financial instruments, and IFRS 16/ASC 842 introduces the requirement that leases must be reported on a company’s balance sheet.

For financial professionals, the perfect accounting storm is brewing with IFRS 9 & IFRS 15/ASC 606 becoming effective January 1, 2018 and IFRS 16/ASC 842 becoming effective one year later on January 1, 2019.

IFRS 16/ASC 842 is a significant change in how businesses currently report their leases, as compliance and accurate reporting will require collecting, abstracting, analyzing, maintaining, and tracking leases in new ways. Major assets including airplanes, real estate, office equipment, technology, and more will now come under the purview of the balance sheet.


The data challenge

Corporate and enterprise data lives in all different places. Some are kept in Excel sheets, others in Google documents, portions in internal IT systems, and some even as hard copies in filing cabinets. Leases are no different – in fact, SAP recently worked with a company who had lease data spread out over 700 finance departments across the globe. Working to track down each data source across hundreds of offices could take as long as a year.

Prior to this new standard, leases were disclosed in the notes of financial statements, with most companies having no location or strategy for this data. A recent study from PWC echoed this description and found that most companies manage lease agreements in a decentralized order, with 68 percent primarily relying on spreadsheets to track lease data. For companies with a substantial amount of assets under lease, updating the balance sheet using spreadsheet-based accounting will require a significant amount of time and effort and could potentially introduce manual errors into the financial reporting process.

With this in mind, businesses should start considering how technology can help them prepare for IFRS 16/ASC 842. By building a comprehensive lease portfolio and centralizing lease data in a single location, financial executives can easily add, view, and have traceability into lease composition, key lifecycle dates, the value of leased assets, and responsible organizational units. Utilizing an automated technology solution can also help corporate finance professionals save time, mitigate human error and increase overall productivity – all while enabling compliance.

The visibility problem

Sales managers, vice presidents, lawyers, administrative assistants, IT professionals, and financial executives all have some connection to leases and hence lease data. Whether the company is renting a plane or ordering a new copy machine, lease activities and lease data touches every aspect of a corporation. Lease solutions should offer the entire organization the ability to track changes and understand who made them in real-time. With this information, stakeholders can better understand all the associated legal, financial, and business implications. Integrating with current systems is also a vital technical requirement to ease the process of data collecting.

Looking to the future

Adapting to any new accounting standard such as IFRS 16/ASCO 606 requires investment in the development of people, a strategic adoption plan, and updated tools. In order to make more informed decisions, business leaders need to be able to prepare for the financial implications that complying to the new standard will have on their business. Executives need access to technologies that can provide rich analytics and visibility into the lease portfolio composition and provide “what if” scenario analysis, and cost predictions to identify opportunities to efficiently manage leases. As the countdown for January 2019 continues, accounting teams need to begin looking for a solution that allows for efficient management of lease administration in a user-friendly and easy to learn way.

 

Thack Brown is General Manager and Global Head of Line-of-Business Finance at SAP.