IFRS 16 has resulted in increasingly complex lease accounting. Implementing and maintaining compliance with the new standard is a complicated process that involves new processes, policies, and systems.
The compliance deadline has arrived, but if recent research is any indication, many companies are still lagging behind in their transition.
Some of those delays may be caused by using the wrong tool. Whether you’re relying on Excel, chose a software vendor that didn’t deliver on what they promised, or used a system that only got you through the initial transition, you need a solution that will help you stay compliant for the long term.
Key features to look for in IFRS 16 software solutions
The system you choose should come with all the features you need for compliance out of the box. There are many companies out there offering lease accounting solutions, but their basic packages only get you part of the way toward compliance.
For long-term compliance, you need to implement a system with features that meet these requirements:
IFRS 16 calls for significant changes to disclosures than were previously required. Some of the changes include additions to right-of-use (ROU) assets, total cash outflow of leases, and interest expense on lease liabilities. A solid IFRS 16 software solution should be configured to provide the reports you need to meet those requirements with ease.
KPMG offers an in-depth guide on IFRS 16 disclosures. Read it here.
Bringing the majority of your leases on the balance sheet puts the spotlight on your controls around lease accounting. It’s important that you choose a software solution that supports your internal controls.
Features such as data entry validation (where one person enters a lease and another has to approve the new information) and role-based access (which allows you to control how much access users have) prevent inaccurate information from being introduced into the system.
To save you time and ensure your accuracy, your lease accounting software should be built with the complexities of IFRS 16 in mind. Practical expedient elections, borrowing rate charts, and useful life charts are just a few of the data intelligence features that you’ll need.
For a more comprehensive listing of the features needed for compliance, download our comparison guide:
What to look for in an IFRS 16 software vendor
It goes without saying, but the vendor you choose for IFRS 16 should offer you upfront assurances that they’re well-versed in the standard. While IFRS 16 is aligned with ASC 842 in many ways, there are some key differences.
Your software provider should have in-house accountants who have a deep understanding of the nuances of IFRS 16. For example, there are distinct differences in how lease classification is determined and addressed under each standard.
Under ASC 842, lease classification is determined using a five-part test. There are two types of leases – finance and operating – and both go on the balance sheet, with the classification of a lease impacting how it’s treated.
Under IFRS 16, all leases are finance leases. As such, there is a single treatment for all leases that go on the balance sheet. This is perhaps the biggest difference between the two standards and a capable software provider should be able to address it correctly.
Additional benefits of using the right IFRS 16 tool
A well-rounded IFRS 16-compliant software offers you benefits well beyond compliance. Here’s an example. How many times has your department been notified that you missed a payment for a lease? Or have you ever found out that you overpaid on a lease because you weren’t notified of a rent abatement?
What if you had a tool that sent automated alerts to prevent you from encountering those issues? A robust lease accounting tool can send you alerts via email when an important date is coming up.
Another non-compliance benefit is the ability to grant access to your colleagues outside of the accounting department. Real Estate, IT, and other departments that deal with leases can efficiently access the documents that they need through a searchable, cloud-based system. Imagine how much time that will save when compared to searching through folders on a server or hard copy files in a filing cabinet.
The only way to enjoy these benefits is to invest in a lease accounting system that is purpose-built for lease accounting and backed by accountants with in-depth knowledge of IFRS 16.
More IFRS 16 lease accounting articles
If you enjoyed this blog, leave a comment or read at some of our other blogs on accounting for lease under IFRS 16:
- New Lease Accounting Standards: A Summary of FASB ASC 842 and IFRS 16 Changes
- Practical Expedients for ASC 842 and IFRS 16 in Plain English
- Incremental Borrowing Rate and Discount Rate for ASC 842 and IFRS 16 Explained
- Restatement of Financial Statements under IFRS 16 and ASC 842: What’s the Impact to Public Companies?
- How to Prepare for an Audit of Your Financial Statements after Transitioning to IFRS 16 and ASC 842
- IFRS 16 vs. US GAAP Lease Accounting: What Are the Differences?