With the start of FY2020, the demands of IFRS16 are now real. This new financial reporting standard is now impacting many of South Africa’s best companies; however, many organisations remain under-prepared. As a result of being forced to adopt this new standard comes a number of new challenges relating to the complexity and management of lease data required by your business.
Put simply, IFRS16 has required the vast majority of a business’ leases to now be recorded on the balance sheet, as a finance lease, rather than as a simple expense line in the annual profit & loss statement. This is a significant reporting shift from the existing ‘straight lining’ of rental payments. It’s a step into the unknown for most tenants.
While primarily considered for its accounting changes, the real impacts are much greater for tenants with real estate leases. In this article we discuss how the new standards affect the way your business needs to record and manage lease data, the risks of non-compliance, and how to ensure your business is managing IFRS16 effectively.
What do the changes mean for you?
Having complete and accurate data for your real estate leases has never been more critical. For many leaseholders the management of this information is currently done via a simple spread sheet, incorporating just the current year terms and expenses for the P&L statement.
The introduction of IFRS16 however, has dramatically changed the demands of lease data for business tenants, requiring far more complex reporting data across entire lease and even option periods.
Not only has the required breadth and depth of lease data increased significantly but also the retention requirements of that data. Rather than reporting each lease or fiscal year in isolation, under IFRS16 a complex set of data algorithms are required to be performed for every reporting period across the entire term(s) for every lease held.
As a part of IFRS16 there are also new statutory requirements for businesses to make future determinations on matters such as the intended take-up of option periods, financing rates and capital expenditure, all to be included within an audit scope.
In working with dozens of companies already making the transition to IFRS16, LeaseEagle Solutions Manager, Anthony Corbino has witnessed firsthand that in addition to the extra effort required the impacts on balance sheets, EBITDA, Debt Ratios and real estate KPIs can be significant, and cannot be put at risk or left to chance.
“Whilst almost all leases are subject to IFRS16, it is generally accepted that for most company’s real estate represents as much as 90% of the reporting effort required, and a similar level of the financial materiality for financial statements”, Anthony observed.
“Furthermore, I have seen that the impact on some customers’ balance sheets is as high as 30%, so it can be very significant.”
The risks of leaving it too late
At the core of the new IFRS16 standards is a push for companies to provide stakeholders with greater visibility into their financial position and future commitments.
By its very definition, ‘shining the light’ on this area of a business requires the sourcing of additional data and business records. Should a business not be able to capture and manage the necessary information correctly then it will simply not be compliant with the current International Accounting Standards, or be at further risk for auditing, governance or assurance practices.
Put more simply, it will be impossible for basic spread sheets to be able to support IFRS16 compliance reporting, due to a lack of applicable data, an inability to perform the complex calculations, and insufficient audit controls.
In Anthony’s view, “Without the right information systems in place, achieving IFRS16 compliance, if not impossible, requires at least one additional senior resource.”
“Most companies I’ve seen adopt IFRS16 have seriously underestimated their data requirements, expecting the information to already be captured, and in most cases it just isn’t. In my view, deploying built-for-purpose software that automatically integrates the management of source lease data, with the generation of the necessary reporting calculations is essential in being able to achieve ongoing compliance with the IFRS16 standards.”
“Further, complexities within the required calculations are extensive, and the assumption that a simple DCF model will suffice for real estate leases is generally flawed. Impacts such as variable adjustments to lease payments, multiple lease terms, the impacts of operational decisions and the absence of any intrinsic discount or financing rate are all reasons why IFRS16 reporting for real estate leases is significantly more complicated than for say vehicles or equipment.”
Don’t wait, lease software can do the hard work for you
Given that the transition to IFRS16 is already in full effect, it’s important that the required changes are already being implemented – waiting any longer is simply delaying the inevitable and could even be too late.
As highlighted, the criticality of having complete and accurate data is paramount. More importantly, it is not just about the data required to establish an initial position upon transition, but more so about the multiple data points required to conduct subsequent measurements for each future reporting period.
Lease management software can do the hard work for you by offering a solution that seamlessly combines the necessary data management functions as well as the decision making and audit controls required to ensure your finance team can deliver for the business going forward.
For those companies impacted, non-compliance is simply not an option, and the right solution will deliver your team the capabilities and efficiencies they need to be able to effectively adopt IFRS16 into their already demanding workload.
A powerful solution
LeaseEagle is an innovative, lease management solution, built specifically for tenants, and trusted by customers globally. Its capabilities and customisations deliver the reporting, analysis and data management that organisations require to meet the ever-changing demands of business today.
And more importantly, LeaseEagle is IFRS16 compliant – an integrated lease management solution for tenants to manage the data, decisions and reporting requirements of the new IFRS16 lease accounting standards.
“Every time a business has to prepare financial reports it now must be able to document all of its lease commitments on the balance sheet, and also understand any movements within their portfolio since the last reporting period – the need to be able to define these lease commitments is not just a once off event, but a requirement every single time.”, Anthony notes.
“Through the integration of a customer’s core real estate data, LeaseEagle does this automatically, solving probably the greatest challenge that businesses will face in adopting IFRS16.”
However, the migration of lease data into the core LeaseEagle system is simplified by using our advanced data importing tools.
With the lease data component solved, LeaseEagle can then deliver the functionality to record all necessary business assumptions as well as the required computations for reporting to both the balance sheet and the profit & loss statement, all IFRS16 and audit compliant.