Minimising the complexity of IFRS16 compliance with support from a new compliance module for IFRS 16

Way back in 2006, when the IASB announced the concept of a new project into lease accounting, the potential of significant implications for our customers began to emerge.

Since IFRS 16 was officially issued in January 2016, MRI LeaseEagle has committed the majority of its R&D investment into the development of a solution in keeping with our company’s vision of Simple Intelligence. After more than two years and more than a half a million dollars in R&D investment, the first production version of a new compliance module for IFRS 16 was released in February 2018.

Now with the first IFRS 16 year-end either just passed or just upon most of our customers, those that have already activated the module are ready, and in many cases have been so for at least a year. Some have even moved into a second reporting year, and thus tackling the greater challenge of tracking subsequent measurements.

Having been actively developing our solution for IFRS 16, and working with companies in this space for nearly five years, our team has gained incredible insight into the practical adoption of the IFRS 16 standards, as well as having been exposed to a myriad of questions and varying approaches by those companies adopting them.

The complexity of IFRS 16 has been widely underestimated

Without doubt, the greatest misconception companies have made in initially considering IFRS 16, is that it will be an annual calculation for statutory reporting purposes, so whilst laborious it’s not something that they have to actively consider. In theory, and if all leases never changed, then perhaps this could work.

However, when more fully thought through by the finance team, it becomes clear that in order to accurately account for movements within the company’s lease portfolio the reporting for IFRS 16 becomes a far more regular requirement, highly recommended to be a new part of the End of Month (EOM) process.

Suddenly, the realisation of the sheer amount of work that this new standard will now generate can be profound, from our experience, even as significant as the realisation of the standards’ impact on the Balance Sheet! As a result, the idea of trawling through spread sheets of data, and manually developing formulas for each output, becomes very unappealing and for most modern and progressive finance teams, completely unacceptable.

In addition to a laborious and unregulated process for calculations and journals, the lack of visibility and control that typically exists around the lease data can result in the monthly data collation process being a far greater challenge than the reporting itself. Sometimes even the simplest of questions become the hardest to answer:

• Do we have all of the data that we need?
• Is the data correct?
• How do we know which leases have changed or been added?
• How do we know what might’ve changed for each lease?

For those customers where an initial position for IFRS16 has taken longer, on virtually every occasion this has been due to problems with sourcing the data.

Particularly for businesses with large leasehold property portfolios, there is often a disconnect between the ownership of this data and the Finance Team. They should have the current month’s rent, and perhaps the entire yearly forecast. But for all future lease years? All rent reviews, cash incentives, option terms? Almost certainly the answer is NO.

Thus, whilst the reporting standard sits with finance, the required data is being managed by the Real Estate Team, or even Legal. Furthermore, because the management of the data has primarily been for other purposes, the level of detail and accuracy possessed is generally insufficient for modelling future financial liabilities, making detailed assumptions and accurately reporting for the company’s financial statements.

As a result, when fully considering the needs for IFRS 16, many Finance Teams discover that due to the lack of visibility and control that they’ve had, they’re working with insufficient and/or unreliable data, leading to the risk of inaccurate financial reporting, which is unacceptable.

New compliance module for IFRS 16 focuses on simplicity and integration

As the vast majority of MRI LeaseEagle customers now know, our optional development of a new compliance module for IFRS 16 module can make the reporting of their Initial Position for IFRS16 a pretty simple one-off task.

With development of a new compliance module, IFRS 16 reporting can be completed in a matter of hours, even for an initial position at transition. The simplicity comes from the alignment and integration of the core lease data, with the standardised financial calculations and detailed reporting outputs.

It’s one secure controlled solution for managing the data, recording the business assumptions, and producing the required outputs.  By combining automated lease tracking with proactive variance alerts and an auditable history for decisions and notes, development of a new compliance module for IFRS 16 ensures that the lease data required is:

• In view every month
• Informing your team of where to review, and
• Delivering ‘push button’ data outputs for the production of journals

“As a public company with over 120 property leases in multiple countries, managing AASB16 without MRI LeaseEagle’s new compliancemodule for IFRS 16 would be virtually impossible.

Their solution is both simple and powerful and the support and expertise that we have received throughout has been first-class.”

– David Speirs, CFO, Beacon Lighting

In developing our solution for IFRS 16 the team has been almost entirely focused on the simplicity of development of a new compliance module for our Customers. Whilst this extends into the user experience and system workflow, the single greatest advantage that MRI LeaseEagle has in delivering the best outcome for our Customers is in having functionality natively integrated into our core platform for managing lease data.

This single solution approach ensures that the lease data required for IFRS16 is available automatically. If there is a change in the lease profile, cash flows or even Option status, then their users are alerted on screen, as well as being able to drill down to see what has actually changed in the core data.

From a control and workflow perspective, this means that there is no tedious monthly need to go and manually collate all of the new data, or survey the legal or property teams for any changes. The latest information is there and available, as well as alerting you if required.

We’ve already seen this be a game-changer for Customers, transforming the demands of IFRS 16 and in some cases even ‘correcting’ the auditors, if certain data points have been mistakenly left out.

In fact, our team has seen firsthand some Customers’ auditors make multi-million dollar mistakes using Excel, due only to errors in the manual entry of disconnected data. Landlord incentives, make goods and CPI increases are the most common points of data omission in our experience. However, once the development of a new compliance module for IFRS 16 process is understood, all a Customer needs do is provide their audit firm with a view-only login and the right level of data and detail is at their disposal.

The business benefits of a new compliance module for IFRS 16

In most cases we have seen the adoption of the new compliance module for IFRS 16 not only achieve ideal results for managing IFRS 16 reporting compliance, but also have a significant influence on the detail and accuracy of the core lease data for property, payment and business analysis purposes.

It is well known that the best protection against “stale data” is for it to be continuously used and when relied upon by the Finance Team each and every month, Customers constantly see a real uplift in their data quality across the system, ensuring both complete accuracy of reporting and their long-term reliability on MRI LeaseEagle.

The great benefit of the tight integration between the core system and a new compliance module for IFRS 16 is experienced immediately by both new and existing customers that activate the module. We’ve even seen some companies transition from zero IFRS 16 reporting to a complete set of journals in less than 48 hours – complete deployment is typically a very simple five-step process:

1. Data Gap Analysis
2. User Training
3. Policy Configuration
4. Lease Assumptions
5. Reporting & Journals

Ongoing improvement and development

Organically, development of a new compliance module for IFRS 16 has evolved since it was first released in February 2018, with the adoption and influence of customers, updates and interpretations, complex lease scenarios and general improvements. Rather than “going it alone” our Customers have the support of a vendor who is committed to the ongoing development and improvement of their IFRS 16 solution, engaging both at a practical user level as well as with domain and industry expertise.

In fact, the evolution of a new compliance module for IFRS 16 has even resulted in the use of the module by many customers for not only their real estate leases, but also their vehicle fleet and equipment leases, creating a single solution across the business for the many customers also managing IFRS 16 for thousands of non-real estate leases via MRI LeaseEagle.

From the outset of  a new compliance module for IFRS 16, the importance of its accuracy and integrity has also been at the forefront of our considerations. Through the engagement of globally recognised consultants and detailed third-party testing, MRI LeaseEagle has sort to ensure the accuracy and reliability of our numerous proprietary algorithms that comprise the detailed accounting treatments required, and remain committed to the continuous improvement and enhancement of the module to meet the evolving needs of the IFRS 16 lease standards for the hundreds of finance users that now rely upon it.

The ultimate test, of course, is not a single piece of paper, badge or award, but rather many satisfied customers with satisfied auditors, and that is what our team is focused on. Quite simply, in addition to the formalised testing that we initially conducted to validate our algorithms, development of a new compliance module for IFRS 16 has now been tried and tested by many companies, and their many auditors and across multiple regions, fundamentally verifying that Customers can rely on MRI LeaseEagle to simplify their IFRS 16 reporting by getting it right.

For the many companies still yet to fully digest or adopt IFRS 16, their ability to make this transition will be made significantly harder by the likelihood of inaccurate and insufficient data, as well as the need to design and build the necessary complex algorithms that these new standards require.

Without the right system, the complexity of these new standards creates an additional risk of inaccuracy for financial statements, plus the additional cost of increasing headcount. To do it a better way, the right way, why not take the opportunity to speak with your Account Manager today, and have IFRS 16 solved by June 30.

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