Blog March 12, 2020

IFRS 16 Leases – 5 lessons learned from the Private Sector

By Gavin Maze

IFRS 16 Leases

IFRS 16 leases represent the biggest change to lease accounting in decades and will have a significant impact on financial reporting in the Public sector from 1st April 2022.

What lessons can we learn from the Private sector since their transition to IFRS 16 on 1st January 2019?

In this blog, we look at five areas of best practice to mitigate risky, costly and time consuming IFRS 16 lease projects.

Lesson 1: Invest in the right software

Many private sector companies have started trying to manage IFRS 16 leases via Excel or ‘IFRS 16 calculators’ only to run adrift. Challenges in terms of process, limited automation, security and double handling of spreadsheets and finance systems leads to data integrity problems and overall lack of control.

Investing in lease management and accounting technology ensures that the business-as-usual treatment of leases is managed effectively whilst automatically driving the asset and liability calculations and disclosure reporting for the finance team. If implemented correctly, the technology should meet and then exceed the return of investment over time.

Lesson 2: Have a robust data management strategy

The data required for managing IFRS 16 leases is usually housed in multiple sources and structures. Equally, leases will vary in complexity and these factors can exacerbate the challenge of building sustainable data integrity for meeting IFRS 16 lease accounting standards. Private sector customers who took advantage of AI lease abstraction tools and integrated these with their chosen lease accounting software saw a significant uptick in accuracy. By tasking these tools to manage changes to asset and liabilities on an ongoing basis, organisations avoided having to undertake follow-up data capture projects year on year, which is costly and time consuming.

Lesson 3: This is wider than just a finance issue

What started as a purely finance-based project in the private sector quickly became a wider remit involving process transformation for most core departments. Finance quickly recognised that they needed to actively involve other departments who have touch points during a contract’s lease lifecycle. Departments ranging from Real Estate, FM, IT, Procurement, Legal, and Finance may all play a role. Successful transitions understood the importance of end-to-end processes and controls required to efficiently manage the new IFRS 16 lease accounting standards on an ongoing basis.

Lesson 4: Build the right team for success

Successful transitions in the private sector treated this as they would approach any other business-critical project. They started by assigning a Project Manager who had all the tools and experience to deliver a successful outcome. There should be new policies, procedures and governance applied to support this process which needs to be documented and managed on an ongoing basis. Approaching this in the correct way mitigates risk and needless expense further down the line.

Lesson 5: Keep auditors updated and involved

The ramifications of failing a government audit can be wide-ranging, depending on the circumstances. Examples may extend beyond embarrassment for the individuals, their bosses and the office as jobs can be put at risk. Reputational damage may have long-term impacts, additional expense is likely to be incurred for remediating these failures, and closer scrutiny by the auditor for future audits is an expected consequence.

Many of our clients in the private sector would recommend keeping auditors updated on technology you plan to use in managing obligations for IFRS 16 leases, actively involving them during the procurement process. This allows their perspective on the suitability or indeed any perceived limitations of the technology and adds value to ensuring that entities make informed decisions in selecting the right solution to be IFRS 16 compliant now and for the future.

The government’s application of IFRS 16 is detailed in the government financial reporting manual (FReM) and local authorities under CIPFA.

If you would like to find out more about our Lease Management, Lease Accounting and AI Powered lease abstraction tools, please get in touch today.

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