IFRS 16: The devil is in the application guidance details
Insights from the IFRS Round Table on the implementation process of the new IFRS 16 on Leases
On March 20, Trifinance CFO services hosted an IFRS round-table discussion with some of Belgium’s top IFRS reporters to discuss their experiences in implementing the new standard on Leases. Exchanging insights and experiences allowed participants to learn how peers are getting on with the implementation process, which bottlenecks and pitfalls they encounter, but also which opportunities they see.
Article by Mario Matthys, Expert practice leader Corporate Reporting, CFO Services
What do first experiences reveal?
The scope of the project is often misunderstood
IFRS 16 is often seen as a finance & administration project. Finance leaders tend to charge their teams to ‘just implement it’ with as little noise as possible and in most cases without having budgeted any implementation cost. The scope, however, deserves the right attention from the start: the new standard affects departments beyond finance and reporting. Considerable time and effort need to be spent with other business departments to make assessments on definitions, options, obligations and other key contract data. Procurement, HR, IT, tax, treasury and business teams need to be involved from the very beginning to come to an efficient implementation and rollout plan.
The devil is in the application guidance details
Issuance of detailed company instructions and guidance is a must.
Determining whether an asset is dedicated and under the control of the company turns out to be not very straightforward. For contracts such as warehouse spaces, containers, office rent, … detailed and clear guidance to see whether these fall in scope is recommended.
Determining the lease term when renewals or termination options are in place needs a clear process, including management confirmation.
All reporters agreed that more such judgements are necessary and more involvement of senior staff is required. The clearer and more detailed the group instructions, however, the easier to apply the standard consistently.
Transition options matter
It’s crucial that companies reflect well about the implementation options before starting. Preparing the company for the changes is a challenging and time-consuming process. Finding the right balance between accuracy and completeness at one side and workload and cost on the other side avoids chaos and costs. The choice of transition methods and practical expedients needs to be well understood by management before starting the implementation project. A key decision to make is to what extent (pro forma) comparatives are necessary, both for financial as for business reports.
Choosing the best transition option requires not only thought but preferably also modeling of alternative approaches.
Tooling needs careful consideration
Lease management tools are emerging all over the place. They have different features and objectives. Most companies have made (or are in the middle of making) the choice for a specific tool. The choice for the best fit for your company requires considerable consideration.
At the same time, the impact on existing tools, systems, reports and KPI’s needs to be brought to management’s attention. New accounts, impact on inventory costing, new subtotals or KPI’s, reports and BI tools need careful consideration and planning.
Audit procedures are being developed to cover this new standard, but different interpretations exist amongst auditors. Expertise is not yet there and application questions are being treated differently depending on the audit firm or even audit team.
It is important to take your auditor with you on your implementation journey. From the start of the project till the implementation and roll out. Discuss your application choices and impracticability to drill down to the detail upfront with them. Keeping your auditor informed during each step of the process will avoid surprises at year-end audit.
IFRS 16 roll out to group companies and budgeting are challenging
Identifying and locating all lease contracts is already a substantial exercise. Having a well-established process of continuous monitoring of new contracts and contract modifications and swift recognition of these changes in place is even a bigger challenge.
Most IFRS reporters highlighted their first IFRS 16 actions and the biggest part of the implementation project to be centrally led. Extensive briefing and training was necessary to roll out the new process to all affiliates and more effort than initially estimated had to be put in getting the new process up to speed when performing monthly closings.
Early coverage of the new IFRS 16 reality in the budget process was often difficult to achieve. Especially for the 2019 upcoming budget exercises, IFRS 16 impacts will have to be specifically dealt with, or you will be comparing different realities.
Do not forget the disclosure requirements
The new IFRS 16 standard will also require relevant disclosures to the users of the financial statements. The scope of disclosures enlarges. Companies need to be ready to effectively compile the data that will be required.
Most of the decisions companies make do not only involve a trade-off between cost and accuracy, but they will also affect the closing process and the financial statements for the years to come.