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Flying the Standard: Taking IFRS 16 Leases to the Next Level For some companies, the adoption of a new lease accounting standard can be an intimidating prospect. However, the level of transparency outlined by IFRS 16 has established its reputation as a key financial tool.

Flying the Standard: Taking IFRS 16 Leases to the Next Level

Flying the Standard: Taking IFRS 16 Leases to the Next Level 

By John Kuett, Vice President, Lease Accounting EMEA, LeaseAccelerator


The new lease accounting standard, IFRS 16, is now in effect. Many companies are still getting to grips with the changes to their financial reporting, with all leases coming onto the balance sheet for the first time. But beyond initial implementation, IFRS 16 is also enabling companies to capitalise on the transparency the new standard is delivering.


Since the International Accounting Standards Board (IASB) published IFRS 16 Leases in January 2016, treasurers and CFOs have been working hard to become compliant with the new standard. It replaces IAS 17 and is applicable for accounting periods beginning on or after January 1 2019, unless previously early adopted with IFRS 15.

IFRS 16 has been a major change for lessees, since the vast majority of leases that were previously treated as operating leases are now coming onto the balance sheet. To give a sense of scale here, the IASB estimated that approximately USD$3tr. of assets and liabilities[1] will transfer onto corporate balance sheets in the coming years as a result of IFRS 16. 

Indeed, LeaseAccelerator’s own research in this space suggests that, collectively, the UK’s FTSE 350-listed companies have £180bn[2] in operating lease liabilities that must now be reflected in financial reports. The oil and gas sector holds a high proportion of leases: according to LeaseAccelerator’s research, Royal Dutch Shell has £18.3bn of operating leases and BP has 10.9bn. Sainsbury’s supermarket chain has £10bn, while Vodafone has £8.6bn, and International Airlines Group has £6.8bn.


Meeting the first hurdle

Given the resource-burden of transitioning to the new standard, most IFRS-reporters have delayed implementation of IFRS 16 for as long as possible. Nevertheless, there were a few early adopters, such as Nestlé and KLM. For most, however, 2019 is the first year that quarterly and annual reports will reflect the balance sheet changes brought about by IFRS 16.

Understandably businesses have been extremely focused on day-one compliance, dedicating vast resources to identifying their leases and determining the best way to adopt the standard – whether that be on a fully retrospective basis or through the modified retrospective approach.

Either way, the amount of work involved in ‘passing the IFRS 16 exam’ for the first time has been significant – and often exacerbated by poor visibility into leases and ownership of them, as well as a lack of technology solutions focused on lease accounting. To achieve robust compliance, companies require central visibility and control of their leases. A key requirement to sustainable compliance with IFRS 16 is a firm grasp on lifecycle events of lease-reassessments, modifications, indexes etc. The list goes on and on. What this means is that meeting the first compliance deadline is just one part of the IFRS 16 challenge. Arguably the tougher task is replicating the peak experience of the opening balance sheet on a quarterly and annual basis.

 

Levelling up: Steps beyond IFRS 16 compliance

  • Implementation is just the start. Leases must be accounted for and analysed throughout their life cycle, not just on day one. While it is important to focus on initial compliance, it is critical to think to the future.

  • People, processes, and policies matter. Having the right workflows and communication lines in place – and automating wherever possible – will assist with delivering consistent lease accounting every quarter.

  • Return on investment. The transparency that IFRS 16 brings is an opportunity to reduce the costs of lease accounting and of leases themselves. With the appropriate software, organisations can also re-evaluate the benefits of leasing versus buying, and demonstrate true value to management and investors alike. 

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