Does your company have systems and processes in place to meet the new requirements?
IFRS 16 (International Financial Reporting Standards) will take effect on 1 January 2019. This means that, in most cases, leases must be recognised in your accounts in the same way as owned buildings, machinery, cars, ships, aircraft and other major capital goods. In other words, they are to be recognised in the balance sheet, whereas previously they were treated as running costs in the income statement.
Then the right to rent office space will become an asset in the balance sheet. Future lease liabilities for offices – and, for that matter, for ships, cars and aircraft – must be recorded as liabilities in the balance sheet. Reductions in residual value should be presented as depreciation in profit or loss.
A CFO knows that such changes involve significant business, practical and theoretical challenges. IFRS 16 entails a significant change from the current standard for how lessees account for lease agreements. Are you ready for the change, which applies to listed companies and anyone else who does their accounting in line with IFRSs?
Here are four questions the company must be on top of to ensure compliance with the requirements:
- How many leases does the company have? Most companies of a certain size enter into binding agreements, which create future liabilities, on many different levels. Often, the finance department does not see more than an invoice. The answer to the question is therefore very often that you have more leases than you think.
- Can you quantify the liabilities and rights contained in your leases? Most leases have so far been recognised based on invoices from suppliers, but without the company having a good system for managing the agreements, which would enable you to quantify the future accounting consequences. Now, you will have to obtain more data and more types of data about the individual lease, but many will search in vain: a significant portion of the data needed to calculate your rental liability is not found in the contract documents.
- What discount rate will you use to calculate the present value of your leases? Here, you can either calculate the implicit interest rate in the lease or use the alternative borrowing rate for the lessee.
- Are you aware of the exceptions in the regulations? For example, short-term and smaller contracts are often exempt from the requirement to be recognised in the balance sheet.
One thing is to comply with the requirements, and many companies are starting to run out of time. For lessees who are greatly affected by the regulatory changes, they may also influence loan terms, bonus schemes, acquisition decisions and the company’s ability to pay dividends.
How will your company comply with the requirements in practice? Although IFRSs are used by companies all over the globe, ERP systems have been slow to launch modules for calculating lease liabilities – if they offer that at all.
House of Control has developed a module that quickly and accurately addresses the new IFRS accounting requirements for leases. The module can be used independently of the company’s ERP/accounting system, and several Norwegian companies are already using it.
The module covers all relevant factors, such as transitional rules, requirements for notes, calculations of the right of use, lease liabilities and lease payments. This is a sophisticated development of our more well-known Complete Control solution, which is used by more than 1,000 customers in 60 countries to register assets, agreements and other liabilities.
Would you like to know more about our reporting solution for IFRS 16? Get in touch with us today!