IFRS 16 In The Real-World, Part 1

The discussions and debates around lease accounting had long since concluded, legislation had been drafted and adopted, and deadlines set in stone.

There are many who would think that that IFRS 16 is now done and dusted and is working smoothly and efficiently in most organisations. However, the pandemic reared its ugly head and put a spanner in the works. And, as we know, it takes organisations a while to put efficient and effective processes in place. As a result, for many organisations, the IFRS 16 train continues to rumble on down the tracks.

The deadlines

The original legislation came into force on 1 January 2019. There are several deadlines set for compliance to be aware of, depending upon the organisation type. 

• Private companies – compliance effective for annual reporting periods starting on or after 1 January 2019. 
• Public Sector bodies – implementation was deferred for a year, from 2020/21 to 2021/22 due to the pandemic. 

Let’s look at each of these individually.

Private companies

Nearly all private companies have been through at least one cycle of reporting to the new standard. When regulation creates a burning bridge i.e., a specified date for compliance, organisations tend to act in two distinct ways:

1. Act immediately, prepare well in advance, seek technological solutions to the problem; or
2. Make do with the technology that is available, go through the first cycle, understand the pain, then act.

For those in the first category, there were plenty of technology vendors who developed solutions as the legislation was being drafted and developed. These ‘bleeding edge’ solutions included leasing software providers as well as finance software providers. Whilst many of the underlying technology platforms were established, the IFRS 16 functionality was undergoing continual development as organisations implemented the solutions, identified issues and fed these back to the vendors. And there were many, as IFRS 16 has a high level of complexity due to the interpretation of the legislation itself and the variety of leases that are in existence.

There were risks for those who purchased technology platforms at an early stage. At that time, the solutions could be demonstrated but were largely unproven as live, working applications. Certainly, none had been through the scrutiny of an audit. As a result, some purchases were made with vendor promises to fix or develop functionality in the future. This is the risk of being at the ‘bleeding edge’.

Now that things have settled down, some organisations will be happy with the selected technology solution. Others may not be so satisfied and are in the market for a replacement. 

Many organisations are in the second category, achieving compliance using technology in place at the time. This invariably means Excel, although we have heard of some bespoke written solutions in MS Access. Either way, the passing of time and an audit would have focused the mind on the efficacy of the chosen method. For some, Excel may have worked well and will continue to do so. For others, they may have discovered that an Excel model is too complex to maintain, or that calculations were inaccurate or that the process was just too inefficient. In this situation, they may now be seeking a technology solution prior to the next year-end.

Andreas Ley, of software provider LucaNet has experience of this behaviour. “When speaking to our customers they mentioned how much easier it is to use an IFRS 16 software solution compared to Excel, especially with the growing number of leases, rolling forward into subsequent years and to maintain compliance with standards.”

Public Sector bodies

There may be some early Public Sector adopters of IFRS 16, but most will be in the throes of a project to deal with April 2022 reporting. The accounting institutes that cover Public Sector are in accord with respect to IFRS 16 and issued a statement when the implementation was deferred because of the pandemic.

“The CIPFA/LASAAC would encourage local authorities to continue to progress with their plans for implementation and ensure that they have the information, processes and systems in place”.

With only 6 months to go until reporting is due to start, hopefully, Public Sector organisations have heeded this advice and are advanced in their planning.  These organisations are at a distinct advantage in that they are entering a ‘mature market’. They are able to seek out technology vendors with a proven track record in delivering IFRS 16 projects, albeit to the private sector. There will be little or no difference between the two. Yes, the Government Financial Reporting Manual (FReM) has interpretations and adaptions to the legislation, however, these do not fundamentally change the underlying calculations or methodology.

How does technology support IFRS 16?

With the complexities that surround the calculation of accounting entries and the variety of leases on offer, IFRS 16 is not easy to model. It is a good example of where re-inventing the wheel is not necessarily the best policy. If a technology vendor has done all the hard work to develop a proven, compliant solution, why would you not leverage on this? Yes, there is a cost associated with this. However, there can also be a significant cost to developing an internal solution, the time taken to build and test a model, and the risk of failure to consider.

What a technology vendor can deliver to you is a proven solution and proven ability in delivering successful IFRS 16 projects. You are not just buying a technology platform, you are buying expertise that will help de-risk your project. And of course, if you are a Public Sector body still planning your approach to upcoming reporting, time is likely to be of the essence.

So, for many organisations, IFRS 16 is still very much alive and kicking. If you are one of those, tune into IFRS 16 in Real-World Part 2, where we take a detailed look at what you should be looking for in a technology solution.

LucaNet IFRS 16 software for lease accounting

LucaNet software takes the stress out of making your lease accounting IFRS 16 compliant. While the complexity of the new rules does make many things more difficult, their IFRS 16 leasing software is ready to handle just about everything in helping you implement all the necessary changes. Whether in restructuring or evaluating your lease contracts, implementing the constant monitoring IFRS 16 requires or reconciling operating leases in line with this standard.

To learn more head over to LucaNet