Lease-Accounting-as-a-Service: Automating IFRS 16 Compliance
By Joshua May, Senior Director Solution Consulting – EMEA, LeaseAccelerator
Consistently meeting the ongoing compliance requirements of the new lease accounting standard, IFRS 16, is no mean feat. The extra resources that finance leaders had at their disposal to meet the 1 January 2019 deadline have now faded away and senior stakeholders are expecting nothing short of a miracle from understaffed accounting teams. Could Lease-Accounting-as-a-Service be a cost-effective and time-efficient solution to these challenges?
Bringing nearly all leases on to the balance sheet for the first time, the legwork associated with IFRS 16 transition, or ‘Day 1 compliance’, has been widely reported. There has been less focus, however, on meeting the ongoing burden of ‘Day 2 compliance’ – and many finance teams across Europe, the Middle East and Africa (EMEA) are struggling to accurately record all of their lease transactions.
Aside from the sheer complexity of the conceptual frameworks within IFRS 16, the new standard brings with it greater focus on asset level accounting. This means that even modest lease portfolios can result in a significant workload for finance teams. It’s no longer acceptable to have a high-level overview of the company’s leases, granular detail is required over each asset in order to perform robust analysis of the lease portfolio.
Furthermore, the new standard requires frequent reviews of individual leases, and often, re-measurement. Since IFRS 16 is a principles-based standard that allows for interpretation, re-measurement can lead to inconsistencies unless a rules-based workflow is in place. In addition, different events across the lifecycle of a lease can trigger yet more accounting entries – again, at an asset – rather than lease-level (see fig. 1).
Fig 1: Events throughout the lease life cycle
As such, lease accounting is certainly not a question of ‘plugging the start and end date of a lease into a spreadsheet’ and leaving it at that, despite what management might think!
In fact, IFRS 16 is shining a light on the inadequacy of Excel to cope with modern lease accounting requirements. To manage thousands of assets in a spreadsheet and to accurately record all of the events throughout the lifecycle of those leased assets would require an army of people. Not only would extra headcount be required, but any additional employees would need to be able to navigate the complexity of IFRS 16 day in, day out. And hiring experienced personnel comes at a significant cost.
Moreover, using a spreadsheet for lease accounting becomes extremely challenging when an organisation is operating in multiple countries across the globe. Take a fleet of leased cars, for example. If you are part of an accounting team in London, how do you know in real time if a car in Dubai has been stolen and needs to be written down, which will require modification of the lease? Yes, email can be used to keep track of such events, but there is still manual effort required to transfer that information into the relevant spreadsheet and adjust the lease accordingly.
Technology to the rescue
Arguably a simpler solution would be to have a single cloud-based lease accounting platform that can be rolled out to permissioned users across the globe, enabling them to log on quickly and modify the lease. Any changes would be reflected in real time to all platform users. What’s more, having a tightly controlled workflow through such a platform, and clear segregation of duties among users, demonstrates good risk management to auditors and regulators.
The potential benefits of lease accounting software run far beyond improved internal controls, however. Stakeholder visibility over the leasing portfolio is another benefit of using a cloud-based solution, especially since bringing the majority of leases on to the balance sheet for the first time has piqued the C-suite’s interest in leasing portfolios and lease versus buy considerations. Internal and external auditors can also be authorised to view the company’s lease accounting platform, as can shareholders, where appropriate.
What’s more, with intelligent lease accounting software, users can interrogate the system themselves, either finding answers to their questions or performing independent testing, without the need to touch base with the finance team. The benefits of such a set-up should not be underestimated.
Fig 2: Measuring the Value of Lease Accounting Software