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Blog Sep 12, 2017

IFRS 16 and the impact of the new leases standard

The new leasing standard jointly initiated by the IASB and the FASB aims to provide a comprehensive model for the identification and the treatment of lease arrangements in the financial statements of both lessees and the lessors, superseding the IAS 17 leases and its associated interpretative guidance. This means that firms will need to apply a control model to the identification of leases, distinguishing between leases and service contracts on the basis of whether an identified asset is controlled by the customer.

Although the first full year of reporting will be 2020, there are significant reporting requirements that organisations need to consider leading up to this – for instance, the disclosure of IAS 8’s impact on IFRS 16 that needs to be made in each financial statement commencing from the end of 2017. It’s well past the time for organisations to start preparing for this transition. This includes the consideration of processes required, software implementations, decisions regarding adoption methods, and evaluating the impact.

There are several best practice approaches to prepare and implement IFRS 16 and organisations need to weigh the pros and cons of the various approaches before deciding the best way forward for their business. From identifying where the data is currently stored, how scattered it is and how it can all be aggregated, to understanding what current data is already available and understanding what additional information is required for the IFRS 16 calculations, there are some important decisions that need to be made in this process.

However, regardless of the approach that organisations choose to adopt, it is important to quickly combine expertise across accounting and real estate management. A collaborative approach to IFRS 16 transition will ensure the elimination of uncertainty, lack of visibility, the risk of repeating the volume of work, and having independent approaches to what is a shared challenge. This will help organisations develop early channels of communication with key stakeholders, minimise the impact on the balance sheet and establish the preferred lease terms for the business moving forward.

Furthermore, technology will play a crucial role in organisations’ collaborative efforts to IFRS 16 reporting. Be it to maximise visibility of the financial position across the lease portfolio or to improve the quality of real estate data by providing a single source of information across the entire business, organisations that adopt technology will see a smoother transition to the IFRS 16 reporting standards. The host of technology currently available can help organisations enforce, automate and facilitate collaboration by providing accurate, real-time data that is available to both real estate and accounting teams throughout the entire life-cycle of their lease portfolios.

Gone are the days when real estate administration was a manual, time consuming and expensive human process. With the power of Artificial Intelligence (AI), organisations are now able to process data using automated, intelligent and computerised methods. Organisations can and should be benefitting from systems that can reduce up to 70% of the time associated with producing lease abstracts over that of human administrative methods currently in play. With the adoption of these technologies, they can now do away with fatigued data and instead rely on a platform that becomes more intelligent with more data that it processes.

The most compelling argument for the use of such smart platforms powered by AI for IFRS 16 reporting is its improved speed and reliability over the human process alternatives. Utilising deep learning algorithms, these platforms are capable of noticing when key information is missing or needs to be reviewed. With the same level of consistency as with manual input, these platforms can offer organisations significant time and cost savings in aggregating and structuring the relevant data.

Companies should realise that setting up the right technologies now is crucial for a successful transition to the new lease accounting standards. It is also important to understand that implementing supporting software now will have long-term benefits for future, annual reporting as well. So, organisations need to make sure that they do not only take the 2019 deadline into account but choose the right systems to ensure long-term efficiency increase.

The article was originally published on Economia, the member publication for ICAEW.
Author: Richard Belgrave, Head of Europe, LEVERTON

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