Applying IFRS 16 – Simplifying Compliance for Entities with Smaller Lease Portfolios

IFRS 16 specifies how a business reporting under IFRS will recognise, measure, present and disclose leases in its financial statements. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for almost all leases.

The new standards, does, however, contain various exemptions aimed at reducing the cost of adoption. The short-term exemption for leases with a lease term of 12 months or less and the low asset-value exemption for leases for which the underlying asset, when new, is of US$5,000 or less.

It is worth observing that whilst none of these exemptions have been specifically designed for entities with smaller portfolios. Broadly speaking, however, it could be proclaimed that such exemptions will have a higher significance to entities with smaller lease populations, lesser resource, lower technical accounting knowledge and smaller finance departments.

For accounting periods beginning on or after 01/01/2019 compliance with IFRS 16 is necessary whatever the size of the business and whatever the volume of leases. However, the task of transitioning a lease portfolio to this new world whilst challenging can be not only beneficial to a business with improved forecasting, managing and reporting but also have a positive impact on how a business is viewed by lenders, stakeholders and investors against other enterprises of its size in its sector through improved transparency and defined reporting standards.

Nevertheless, before any of these benefits can be felt, companies must first identify, collect and validate all the lease information needed to meet compliance requirements. Considering there are so many essential data points needed when it comes to a company’s lease portfolio. When looking to fulfill this aspect of the adoption process and considering the amount of time and resources required to process the data, it becomes abundantly clear that spreadsheets or manual processes are simply not going to be up to the task.

The purpose of this article is to introduce you to a simpler and more efficient way of managing the transition to IFRS 16. One that will allow you to centralise and manage your lease data in one place, whilst also providing the advanced functionality and reporting capability to calculate all the technical accounting figures required for your financial statements.

Lease accounting software solutions, such as LOIS Lease Accounting by Innervisions, are proven across the world and capable of meeting the challenge of compliance with IFRS 16. They also help minimise the business disruption caused by the transition and are equally suited for both global enterprises with large devolved lease portfolios and for entities with a smaller portfolio of leases. In either instance, such solutions provide a flexible, plug-and-play approach to IFRS 16.

The challenge 

To successfully comply the business will need to

• Locate all of its current lease agreements
• Centralise the portfolio of leases
• Identify all assets subject to lease agreements
• Reclassify all operating leases, unless specifically exempted, under the single lease accounting model
• Understand the new lease standard
• Prepare perhaps using EXCEL a file of assets with their costs, leases and liabilities
• The interest rate applicable to a lease or internal borrowing rates to be applied
• Use all of the above to generate the journals from amortisation of the assets

The solution

The business that successfully transitions to IFRS 16 and complies with the new lease accounting standard will be best served by a system

• Utilising a cloud-based proven software solution such as LOIS Lease Accounting
• Which allows multiple users with specific levels of authority
• That allows spreadsheet uploads of lease data and equally capable of generating advanced lease accounting reports
• Able to generate the entries for the ERP general ledger employed by a business
• That can perform impact modelling of how compliance will affect the P&L and balance sheet as different options, exemptions and expedients are employed
• That keeps a full audit trail right through the life of an asset as well as a lease agreement of extensions, returns, upgrades modifications, rental corrections and impairments
• That holds details of lease documents and generates alerts for lease expiries and reminders for return conditions
• Designed to manage lease components and non-lease components of an agreement
• With built-in functionality to handle “right of use”, liabilities and amortization
• Reporting using IRR or IBR
• Built for fully retrospective and for modified retrospective approaches
• Accommodates periodic reporting including, monthly and 4-4-5 reporting requirements
• That allows searches by lease, by asset, by date or by any other recorded key.

The benefits

The spin offs will be myriad even for companies with a sizeable well-managed lease portfolio as post compliance a business will have

• Centralised lease management through authorised users located anywhere by use of LOIS Lease Accounting
• A cloud-based centre for documentation, history and reports
• A system capable of automatically classifying and recording lease agreements together with the associated non-lease elements, right of use asset, liability, interest rate and indirect costs.
• A one-stop repository for all your lease data and your leases assets
• A home for all your lease documentation
• A transparent and clear view of your lease liabilities & commitments for internal and interested external parties
• Improved forecasting of liabilities, expiries and returns

The final step

•  Appoint a team to or take ownership of the compliance challenge
• Take time to look at external resources such as LOIS Lease Accounting
• Speak with other businesses that have accomplished compliance
• Consult with leasing consultancies such as Innervision
• Click on this link for a free lease accounting software demo

For further information on the effects and impact of IFRS 16 and for guidelines on how to comply today then download Innervision's 7 Step Guide to lease accounting compliance below:

Access The Guide Now

Disclaimer: this article contains general information about the new lease accounting standards only and should NOT be viewed in any way as professional advice or service. The Publisher will not be responsible for any losses or damages of any kind incurred by the reader whether directly or indirectly arising from the use of the information found within this article.