IFRS 16 In The Real-World, Part 2

In this article we take a deeper look at the steps in selecting a solution, the specific functionality to look out for, and the benefits of implementing an IFRS 16 technology.

Read the first part here: IFRS 16 In The Real-World – Part 1

Even before you start to look for an IFRS 16 solution…

Before you begin evaluating technology platforms, what are the alternative approaches? Well, you could outsource a model that leverages a third party to undertake this specific task, such as one of the ‘Big 4’ accountants or large management consultancies. In my opinion, this approach is only viable if you have a very large and complex lease estate.

The other alternative is to manage the process within your organisation and to make it as efficient as possible.

Understanding what you need

We often talk about projects and how important it is to understand the problem you are trying to solve. In the case of any regulatory compliance, and IFRS 16 is no different, the legislation does a lot of the work in that it sets out many of the requirements for you.

However, there is still work to do which will be useful when it comes to identifying the technology platform and the implementation. You should consider the following questions:

• Are there requirements beyond IFRS 16 compliance that you need to consider? In terms of legislation, this could include ASC842 if you need to report under US GAAP.
• How many leases do you have and how complex are they?
• Is the solution just for finance and IFRS 16?

Who else is involved?

The last question above is particularly fundamental in two ways. First, is the solution solely for the use of the finance team to make calculations or is it also required by other departments within the organisation to manage leases? These are two completely different needs that will drive you towards either a ‘finance’ or a ‘leasing management’ solution. These will (hopefully) deliver the same financial result but will have strengths and weaknesses in different functional areas. Like in many other cases, there is one solution that fits all!

The second question is concentrated on the use of the solution within the finance team. Is this to be a siloed solution, for IFRS 16 only, or is this part of a wider initiative? As many of the ‘finance’ solutions are based on platforms that are used for Corporate Performance Management (CPM), is this a good opportunity to address other processes such as consolidation, planning and reporting at the same time? This will allow you to leverage a good ROI on any solution that you invest in.

“This is where we see the advantages of a finance driven approach to IFRS 16, rather than a lease management approach”, adds Andreas Ley, of software provider LucaNet,

“It is so easy to extend the use of a CPM platform to deliver process improvements in so many different areas, thus giving a great ROI and also centralising finance on a single solution.”

Detail process requirements

Once you move the fundamentals, you should gather more detailed requirements, such as the elements of the process you are looking to address. For example, do you want the solution to only calculate the values to be posted, or would you like to automate the postings to your GL or ERP system? You may also have certain FX requirements and complex lease types.

And, of course, before you decide on any course of action, ensure you are ‘project-ready’, i.e., you have a sponsor, budget authorisation, a timescale and a project team in place.

Don’t underestimate the data gathering exercise

In my experience of IFRS 16 projects, you will need to become intimately acquainted with the contents of your lease contracts as early as possible. There’s no other way to understand the complexity of the leases or to find the data you will need to make the required calculations. You may need to spend a lot of time talking to the business about the estimates needed to complete those calculations.

As you will find, often the biggest challenge is finding out where the information is stored and who owns it. Even working out if a contract is in fact a lease can be difficult! This is often the case in large organisations or groups that operate in many countries.

Finding the right technology platform

On completing all the above steps, you are now ready to find the right technology platform. Of course, Excel is an option, although this will require building, testing and maintaining. This may be possible for smaller lease estates of low complexity where there are limited users. However, an Excel model becomes more onerous and riskier as these factors increase.

This is where technology can reap dividends. As most of the solutions are built on proven platforms, they already have built in security, workflow and database structures. Also, the calculation modules will have undergone rigorous testing and, as IFRS 16 has been live for some years, extensive user acceptance testing. The benefit is, when there is a problem, it is for someone else to solve. They will also keep solutions up to date with any changes to legislation should this occur.

I am a great believer in a fast time-to-value. In this respect, finding a solution that is proven at delivering quickly is a distinct advantage. Especially, if you are an organisation who is nearing the compliance deadline and you have yet to get a solution in place. Andreas Ley continues, 

“When funds for technology investment are in demand, it is so important that our customers are able to demonstrate quick and tangible benefits” 

“and, of course, this helps them meet deadlines imposed by regulators and takes the pressure off the implementation.”

Multiple financial processes can benefit

Another of my bugbears is not leveraging every ounce of value from a solution, using it for single processes, thus not maximising ROI. IFRS 16 can be too easily pigeon-holed as a stand-alone process that requires a siloed solution. I would take a more expansive approach and see IFRS 16 as an opportunity to invest in a single platform that can be used to address multiple financial processes. 

So, if an IFRS 16 deadline is looming and you have yet to decide how to address it, or if your IFRS 16 process is not yet optimised, take a look at the technologies on offer and you may well find the right solution for you.

Read the first part here: IFRS 16 In The Real-World – Part 1

LucaNet offers the lease accounting software for IFRS 16 compliance. Transparent reconciliation of operating leases in line with IFRS 16, calculation of lease contracts using the modified retrospective and full retrospective methods are some of many features. To learn more about how it can help you, head over to LucaNet.