The new lease accounting standards of IFRS 16 require lessees to bring all the leases and their related liabilities onto the balance sheet. This will greatly impact the accounting practice which was traditionally followed and will further challenge those who manage financial reports. Moreover, it raises the accounting question for the technical team which requires a lot of planning.
The lease accounting managers and the team will have to extract all the data, understand obligations and provisions related to the leases, and change it according to the latest standards. Using the latest and advanced lease accounting software will make the complex process simpler now and in the future as well.
Here is a quick guide that will help companies for a smooth transition to the new lease accounting standards of IFRS 16.
Understand lease portfolio
IFRS 16 standards allow the exemption for all small item tickets. Therefore, your business must understand the lease portfolio and distinguish those items like personal computers, laptops, and office equipment from other small items. It is important because including all items as ROU assets can make accounting very complex.
Additionally, while analyzing items, it is the best practice to produce a written policy that rightly justifies the exemption of items must. This document can be examined by the auditor and hence it can save time and money.
Build a Team and Appoint a Project Leader
Implementation of new lease accounting standards of IFRS 16 will require companies to build a professional team who can tirelessly work to achieve the objectives. At the same time, it is essential to bring all the stakeholders involved like IT, Tax, Investors, real estate representatives, and the accounting team on the same page.
To achieve success in the transition project, a project leader must be appointed who can manage, give out responsibilities, and set deadlines. This will make the transition process smooth and effective. Furthermore, you can appoint leaders at different locations if the company has assets at multiple locations. This role can be given to someone with a financial background.
Assessment and Approach
It is helpful to assess the challenge at hand and the scale of it. Find out which processes will take extra time and effort for faster execution and better results. This will involve a comprehensive understanding of all the leases, related information, ongoing assessments, changes, practical expedients, etc. You must identify the leases which can be exempted like short leases that are 12 months or less from commencement or those for which underlying assets value is low.
Different approaches can be taken to implement IFRS 16 compliance. One of the approaches is restating comparatives and considering that IFRS 16 is always applied on leases. The other approach focuses on cumulative catch-up. You must decide on the approach before moving on to the next step.
Gathering all the Essential Data
Gather all kinds of property leases, equipment, and car leases. The list of details should contain the commencement date, initial direct cost, terms, payments, future rentals, interest rates, termination date, etc. This will be a tough task for global companies. The team should come together and work on gathering as much essential data and lease detail as possible. Those with good attention skills and communication should make sure that no data is lost or missed.
Lease accounting software can be used to feed this data and store it. Moreover, it will help in the easy lease accounting process continuously. The exclusive features in the accounting software will help in managing lease portfolios smartly and effectively too.
Calculate the lease liability which forms the basis of the cost of ROU or Right of use asset. Furthermore, you should calculate the lease terms, future lease payments, lease asset, and ROU at cost. Specialist lease accounting software will help you in this regard.
Be alert of the after-effects
Balance sheets, income statement, statement of cash flows, tax, and other such factors will be impacted by complying with new lease accounting standards of IFRS 16. The effects will be felt on the KPI’s set, debt covenants, capital requirement, remuneration in a business, etc. It is advised that you negotiate contractual agreements in light of the new standards.
Additionally, the IFRS 16 standards will deeply impact EBITDA. Some complexities need to be addressed in this regard as well. Meanwhile, it is better to stay alert and be prepared for the after-effects of implementing IFRS16.
The new lease accounting standards will significantly change the financial statements of businesses. There is an urgent need to use the latest technology available to ease the complexities involved in the transition project. Lease accounting software, as mentioned before, can be of great help in making a smooth transition for accounting teams.
Choose best lease accounting software
For an easy and successful transition to new lease accounting standards IFRS 16, you must use lease accounting software. The team can list the requirements of your organization and then decide which is the best software that will help in achieving objectives.
A lease accounting software will help in accounting as well as financial reporting of leases. Moreover, it will help in identifying short and long-term rent deferred under GAAP. Complex issues like handling premature lease modifications and their accounting, foreign currencies, and borrowing rates on modified capital leases, etc.
Yardi’s lease accounting software is one of the best in the world. It helps businesses to comply with the new standards and get IFRS calculations done easily. Some of the features include:
- Large global organizations with lease assets at multiple locations use the software for easy calculations and making reports which in turn can be used to present a portfolio to investors.
- Automate the calculations using our software which will improve accuracy, completeness, and keep accounting error-free.
- Accounting team track financial activities and share the data with core accounting platforms.
- Reminders can be set to notify yourself of payment activities and other events.
For more details, visit www.yardicorporateleasemanager.com