Welcome to the second edition of LeaseInfo®’s ongoing blog segment dedicated to answering your FAQ’s when it comes to IFRS/AASB16. Last time we started with the basics and explored the steps your business needed to take to become IFRS/AASB16 compliant.
Today we will be answering the most common problem our clients report to us when completing their AASB 16 (IFRS 16) software implementations; managing the variance between their leases’ contractual values and the invoiced amount for rent.
Causes of Variance
Variances between contractual and invoice amounts is a common occurrence and can happen for a number of reasons, especially where a lessee may be managing a portfolio of leases.
The largest culprit is inaccurate CPI calculations; this can be as a result of the lessee or lessor’s miscalculation. CPI adjustments are calculated using the figures from the previous quarter and can be found on the Australian Bureau of Statistics or if you are a subscriber to My Portfolio, our lease management system, you have access to the Public CPI Table within the system.
Double checking CPI calculations is crucial in avoiding variations between contractual and invoice values. Your lease may require different CPI adjustment methods e.g. Average of the eight Capital Cities Index or all Groups in each State Index.
These CPI differences are why it is critical to always refer back to the lease.
Missing a market rent review or fixed rent increase can also result in variations. It sounds simple but when you are dealing with lots of leases it is very easy to miss these key dates.
Lastly, rent review dates can be recorded incorrectly resulting in rent increases being applied too soon or too late. Incorrect review dates can create compounding variations over many years and may only become apparent many years later, when doing an audit.
Dates that start mid-way through a lease create significant challenges.
All these facets are simple, however, when applied over a large lease portfolio can become difficult to find and compound into large variations.
When accounting for variances between contractual amounts and the amounts found on invoices, the IFRS/AASB16 standard states that the contractual value takes precedent over the invoice amount and therefore the invoiced amount should be corrected to match that of the contract.
There are only two circumstances in which the contract value should be changed to match the invoice:
- As a result of a Market Rent Review
- Inputting a change in CPI
In both of these circumstances the contractual value is undefined until the relevant information (market rent or CPI) is determined.
If the contractual agreement has been checked and its value has been calculated using the correct market rent and/or CPI, and the amount invoiced does not match that of the lease then the variation must be disputed. This should be raised with the landlord(s) and a reconciliation agreed to which either reduces or increases the rent to match the contract.
How to Minimise Variances
Using a lease management software system can greatly reduce the risk of incorrect contractual values and some can automatically detect and calculate changes between the amount invoiced by the lessor and the contractual value shown on the lease.
Lease management software stores all your lease agreements and allows for automatic adjustment of key details such as depreciation, CPI and fixed rent.
Reminders can be set to make sure key dates such as a market rent reviews or option exercise windows are never missed and special conditions around your lease can be easily added or tracked over time.
Finally, a lease management system can track your invoices through an accounts payable module which semi-automates the process to ensure payments match contract values, so that issues do not occur.
IFRS accounting can be highly complex and lease management and calculation software can save countless hours, reduce errors, save money and make sure your lease portfolio is up to date and easily accessible.
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.