It’s well known among finance departments and accounting professionals that the biggest regulatory change to lease accounting is fast approaching. It’s the biggest change in 40 years in fact – IFRS 16.
Many professionals within these specialisms will have already started to put measures in place to ensure that transition is relatively straightforward for their organisations. That said, full compliance will still be a considerable task even for the most organised companies, let alone those with less than stringent or decentralised lease management histories.
For the latter party, this new regulation may cause some anxiety, but it’s not all bad news. IFRS 16 gives businesses the chance to reassess poor practice and establish protocol that will ensure financial transparency, not only in time for ‘deadline day’ but far beyond that.
It’s highly likely, however, that many professionals outside of finance will be unaware of the significance of IFRS 16 and what it actually means for their role and the wider businesses they work for. This is a great challenge because the new standard – by nature of its pervasive scope – implicates anyone with the authority to sign-off or modify leasing arrangements.
This means there are potentially hundreds of employees joining the compliance and reporting process for the first time. But with the 2019 deadline fast approaching, and severe consequences for failure to comply, the need for clarity is critical. So, what are the key business considerations for finance directors and their contemporaries in other departments?
The need for collaborative transparency
The new standard obliges professionals of all types to become more familiar with the particularities of their leasing arrangements and the implications that will result from failure to comply. Because IFRS 16 essentially brings all leases onto the balance sheet – some exemptions notwithstanding – it will force those that have until now been free of regulatory obligation into the very heart of the compliance process for the first time.
Inevitably, this will improve due diligence throughout a corporate structure, but will also increase the probability of errors as unfamiliar colleagues slowly become au fait with new standard.
With trillions expected to reappear on the balance sheet, the task of coordinating and calculating this vast amount of data is considerable. It’s simply going to be too complex and labour-intensive to leave the challenge of compliance to one department, even for small to medium sized businesses with a modest amount of leasing arrangements.
Organisations with complex international portfolios will likely find the task near-impossible without some degree of automation or specialist software to help orchestrate the incoming avalanche of lease data. Platforms that provide one ‘space’ for departments to cross-collaborate on regulatory compliance will be desirable in this respect.
IFRS 16 asks for an unprecedented degree of financial transparency, as such businesses will need to approach the entire process with a ‘one version of the truth’ mindset if company figures are to be 100% accurate.
In ‘real terms’ accountancy will become part and parcel many professional’s remit. Real estate, for example, will have to approach new and existing leases with the standard at the forefront of every decision. It may even be that traditional approaches to property are no longer within the best interests of the business.
Procurement and finance departments will now have a greater say in whether certain assets are bought or leased, completely reshaping the role of real estate. Clearly, this restates the need for collaborative reporting. How businesses choose to go about this will ultimately be approached on a case-by-case basis, but specialist technology will undoubtedly offer advantages over less sophisticated methods like spreadsheet software.
Data integrity is everything
Identification, data abstraction, calculation, and ongoing management. These are the key tasks that every business will need to carry out in order to reach full compliance. Without well-managed up to date lease information, the chances of producing accurate final reports is remote.
This places huge emphasis on the integrity of lease data – it must be carefully controlled at every step to ensure it’s not only numerically accurate, but completely auditable (complete data trails, i.e. the who, what, when, and why are required from auditors).
For large multinationals, the issue of data integrity cannot be overstated. Contracts will need to be dredged up from their dusty filing cabinets in order to find the relevant lease components that are subject to scrutiny under the new standard.
These same lease components will then need to be to lifted or ‘abstracted’ from their forms and readied for calculation. International companies will likely have agreements written in a number of different languages that will complicate the process further.
Entrusting these key stages of an IFRS 16 project solely to human labour is risky business. Even the most judicious colleague will make mistakes along the way, as is well documented in a number of academic studies on data input and the propensity for human error.
As such, there’s a real requirement to get everyone on the same page with lease management processing. Imagine a scenario whereby individuals or teams across large geographical areas use their own methods for processing company data, this approach will soon see duplications, errors, and miscalculations. Even if one person produces an error, this is going to have real impact on the veracity of reports at some stage.
But even if colleagues were to be completely accurate throughout the entire process, the task still isn’t complete. Reaching a merely satisfactory place come 2019 is simply not enough. Why? Because lease data is inherently dynamic, subject to constant change throughout a contract’s duration.
Companies will have to dedicate considerable resource to ensure their lease data is completely accurate if they choose to use human labour to manage their portfolios. Some would argue that for big organisations full compliance is not possible without fully automated processes and introduction of specialist software.
In short, if businesses want absolute peace of mind, clarity, and coordination, software is truly the way to go.