This is the second article of a 3-part series that discuss the New Leasing Standard, IFRS 16, that goes into effect on January 1 2019. Let’s dig in to see how this will inevitably change your financial guidelines.
Whether you are a professional services firm leasing cars and offices, a utility company leasing power plans., a retailer leasing stores, or a telecom company leasing cell towers, the future has arrived, and that means that you will have to adapt to a completely new leasing standard.
According to IASB, out of the US$3.3 trillion of lease commitments, 85% do not appear on the balance sheet. For this reason, IFRS 16, under the International Accounting Standards Board (IASB), it requires you to eliminate virtually all off balance sheet accounting that affects credit ratings, and borrowing costs.
If you are a lessor, your business model will have to change when it comes to leasing needs and behaviors.
The new standard will require you to do more than just disclose lease assets and liabilities. It will require you to implement changes to your policies, processes, and controls that support lease accounting, administration and taxes. Operation workflows will require everyone’s involvement, including all departments in your business. Ultimately, there will be a need for more data on balance sheets, which will affect your business model and will have far-reaching implications for your finances and operations.
It will be critical for you to catalogue all of your leases. Information such as lease terms, renewal options, and payments, etc., will all have to be measured and included on the balance sheet. The sooner you begin to gather and analyze the data, the sooner will you begin the process of controlling and handling the data on new leases.
Impact on Tax
The standard will most likely have an impact on taxes when it comes to your leasing transactions. As tax accounting for leasing is often based on strict accounting principles, seeing as there is no uniform leasing concept for tax purposes, the effect of your lease accounting model will vary significantly depending on specific tax jurisdiction.
Implementation and Transition
The need for implementing the new standard requires for you to know the most opportune time to transition. Deciding to adopt the leases standard early on in order to align with the transition to the new revenue recognition standard is optimal. Once you decide to transition, and there is a clear understanding of what needs to be changed based on your current state, you can then design the implementation and transition plan.
This new accounting change presents considerable challenges. The better you are able to understand how the new standard will affect your company, the easier the will transition be. Since you employ significant leasing activities, you need to review the new standard, and start the process of implementing it now. The earlier you start, the easier it will be to reduce overall implementation costs, while avoiding unwanted cost surprises and mistakes.
Using spreadsheets to manage and account for their leases, will ultimately lead you to making mistakes on your financial reporting. With the complexity of the new standard, bringing all leases on the balance sheet via spreadsheets is no longer cost-effective. Lessees need to implement automated tools that manage lease data to perform calculations as required by the new leases standard. A sustainable lease automation solution will help to deal with the new lease accounting requirements.
Adoption of Automated Technology
Forward-thinking companies need to start thinking about a solution that will identify system gaps and workflows that may need to be adapted in all departments, and on a timely basis. Timely assessment of the system gaps and business and IT requirements will support the software vendor selection process for a lease software solution. This will help reduce reporting and compliance risks.
You must consider the policies and systems in place within all of your departments to understand what is involved when it comes to leasing. This may vary from team to team, and so it is important to unify everyone within your organization in order to effectively meet the new leasing standard.