5 facts about lease accounting and the impending IFRS 16 changes
Change is a fact of life for everybody, especially accountants. You would be hard-pressed to find a profession that deals with change more frequently than it does.
At the RAM blog, we know that some of you will want to bury your heads in the sand and wait for this all to blow over. We propose that instead of doing that, you read the 5 facts that we have learnt about IFRS 16 since the International Accounting Standards Board’s announcement in early 2016.
1. IFRS 16 is coming
For years, there has been a clamour for increased transparency when it comes to lease accounting. The International Accounting Standards Board revealed the IFRS 16 regulations in early 2016 in a move that will transform the way that companies account for leases.
2. Reform to the leasing industry is crucial, with so much at stake
The leasing industry is gigantic, with over £2,500,000,000,000 (yes, that many 0s!) worth of leased assets in operation at globally listed companies. Around 85% of the leases are classified as “Operating”, meaning that organisations do not have to include associated liabilities on the balance sheet.
The distinction between “Finance Leases” and “Operating Leases” when it comes to reporting will be a thing of the past in January 2019, when the regulations take effect. This means that Operating Leases, aside from those that are low-value or short term, will have to be accounted for in the same way as Finance Leases and around 85% of £2.5trillion (about £2,125,000,000,000 for those interested) worth of leased assets will need to find their way onto balance sheets.
With such a massive amount circulating between lessees and lessors, visibility of leased assets simply had to be improved. The IASB estimates that around 50% of medium/large companies and most public sector bodies will be affected by the regulation changes, due to their utilisation of long-term (over 12 months), high value leased assets – so IFRS 16 is going to be an unavoidable fact of life for many accounts departments!
3. IFRS 16 will improve the quality of information available to investors
It has been claimed that, in some instances, organisations have been able to manipulate arrangements under the current standard to skew their accounts. When investors look to purchase a stake in a company, they would certainly want to inspect the balance sheet before doing so. With so much leased equipment not being present, potential investors do not have the full picture of the financial state of the target company.
IFRS 16’s primary directive is to ensure that companies’ financial statements correctly reflect the performance of the organisation. Ensuring that significant liabilities for all leased assets are shown on the balance sheet improves transparency and means that year-end accounts are accurate. It is a change that will lead to a lot of work being required at many companies, but it is also a change that is arguably long overdue.
With the reporting method for such a high volume of leased assets about to change, there is a lot of groundwork that needs to be done for many organisations. The first step will be to ensure that there’s a central register of leased assets and to get this information systemised – ideally using specialist lease accounting software. Spreadsheets will do the job, but a solution that has been specifically tailored for the task expedites all the processes involved whilst decreasing the risk of manual data input error.
4. The time to start preparing is now!
5. Lease Accounting software will not be enough on its own
While having all lease information available on such software will prove beneficial, integration with a fixed asset accounting system will be crucial to saving labour-hours and preparation time when it comes to the production of the accounts.
With standalone lease software that does not integrate with a corresponding fixed asset tool, organisations will be able to export lease data to a spreadsheet, then manually adjust the balance sheet to reflect the lease/liability values that have been output by that system. This approach will work, but it is not going to be the most cost/time effective solution. Deploying integrated systems will cut down processing times massively and ensure that a balance sheet, complete with all lease expenses, can be generated simply and accurately.
6. (Bonus fact) RAM can help!
With less than two years to go and the sheer volume of change required, the time to start gearing up for IFRS 16 compliance is now! If you would like more information on RAM’s integrated lease and fixed asset accounting offering, please do get in touch using the details below and we will be happy to help you get your preparations underway!