IFRS 16 and ASC 842 have dramatically changed the way that leases are recorded on a company’s balance sheet. For some, this could mean up to 66x more journal entries and will equate to trillions of dollars being added to companies’ balance sheets globally. The first step towards compliance is understanding the standard.
When first starting an IFRS 16 and ASC 842 project it's important to unpack the standard and investigate how your business is going to be impacted. Like an iceberg, there is often much more lurking below the surface.
From our research we have found that for large, multinational companies in particular, a shift to the new leasing standard (IFRS 16 / ASC 842) will cause unforeseen impact. Some of the industries that we've found to have complex lease accounting include logistics, retail, telecoms, CPG, oil and gas, manufacturing, technology and financial services.
We've created a 'Leaseberg Index' which illuminates the accounting complexity in each of these sectors.
In 2016, when we first asked finance teams how they were handling the new leasing compliance standards, many believed there was little to no impact. As time went on, finance teams began to realize there were many hidden aspects to leasing that they had not considered. Akin to an iceberg, we called this situation the 'Leaseberg'
Look at the number of leases in your portfolio. Take note of multi-component leases which will increase transaction (should this be 'accounting') volumes and complexity.
Complex arrangements like subleases, intercompany and embedded leases can increase accounting complexity, volumes and systems requirements.
While the two standards look very similar, the correct application of IFRS 16 and ASC 842 accounting will lead to different balance sheet numbers.
Identifying and centralising disparate lease data is a significant challenge of the standard.
The new lease accounting standards will make financial statements more transparent and comparable by requiring organizations to report operating lease liabilities on the balance sheet. But will the lease accounting standards have other consequences?
We believe the standards may change CFO behavior in the following ways:
1. Drive more scrutiny around lease vs. buy decisions.
Read the full blog post for more details.
"It sounds very simple to put your operating leases on the balance sheet, but it's actually very complex. In order to do that the standard requires a number of very complex calculations and a number of judgments within those calculations to actually get the numbers on the financial statements. That's a huge challenge for finance functions."
-Lucy Newman, Partner, Deloitte
Download the PDF for a more in-depth look at some of the specific lease accounting challenges that might affect your company as a result of IFRS 16 and ASC 842.
Get a clear and concise understanding of complex lease types to look out for, the importance of selecting the right transition methods, the challenges posed by multi-GAAP reporting and the subtle differences in the standards.
Planning is where the bulk of the work is for most companies. Making sure you are aware and prepared for the complexity of your project is essential to ensuring a smooth project. In this section we help you translate the standard into action.
Top things to consider:
After looking at hundreds of lease accounting standard RFPs, we've put together a list of the most frequently required product capabilities.
Look like your organization's list? Discover Aptitude's lease accounting software.
1. Accountancy problem? Accountancy solution: Becoming compliant requires the unification of lease, sublease, lessee and lessor data from various sources, silos and business entities. Addressing these sorts of complexities requires an accounting specialist.
2. Plan for the future: Try to think beyond the problem you need to fix right now. Where will your business be in the next 8 years? Will you expand into new countries? New products? New business models?
3. Don't delay: Many companies delay kicking off the selection process until they have all their lease data centralized and standardized. Select a vendor in parallel to doing your data capture. Vendors may even be able to help you with the data collection and standardization process. The clock is ticking!
Download the Aptitude Lease Accounting Engine (ALAE) product fact sheet to learn how it addresses compliance challenges, fits with existing systems and delivers business benefits.
Every project is different and has its own peculiar challenges. To implement a lease accounting project successfully it's imperative that the solution you choose can handle your specific needs and can support you along the way.
Over the last several years Aptitude Software has worked with global companies to implement software solutions to drive new standards governing revenue recognition (IFRS 15 / ASC 606), leasing (IFRS 16 / ASC 842), financial instruments (IFRS 9), and insurance contracts (IFRS 17.)
And we’ve learned a thing or two along the way, including the importance of 'speaking the language of finance'.
Bringing project accelerators, best practices, deep accounting expertise and years of experience, they help organizations achieve their goals. From compliance to complete finance transformation, our teams have delivered it all.
Read our case study to see how we are helping a global technology leader achieve leasing compliance.
What's the bottom line? With all the moving parts associated with an IFRS 16 or ASC 842 project it can be difficult to get an idea of the costs and timelines.
Based on hundreds of prospect interactions and our project delivery experience, we've boiled down the core influencing factors into 10 questions. From your answers we will be able to give you an estimate for how much a solution might cost and how long it will likely take to implement.
After answering the questions we will give you a call within 24 hours (usually sooner) to walk you through our estimation of your project timelines and costs. We are more than happy to discuss how each aspect of your project might affect the outcome.
Rest assured your data will not be shared, and will only be used for the purposes of this estimation.
Take a tour of our latest finance application, the Aptitude Lease Accounting Engine. The product centralizes lessee and lessor accounting in one place and provides both IFRS 16 and ASC 842 compliance with all the finance controls required.
Our weekly demo takes place on Wednesdays at 4pm GMT