As the next annual close is rapidly approaching, so is IFRS 16 reporting and the struggles that come with it. If IFRS applies to your organisation, it is highly likely that the IFRS 16 standards will affect you.
Ever since IFRS 16 was introduced in 2016 and came into effect on the first of January 2019, you might have struggled with calculating the correct impact on your balance sheet and P&L. Especially in cases where the calculations have been done manually in Excel, it must have been nearly impossible to calculate the correct impact on complex contracts. Therefore, it might lead you to the conclusion that you need to automate the calculations or even integrate these in your standard reporting process. Perhaps you even want to be able to Plan or Forecast potential lease impacts.
What are the key points to keep in mind when automating your IFRS 16 reporting process?
First, make sure that the project members know the IFRS 16 requirements, so that they are familiar with the terminology and rules. This might seem like a given, but it is vital for a quick and clean implementation. If the knowledge is lacking within your organisation, you might consider looking for help from specialised advisors because it is a complex matter.
Second, make sure your lease data is complete. This sounds obvious, but the variety and number of leases within your organisation might surprise you. Make sure to define the ownership of data as well, since part of this data is operational data and not fully integrated with the financial systems. To avoid manual data gathering for each different contract you have, sometimes lease providers offer the option to deliver data out of their systems. This data could be automatically uploaded in your reporting systems after passing the required data validations. For example, contract data needs to include all relevant dates, amounts, extra cost and incentives, intervals and renewal/termination/purchase options. Determining the right data points is essential for automating your processes.
Once all the data is gathered, you will need to determine the accounting rules that you want to apply. As the IFRS 16 standard provides a framework, rules need to be set defining all required journal entries, e.g. for tax bookings, lease transfers, dismantling costs and initial direct costs.
Another important part of determining the IFRS 16 impact on your financial statements is the set of market factors that you will apply. FX rates is the easiest to apply. Secondly, not all lease contracts have an implicit interest rate, therefore the discount rates should be determined to have the correct incremental borrowing rates. Next to that there might be an indexation that needs to be applied. This could differ per country, market or region. Therefore, identifying the right indexation information might require some efforts and internal alignment.
Last but not least, it's essential to align different parties involved within the organisation. The IFRS 16 impact assessment needs commitment from different teams across the organisation. For example, the Tax department, Procurement, Property team, line managers and local Finance will need to deliver input. Next to that, the local finance departments will have different needs in output reports, which does not always align with the reporting needs on group level.
To ensure that the IFRS 16 automation lands well within the organisation, it is recommended to establish a broad project team, including capacity for change management.
There is a lot of information to gather to ensure the right IFRS 16 impact, but once it is automated it will be a small recurring maintenance task. Based on our experience, the identification of the correct data and market factors requires time and ownership, but also a strong collaboration between several departments. With the correct lease engine and approach, it is all worth it!