In a new guide, international auditing firm Grant Thornton shares what they have learned from implementing IFRS 16 at their clients.
IFRS 16 brings with it both greater transparency and a number of challenges for businesses. It requires companies to bring all operating leases on to the balance sheet for accounting periods starting on or after 1 January 2019.
Most companies use leasing contracts in some capacity, so the impact of IFRS 16 has been wide-ranging, impacting not just financial reporting, but also business models and processes in many departments.
What’s the problem?
So, what’s the problem? That’s the question asked by Grant Thornton in a recent guide to how companies should handle IFRS 16 compliance issues. And their answer is clear:
“IFRS 16 requires that operating leases are reflected in the balance sheet as an asset and liability. This will directly impact earnings before interest, tax, depreciation and amortisation (EBITDA), as well as many other financial ratios.
Not only is there a significant cost to implement and comply with the standards for existing leases, there is a knock-on effect on financing and reporting decisions across the board.”
Transition to IFRS 16 involves a series of obstacles, according to Grant Thornton, which all companies need to negotiate. They split the treatment of the IFRS 16 requirements into four stages.
1. Get all your data in order
Do you have a complete and accurate picture of all the company’s leasing and rental contracts, right down to each department in every subsidiary? No? This is the key issue if you are going to comply with IFRS 16. According to Grant Thornton, you are not alone: “We typically find that clients have outdated lease data, are missing key information, or have no lease data at all.”
Start by collecting the information and data that are readily available – including whatever is in the office filing cabinet. They you can go deeper and broader into the organisation and ask the various departments for further details.
2. Make accounting judgements
Once your data is in order, the focus moves to making accounting judgements. The IFRS 16 judgements include:
● Establishing the key dates for the lease, including any renewal, termination and purchase options, as well as rent-free periods.
● Deciding which leases are covered by IFRS 16 – and which are not.
● Deciding how to account for different kinds of lease payments (variable and fixed).
● Setting the discount rates for each individual lease.
3. Quantify the impact
Some companies choose to use spreadsheets to make the calculations, while others choose a software solution that is tailored to this particular issue – and is easy to maintain.
4. Implement suitable controls, systems and processes
“Once you’ve made your way through the IFRS 16 transition process, the journey continues. Keeping your lease data accurate and complete, maintaining up to date accounting judgements, and routinely quantifying IFRS 16 journal entries will need to become business as usual.”
How is IFRS 16 being handled at your company? Was everything done on a spreadsheet the first time around? House of Control has a unique and ready-to-use IFRS 16 software. Not only does it make this year’s reporting simpler, more efficient and precise, the module will also save the Finance Department even more time and resources in the years to come.
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