IFRS 16 is now in place – but many businesses were worryingly ill-prepared before, so how many are ready now? Stephen Burns, director and head of asset finance advisory at Link Market Services, assesses the current position.

IFRS 16, a new global lease accounting standard, has been in place since 1 January 2019, and will impact every industry that uses leasing to obtain access to assets. But despite having three years’ warning, far too many businesses were worryingly ill-prepared in the months leading up to it.

In November, an International Accounting Standards Board report stated that 23% of organisations still had not started to assess the impact of the change, and 52% were only in the assessment phase – with most in the earlier stages of their efforts.

GLOBAL CHANGE

With the legislation now in place and the standards requiring significant behavioural change, it is vital that businesses have solutions in place.

In short, IFRS 16 requires businesses to account for their leases under a single accounting treatment, bringing almost all leases ‘on balance sheet’ and recognising a right-of-use asset and a lease liability.

It is a global change, and the new regulations will have a substantial impact on companies and organisations that currently use IFRS to report on their leasing.

The primary objective of the change is to make it easier for investors, credit rating agencies and key stakeholders to compare companies and have a clearer picture of off-balance-sheet lease obligations.

Virtually every industry uses leasing and will feel the impact of IFRS 16. However, the types and volumes of assets that they lease, as well as the terms and structures of these lease agreements, will differ significantly.

For example, a professional services firm leases cars and corporate offices, a utilities company leases power plants, a retailer leases retail stores, a telecoms entity leases fibre-optic cables and cell towers, and an airline leases aircraft – all with very different characteristics, contractual payment liabilities, terms, regulatory frameworks, pricing, risks and economics.

As a result, different industries will have different implications when the new leases standard is adopted.

But the sheer volume of leases and lease contracts involved, along with the associated balance-sheet implications, means it could realistically take an organisation 12 months to locate and analyse every lease affected by the new standard.

IFRS 16 requires significant behavioural transformation in how leases are accounted for, as while leases might previously have been put away in a dusty drawer and forgotten about, they are now central to the accounting process.

FAILURE TO COMPLY

The impact of failing to comply with the new accounting standard could be severe: if a company fails to comply with IFRS 16, their accounts will be deemed to be unqualified.
Although this comes with no direct financial penalties, it can impact their credit agreements, lending covenants, future ability to source credit lines and, in the case of listed companies, seriously impact their share price.

It also comes at a time when businesses’ reporting is under threat, with the big four audit firms – EY, Deloitte, PwC and KPMG – facing multiple reviews into the sector. Audits are an essential part of a company’s efficiency; moreover they are vital to reassuring shareholders and prospective investors that a company’s accounts can be trusted. Satisfying the requirements of IFRS 16 is vital to a successful audit.

For organisations that are not yet fully ready for the new accounting standards, or not yet confident that all rules are adhered to, one option is to utilise the expertise of third parties specifically designed to overcome these challenges.

Tools have been developed to help organisations prepare and adhere to IFRS 16, and third parties have expertise in helping clients in the process of gathering and storing data, updating processes, contracts, and understanding the tax considerations of the changes.

For example, our team of experts have been monitoring the changes since they were first announced, and hold the knowledge and expertise required to help companies better understand the changes, identify how they will impact their business and what they will need to do to achieve compliance.

They can also support in consolidating an entire organisation’s lease details and documentation onto one single database.

LONG-TERM EFFECTS

It is also important to think about the long-term effects of the new standards. Incorporating technology and tools will deliver benefits well beyond simply satisfying auditors.

For example, specialist lease accounting software, such as LS2, combines the critical components of both lease management and lease accounting.

Authorised users can access centralised records, including documents, notes, processes, notice alerts, reminders and accounting reports, from anywhere in the world, at any time.

It also includes automatic alerts with good lead times for making necessary decisions and is agile and flexible, ready for unlimited growth and change. The IFRS 16 deadline has already been and gone. If they have not already done so, businesses need to look for solutions.