IFRS 16 compliance presents the choice to be outstanding
One of the main regulations governing leasing arrangements is IFRS 16. In January 2016, the International Accounting Standards Board issued a new accounting standard for leases, called IFRS 16, replacing the old IAS 17 scheme
The new regulation describes the recognition, measurement, presentation and disclosure of leases for both parties to a contract. The main difference between the new mandate and its predecessor is that IFRS 16 brings most leases onto the balance sheet for reporting purposes.
Virtually all large organizations use rentals or leasing to obtain access to assets, which means they will be affected by the new standard. The IASB has imposed a deadline of January 1 of next year for businesses to have this transition completed. [The Financial Accounting Standards Board has its own version of the leasing standard, which also takes effect next year for public companies.]
The change will be significant, both in terms of the additional manual workload, such as the heavy lifting that is manual contract review, as well as repapering. This is a change not only in how organizations pursue and report on leases, but is also a fundamental shift in overall outlook, placing more assets and corresponding liabilities onto the balance sheet.
There is a real opportunity for the new regulatory requirements, which will notably change how balance sheets are represented, to also yield an epiphany in how contractual data unlocks opportunities that contribute to the balance sheet itself.
In the IFRS 16 process, organizations will likely uncover long-forgotten lease agreements, auto-renewals or other areas where money that has been bleeding can be recovered.
Ensuring leases are IFRS 16 compliant
The first step of the IFRS 16 compliance process is finding and collecting all of an organization’s leases no matter where they may reside. In some organizations leases may have already been brought together in one place, while in others they may be spread across multiple servers and file systems.
Regardless of where they may be found, it is necessary to pull specific information out of these documents to start the compliance process and that requires them to be contained in a single, searchable location.
The latest software designed for the analysis and discovery of contracts can automate a large part of the process, automatically finding leases across an entire contract corpus. Once found, a search-readable .pdf version of a lease can be created and brought into any existing contract lifecycle management system. Simultaneously, discovery and analytics systems can also be employed to extract key contract metadata, thus creating an efficiency that otherwise could not be achieved.
What are you looking for?
Working with our clients, my team and I have developed a comprehensive set of data points to aid in achieving IFRS 16 compliance.
|Data Points ||Data Points ||Data Points ||Data Points |
| Lessor ||Variable based on index or rate? ||Termination breach ||Rent review uplift to market rate |
|Start date ||If yes which index or rate? ||Termination Date ||Rent review frequency of uplifts |
|Contract duration ||If yes, what is index or rate at date of commencement? ||Termination breach penalty payment ||Rent review date |
|Initial Rent-Free Period ||If yes, what is current rate? ||Purchase option ||Contract type |
|Lease incentives ||Frequency of revaluations to latest index or rate ||Purchase Price ||Contract number |
|Lease rental ||Residual value ||Purchase option reasonably certain to be exercised ||Contract Currency |
|Frequency of rentals ||Rate implicit in lease ||Extension option ||Rental Space |
|Rental first due ||Service element in contract ||Extension option until || Address |
|Payable in advance or arrears ||Restrictions or Covenants imposed ||Rent payable under extension ||Contract Reference |
|Variable payment ||Termination ||Rent review fixed uplifts || Signed |
Many of these data points should be extracted in an automated process when a lease enters a contract discovery and analytics platform, which could account for a time savings of up to 80 percent.
Final determinations and the need for human input
What about the data points that require human input? At this stage in the process, all leases should be federated, with large segments of important data having already been automatically extracted.
Now human eyes will be required, but instead of finding, opening and reviewing documents, and then taking notes or capturing information in a spreadsheet, it should also be possible to complete this task with technology.
With contract review functionality, which is a core feature of contract analytics systems, individuals can be assigned the task of making determinations based on contractual information held in leases. That information can then be stored as metadata associated with an individual lease.
For example, by clicking a button, the reviewer can be taken to the specific part of the lease containing the information in question. This adds yet another layer of time savings and removes more than a few headaches along the way.
A consolidated lease repository, capable of extracting key terms and phrases on a self-service, ad-hoc basis, makes it possible to respond to new requirements and requests. But what really sets effective contract discovery and analytics technology apart is the ability to grow and change.
It should be possible that automatically extracted metadata fields can be changed by the end user in a process that requires no coding. Users should be able to feed the platform existing contractual language, give this new field a label, and then begin training the system to find and recognize this new field across an entire contract corpus.
Reporting and presenting the data
Another crucial function of an analytics platform for leases is the ability to create reports using pertinent contract lease information. Ideally, reports should be customizable so that any fields that have been created in the system can be easily utilized to create the reports.
With all of the information an organization needs, and the ability to quickly and effectively find and review documents, the information necessary to prove alignment with IFRS 16 should, for example, be exportable so that it may be tapped by the finance team in the final steps of compliance.
Any IFRS compliance effort should start with a plan that, from the outset, identifies the dependencies and processes necessary for success. Efficiency and precision can be purpose-built into this effort by selecting not only the right personnel, but also providing them with the crucial tools for the job which necessarily includes automation using technology for analytics and discovery of leases.
Achieving compliance by the deadline and optimizing revenue will be empowering, and it will also help to achieve that elusive ‘future-proofing’ ideal of readiness for when the next regulatory challenge appears on the horizon.