The 1 January 2019 date of initial application for IFRS 16 has now come and gone. Depending on your organisations reporting period you are most likely going to be affected in the next six months.
Many organisations who meet the Federal Government criteria are on the way to being ready, however if your organisation is still in the process of determining if you need to comply with this new major accounting standard, then here are 9 steps to take to ready your organisation for IFRS 16.
Step 1: Determine which leases should be included
Along with step 2, step 1 is probably the most time-consuming phase of becoming IFRS 16 compliant. Various departments within your organisation may need to be involved in this step to bring all your leases together and determine which of them need to be captured to comply with the standard.
Property will of course need to be consulted on all property leases, operations for equipment leases and finance as well for other types of leases.
Under the standard, all operating leases for property, vehicle, aircraft, manufacturing and mining equipment, need to be included.
Step 2: Capturing critical lease information in a database
This is one of the most critical steps in the process of becoming IFRS 16 compliant, capturing the key information that will be needed to do the complex lease calculations.
If you are one of the few organisations that are already using a lease management system, then your organisation is already in a good position to become IFRS 16 compliant.
And if you don’t currently have a lease management system in place, you are most certainly going to need one now. No more is a spreadsheet going to be an adequate way of capturing and monitoring your lease data.
While this process can be long and laborious, you are not alone. LeaseInfo not only have a lease management system with built in IFRS 16 (AASB 16) lease calculator, we also have a data extraction tool (Accurait) and team of highly trained property and accounting experts here to help you.
Step 3: Determine systems and processes capability
So, you already have a lease management system in place, but is it capable of doing the complex calculations required under the IFRS 16 accounting standards?
It is very important at this stage to speak with your lease management system provider to ensure they are ready to go when you need to start doing the calculations.
Step 4: Consider exemptions
Under IFRS 16 there are a number of exemptions that you need to consider and decide if your organisation will exclude leases that fall under these exemptions.
- Short Term Leases: Leases with a term of 12 months or less.
- Low Value Assets: Assets that are valued at under USD $5,000.
Step 5: Determine the transition approach
The standard permits two transition approaches for existing leases that, as an organisation, you need to decide on one for all contracts, there is no ‘cherry-picking’ permitted.
Option 1: Full Retrospective
If you choose this transition approach you are required to restate all leases that are still current at the DIA date as if IFRS 16 always applied. This means going back to each lease’s commencement date and restating the liability and asset.
Option 2: Cumulative Catch-Up
This approach requires less work on set-up and is the approach most organisations will likely choose. With cumulative catch-up you have either the option to measure the liability as if IFRS 16 had been applied from lease commencement except using the current incremental borrowing rate or measure the liability as at the DIA date with adjustments for accruals and prepayments.
Step 6: Determine the discount rate
Estimating appropriate discount rates is one step where you will most likely need to speak with your accountant or an IFRS 16 specialist. It is one of the most important judgements that need to be made because it has the largest quantitative impact on the lease asset and liability valuations.
Step 7: Consider impact on financial results and position
All organisations should assess the potential impacts on its financial statements and evaluate how this accounting change may affect the position and performance of the organisation.
IFRS 16 could result in a gross-up of the balance sheet for some organisations and this could cause a deterioration of debt ratios and return on assets compared with the old way of accounting.
Step 8: Communicate the impact to affected stakeholders
Before proceeding with the judgements made for the above steps, it is important to communicate the impact that these changes to accounting standard will have on the organisation to stakeholders.
Stakeholders may need to review the changes IFRS 16 has on the balance sheet so that decisions, strategies and organisation financial standards are still being met. They may need to revise how they view the organisations financial position and performance.
Step 9: Consider revising your leasing strategy
Once everything is in place, your organisation may need to revise their strategies for leasing going forward. You can read more about what Simon Fonteyn, Managing Director of LeaseInfo thinks this new global accounting standard will have on commercial leases in Australia.
The implementation of IFRS 16 into your organisation is a challenge and should not be taken lightly. Significant advice, research and collation of information is required. The sooner you start this process, the more prepared you will be at reporting time.
LeaseInfo’s Lease Capitaliser module of our lease management system, My Portfolio is well equipped to help you manage and calculate the requirements of IFRS 16. You can also find more information about the IFRS 16 Lease Capitaliser software. Or call us on 1300 738 245 to arrange an obligation free demo.
This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.
Deloitte – Leases: A Guide to AASB 16
Deloitte – IFRS 16: Leases, tax impact
Deloitte – A guide to the incremental borrowing rate