The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. IFRS 16 defines a lease as a contract that conveys to the lessee the right to use an asset for a period of time in exchange for consideration. As such, this right to use an asset is to be recognized on the balance sheet.
Satriun Group is currently involved in the implementation of IFRS 16 at a number of corporations, of which at several large international corporations headquartered in The Netherlands, Switzerland and France. These corporations are lessee in thousands of lease contracts; mainly for buildings, cars and equipment. The implementation of IFRS 16 is considered complex for a number of reasons.
1. Contract parameters
Lease contracts for buildings feature many parameters such as extension options, purchase options, indexation rights, service costs, and dismantling & restoration costs, to name a few. These parameters each influence the accounting treatment for individual contracts – and there can be an interesting mix of parameters to be considered. As such this makes the interpretation and implementation of IFRS 16 complex for even the most skilled and trained accountants.
2. Incremental borrowing rate
IFRS 16 requires the incremental borrowing rate to be applied to calculate the net present value of lease contracts, in case the borrowing rate is not explicitly mentioned in the contract itself. Defining the incremental borrowing rate requires a study in itself as elements such as company risk, market risk, and currency risk each need to be considered. The incremental borrowing rate furthermore should be split by lease maturity, by country/market and by asset type. In addition, the incremental borrowing rate is subject to changes over time.
IFRS 16 introduces a relatively low materiality threshold of USD 5’000 per contract. If corporations would elect to increase the materiality threshold, evidence would have to be provided for. Obtaining evidence in turn requires a materiality study based on a representative collection of lease contracts – exactly what the corporation would want to avoid from the viewpoint of administrative burden. A classical catch 22.
4. External data sources
There can be many lease cars in use at a corporation. Most corporations use multiple lessors, sometimes a lessor per country, but also per country there can be commercial relationships with multiple lessors. Lease contract information should be obtained from these lessors in order to determine the IFRS 16 accounting impact. Information needs from external sources generally cannot be influenced and controlled very easily by a corporation.
5. Subledger software readiness
Most accounting software suppliers are not yet ready to deliver an IFRS 16 compliant lease accounting subledger. Furthermore, many corporations have a diversified technological landscape with numerous accounting solutions in use. For now, the answer comes from smart CPM vendors such as CCH Tagetik, Sigma Conso and Anaplan who have delivered good lease accounting solutions – great to bypass the IFRS 16 challenge but not necessarily a permanent solution. Also Satriun Group tself developed an IFRS 16 solution on top of SAP FC to bypass the lack of IFRS 16-ready subledgers.
The impact of IFRS 16 should not be underestimated, neither in large nor in small / medium-sized enterprises – and independent of electing the full retrospective or modified retrospective approach. The standard touches upon all layers of the information pyramid: from subledger software, general ledger software, consolidation software to disclosure management software. It furthermore impacts a wide audience within the corporation both from the perspective of the accounting and reporting process as well as from the perspective of user training and knowledge management.
All in all, there are interesting IFRS 16 times ahead of us until 1 January 2019.
Casper van Leeuwen is an Executive Partner at Satriun Group, a European consultancy specialized in Corporate Performance Management and the practical application of CPM with enterprises.
Would you like to receive more information or exchange thoughts about the subject?
Please contact Casper on +31 6 13 08 49 72 and Casper.van.Leeuwen@satriun.com