Major changes related to lease accounting go into effect in less than 18 months. And yet, according to the July 6 Accounting Today article “Companies Grapple with Leasing Standards Complications,” approximately 80% of companies have not yet begun transitioning to the new standard.
The new standards, which will apply to most public companies with lease portfolios, will have significant impact on finance, as well as business owners and stakeholders throughout the enterprise.
According to a Deloitte partner quoted in the article, too many finance teams are underestimating the time that will likely be required for the comprehensive data collection required by the new lease accounting standards.
“The accounting itself isn’t that complicated, but they underestimate how difficult it will be to implement the new lease standards just because of the sheer amount of data that they’re going to have to gather in order to comply. As we’ve done these projects, we’ve learned that for the more complicated lease contracts that you have, you can need up to 75 different data points just to determine how to account for your lease. Multiply that by 1,000 or 2,000 leases, and the amount of data that you have to gather is probably not going to work on spreadsheets anymore, likely what most companies have been doing for lease accounting.”
If you’re just beginning the transition to IFRS 16, and/or its U.S. counterpart ASC 842, be prepared for managing major changes in these areas:
People. Compliance with this standard will require ongoing cooperation from virtually all departments and business units of an enterprise. All leased assets – vehicles, equipment, buildings, computers – must be analyzed and accounted for. Finance should be prepared to educate the stakeholders owning and managing such leases about the new standards, the importance of compliance, and the lease-related information you’ll need. Processes. Virtually any and all processes related to lease management and accounting will be affected by the new regulations. Processes related to lease inventory management, data collection and ongoing maintenance, and internal controls will likely need to be re-evaluated and modified. Technology. Few companies have comprehensive lease management systems. As the article above points out, most currently rely on spreadsheets. However, the granular level of detail soon to be required will make it virtually impossible for any company with a large lease portfolio to effectively meet requirements using spreadsheets. Such companies will need an enhanced financial system that can handle the data collection, calculation, reporting, and disclosures required by the new standard.
We advise companies yet to begin the transition to IFRS 16 or ASC 842 to evaluate technology options as part of a holistic approach to a more effective lease strategy that can better inform and support business decisions. In addition to addressing all areas of compliance, an optimal solution should also fit into your current technology ecosystem without major disruption.
For those of you familiar with CCH Tagetik’s focus on meeting the wide range of financial compliance standards, you may already know that we offer a comprehensive solution for IFRS 16/ASC 842, as well as solutions for revenue accounting (IFRS 15 and ASC 606), financial instruments (IFRS 9), and insurance contracts (IFRS 17). These solutions all share the criteria we believe are important for progressive finance, including: a single source of truth, a contract data repository, easy integration with ETLs for easy importing and exporting, built-in calculations and finance intelligence, workflow management and complete data auditability. Furthermore, given our past experience with Solvency II and in meeting the complex reporting and disclosure requirements of global organizations, you can be sure our lease accounting solution is bullet proof and tested.
For more information on preparation considerations for IFRS 16 and ASC 842 and for details on CCH Tagetik’s solution, see the following resources:
Lease accounting data sheet and two-minute demo Lease accounting recorded webinar IFRS 16 e-book