Discussing the most prevalent implementation issues that have arisen in the first 10 months of the IFRS 16 implementation period, Brian O’Donovan, partner in KPMG’s international standards group, said the question he has most frequently been asked since IFRS 16 was published in January 2016 is what accountants should be doing right now to prepare for the implementation of the standard and whether they are doing more or less than their peers.
To help accountants assess their readiness, O’Donovan encouraged those attending the conference to anonymously answer whether or not they know which of their contracts are leases; who holds their lease information; what new leases they will sign by 2019; how IFRS 16 will affect their KPIs; whether covenant compliance will be affected; which transition method they will apply; whether they will apply the optional exemptions; whether their operating lease disclosures are complete and accurate; what they will say about IFRS 16 in their 2016 annual report; and who owns their IFRS 16 implementation project.
The majority of participants could only answer, “yes” for three to five of the 10 questions. None of the participants answered yes to all 10.
The aim of the poll was to give attendees a sense of how their readiness and preparation compares with that of their peers.
He encouraged those attending the conference to set a date by which they want to be able to answer yes to all 10 questions.
O’Donovan, who specialises in revenue recognition and lease accounting, also encouraged accountants to think about what pre-adoption disclosures they can make and to look closely at operating lease commitments in their 2016 financial statements to acknowledge their importance.
He told those that will be affected by the new standard to familiarise themselves with the definition of IFRS 16, the optional exemptions to the standard and which variable lease payments are included in the lease liability.
He also told attendees to think about what discount rates they will use in implementing the standard. While lessors will continue to use the rate implicit to the lease, he expects the majority of lessees to use their incremental borrowing rate.
He reassured the conference that those who know how to do finance lease accounting will know how to apply this standard “to an extent”.
IFRS 16 will come into effect in January 2019.