The British arm of the global auditing network KPMG has shared five tips for ensuring compliance with IFRS 16’s requirements for the recognition of leases in the balance sheet.
1. Identify all your leases
Do you have a complete overview of all the leases that have been entered into at various levels in the company? When entering into new contracts, it is essential that you have a process to identify whether that contract contains a lease that falls within the scope of IFRS 16. Is the amount concerned material and of sufficient duration to be recognised in the balance sheet? This is relatively simple when the contracts are entered into or recognised by qualified accounts department staff, but in practice more difficult when the distance increases.
2. Opex versus capex
The distinction between operating costs (opex) and capital costs (capex) has been moved for contracts covered by IFRS 16. It is true that when agreements that used to be defined as opex end up as assets and liabilities in the balance sheet, liquidity management is rarely affected. But, when the figures appear in the balance sheet, it may prompt the CFO to review existing strategies for deciding whether to purchase or lease/rent.
3. Maintain multiple books
Companies and subsidiaries that keep their accounts in accordance with IFRS nevertheless pay tax under national rules. This will normally affect the deductibility of leases in the financial statements. You may therefore still need systems and processes in place to distinguish between finance and operating leases.
4. Which systems do you use?
There are several technical solutions for making the calculations needed under IFRS 16. At House of Control, we have developed a solution that not only accurately calculates balance sheet values and depreciation, it also gives you outstanding cost control and an overview of future liabilities. As a result, it is a tool you can use to both cut costs and streamline your budgeting process.
5. This is a continuous process
The CFO and accounts team will need to continuously review judgements and assumptions across the lease portfolio. Overall, writes KPMG, it is clear that beyond the standard’s technical requirements, there are some significant practical considerations that you need to consider when implementing your project.
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