As the January 1st 2019 deadline looms for IFRS16, we take a look at how you can get your organisation ready – and have some fun in the process.
OK…perhaps not fun, but it will be cathartic and it’s a great opportunity to dig out all that old paperwork and sort through those lease details. And then scan and archive them for easy retrieval. As an accountant working in IT, I keep an eye on all new legislation and standards coming along. It strikes me that IFRS16 has been somewhat overshadowed by GDPR. We now have just six months to the end of the year to ensure that we’re compliant for 1st January 2019. Not long at all.
What is IFRS16?
It is the new accounting standard that replaces IAS17. The idea is to ensure that there is a consistent accounting treatment for all assets used within the business – so rather than just expensing the costs to the profit and loss statement each year (e.g. of leasing a machine or vehicle), it is shown on the balance sheet along with all its related costs. It is therefore similar to how it would be treated if you had bought it and taken ownership of the asset (as in a finance lease). Therefore, it is clear that this affects your operating leases, with a few exceptions.
Where are most organisations?
In my experience, most organisations track their operating leases on a spreadsheet or similar stand-alone system. If this is you, then you do have a list of your leases. If not, then you’ll need to go back to source documents - and probably identify all your lease suppliers and sort though the most recent 12-months of accounts payable payments as a cross-check. But it’s all achievable – although the clock is ticking.
How do I get compliant?
Well, if you’re an SAP customer running SAP ERP such as ECC, then my recommendation is to evaluate the functionality provided by SAP. While there are several specialist cloud-based solutions that have sprung up recently, these are likely to present you with more integration challenges – thus prolonging any deployment time and therefore cost. One of the key differentiators of the SAP solution for IFRS16 is that it is enabling part of the current ERP with a small add-on. This should enable a much quicker implementation and the main time-consuming part of implementing a 3rd party (namely integration) is already there.
So, if you’re in the fortunate position of running SAP ERP, then it’s a 4-step process from an operational perspective:
- Contact SAP and confirm what’s needed (if anything) to enable the additional module.
- Sort through all your lease data, analyse all your active leases, and fill in the data preparation sheet with all the relevant information. Don’t forget that you can elect to exempt low value assets (i.e. less than $5,000). This is the task that takes the time.
- Upload the data to SAP (Start with a few and test that the results are what you expect).
- Update your procedures to ensure that the required information is captured on all new leases, and is then entered into your ERP solution as part of the day-to-day finance process.
If you are a normal business (and no, I’m not going to define “normal”), then you may be aiming for a 3-month project, plus some testing of your new processes. So, as long as you don’t leave it too late, you still have time – but not much!
Are there any other benefits of this process?
1. You will have centralised all your lease information and possibly conducted a comprehensive audit. You may well find some assets that you are paying for, but don’t currently have. One of my customers with a wide range of customer outlets across Europe has already identified significant savings – as well as future savings when leases are up for renewal.
2. By ensuring that you have all your leased assets properly accounted for on your asset register, you are reducing risk and increasing the financial control across the business.
3. By introducing a new end-to-end process in a single solution (without interfaces) then the process for new leases is simply built into the process. This also allows you to centralise other practices such as: calculating investment and construction costs, space and facilities management, maintenance and repair – as well as energy and safety.
4. This then becomes the foundation for a full Property Lifecycle Management solution
As stated above, contact your local SAP office and start the process. Paul Lloyd-Smith, Sales Executive at SAP UKI understands the challenges that customers are facing to consolidate their lease information, to compile a single source of the truth and to also implement a technology that enables swift and accurate computations and reporting of the lease landscape to IFRS16 requirements.
Paul is working with Bluefin and his clients here in the UK to help them utilise part of their existing ERP to achieve the goals before the end of the year to enable testing of systems prior to the go live date of Jan 2019.
Or, contact the experts here at Bluefin
and we’d be more than happy to share our experiences. Just don’t delay!