Regulatory Technology Advice | Deployment | Development | Optimisation
The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016 which sets out the principles for recognition, measurement, presentation and disclosure of leases for both parties to a contract. IFRS 16 becomes effective from 1 January 2019; however, it can be applied before this date if an organisation also applies IFRS 15 Revenue from Contracts with Customers. IFRS 16 completes the IASB’s project to improve lease financial reporting and replaces IAS 17.
Arranging a lease results in a company (the lessee) obtaining the right to use an asset at the start of the lease and if lease payments are made over time, also obtaining financing. IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model.
A lessee is required to recognise:
(a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and
(b) depreciation of lease assets separately from interest on lease liabilities in the income statement.
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
Data collection. The need to enable hundreds of thousands of leases to be held within a flexible model, efficiently storing all levels of granular data required for IFRS 16.
Complexity. Lease structures can be complex, as can the accounting scenarios. Leases can be of multiple types and can be further impacted by multi-GAAP and multi-currency considerations. The system needs to support both the full retrospective and cumulative catch-up approaches to cater for the period of transition.
Audit & Disclosure. Ensuring a consistent approach that is fully auditable and traceable is a key part of implementing any new accounting standard. This is of particular importance as the IFRS 16 accounting standard requires judgements and decisions to be made at various points across the accounting process.
IFRS 9 & 15 Compliant. IFRS 16 is one of a number of new accounting standards. It needs to co-exist with IFRS 15 revenue recognition for asset fair value calculation, plus any asset impairment charges under IFRS 9.
Technology. Most lease administration systems are old, poorly integrated and hard to change. The accounting functionality is usually limited and inflexible and therefore a tailored solution is required.
Finance & Lease Sub Ledger: The move to IFRS 16 lease accounting can result in a significant increase in journal entries driven by multiple events over the lifetime of the lease. A Lease Sub Ledger allows detailed finance and lease information to be held in a centralized accounting hub to drive detailed reporting across the organisation of key movements and ratios. All data is validated with online balance to journal to lease drill down and enquiry.
A Sub Ledger provides a great alternative to overloading the existing Oracle or SAP GL. The sub-ledger provides great flexibility around account codes, hierarchies, accounting periods, calendars, and transactional, reporting and base currencies. Multiple balance types are stored allowing for financial, non-financial and lease aligned reporting. Both IFRS 16 and existing IAS 17 balances can be held simultaneously for comparative reporting.
IFRS 16 Finance Data Model. The best practice IFRS 16 data model caters for the most complex of lease structures and organisation or party relationships. The system stores a rich source of information to meet financial and lease based reporting requirements. To ensure complete financial reporting integrity and record the accounting information and the full lease life cycle event simultaneously.
Detailed payment schedules, index linked rates, terms, lease options and other key data items should be stored in the data model with full traceability and audit with the accounting entry.
Millennium Affine works with several technology vendors who supply appropriate solutions that overcome the challenges associated with IFRS16. Contact Brendan Shaw for further details.