The impact of IFRS 16 is expected to be pervasive, and with the deadline approaching fast, the need for clarity is paramount. Even for small to medium-sized businesses, the task of becoming fully compliant could be labour-intensive.
For those with large portfolios or decentralised lease management practices, the task is particularly burdensome. But while this may instill anxiety within companies that have not been so stringent in the past, there is cause for optimism. This new standard gives organisations the opportunity to reassess where they have been going wrong and put measures in place to ensure future financial reporting is organised, transparent, and most of all, compliant. A clean slate.
Preparation, transition, and ongoing management of leases under IFRS 16 is complex – it requires in-depth analysis of portfolios that, if not done correctly, will have catastrophic consequences at some point down the line. Due to its far-reaching scope, the new standard obliges professionals to become more familiar with the particularities of their leasing arrangements (including the varying options, dates, exemptions etc.) and the penalties that result from failure to comply. It also brings those that have typically been free of regulatory obligation into the compliance process for the first time.
This effect will improve the degree of diligence throughout an organisation, but also increase the likelihood of errors as ‘green’ colleagues slowly become familiar with new regulation. But with serious consequences resulting from failure to comply – not to mention the possibility of an embarrassed CFO having to explain to auditors why the figures don’t add up – the need to manage the implications of this new standard is clear. In short, IFRS 16 places considerable emphasis on two things: communication and consistency across a corporate structure, and the ongoing integrity of company lease data. But how do organisations achieve this?
Collaborative reporting – A new normal
Accountancy has always been the reserve of the finance department, but IFRS 16 will create a ‘new normal’. The new standard primarily implicates land and built assets (in addition to plant, machinery and equipment), therefore real estate professionals, and indeed other departments, will need to start involving themselves in achieving full compliance and maintenance of financial accuracy. What some might call collaborative reporting.
Real estate will become more strategic in the way it approaches new leases, considering every new agreement within the context of the new standard. It may even find that its preferred or traditional approach to property leases is no longer in the best interests of the wider business. Procurement and finance teams, for example, will need to be involved in discussions over whether new assets need to be leased or bought.
With trillions projected to find its way back onto the balance sheet, no single department will be able to comfortably orchestrate this slew of financial data, so cross-department collaboration will be vital. This issue is especially pressing for multinationals where information is likely to be held over large geographical areas and in a number of different languages.
The easiest way of achieving collaborative reporting will likely be through utilisation of lease management technology that assists with analysis and comparison of data, while also maintaining consistency across a network as information changes through time.
Maintaining data integrity
The accuracy and management of an organisation’s lease data is, above all else, the most critical aspect of achieving full compliance under IFRS 16. Without reliable and up to date lease information, there is no chance of producing reports that legitimately reflect a company’s financial status – which can otherwise be described as non-compliance.
Organisations will have to identify, abstract, and process relevant lease information that is captured under the new standard. This is not an easy feat, especially in cases where lease information is contained different languages and spread across large geographical areas – this again restates the need for a strategic platform that allows for long distance coordination. Without this, companies can expect to see duplication in their data.
The data integrity becomes increasingly important for organisations with complex and long-standing lease arrangements. Those companies will have to trawl back through old documents, sometimes many years old, to identify the relevant lease information that is subject to scrutiny under the standard. It’s highly likely that these documents will contain missing or incomplete information, further complicating the process. Lease management software is now intuitive enough to assure compliance throughout the entirety of an organisation’s IFRS 16 project, from identification and abstraction, to calculation and ongoing management.
The initial expense of technology solutions may put some off but with the deadline looming, I would advise a discussion, especially among large organisations where the implications of IFRS 16 will be substantial.