IFRS 16 lease accounting requirements

Companies with large lease portfolios have a big task ahead of them to identify, compile and evaluate their lease contracts before the International Accounting Standards Board's IFRS 16 requirements come into effect on 1 January 2019. The new standards, which will replace the earlier IAS 17 leasing standard, demand extensive reporting detail that cannot be conjured up overnight.

In the past, many companies have treated operating leases for machinery, cars, real estate, IT equipment and more as expenses. But under IFRS 16, any lease longer than a year will require a right-of-use asset and a corresponding obligation on the balance sheet, which could affect debt-to- equity ratios and, ultimately, stock prices. To avoid the downside - and benefit from the upside of increased transparency - companies should start preparing for what could be a mammoth task of data collection.

CFOs need a system like CCH Tagetik because most companies do not have a central repository to store and evaluate the accounting impact of leasing contracts. Our system can store that data.

Additional reporting requirement

"IFRS 16 is another regulation that enables companies to become more transparent and, therefore, more comparable with other companies based on international accounting standards, and that is what investors want in order to evaluate a company. But for companies, it is another burden to add to the heavy load of reporting requirements," says Marco van der Kooij, Benelux and Nordic managing director at Wolters Kluwer CCH Tagetik.

CCH Tagetik, which is part of Wolters Kluwer Tax & Accounting, is a leader in global performance-management software solutions. Van der Kooij has been with the company since 2009, and previously had a broad range of experience in software implementation for large companies in the Netherlands. He is now in charge of CCH Tagetik's go-to-market strategy for IFRS.

CCH Tagetik's software provides simplicity through cloud-based solutions that enable companies to unify financial and operational planning; shorten the consolidation and close process; immediately analyse results; model and compare the full financial statement impact of business scenarios, and adjust strategic plans. The result is a streamlined process that can ensure swift and reliable compliance.

"Companies face a huge effort to collect data on their leasing contracts and then must ensure that the data is correct before the reporting process can start, but there are gains in terms of transparency to investors," Van der Kooij says. "We have some implementations of our software running now and we are finding that many companies did not know how many leasing contracts they had, or how these would impact their reporting processes. The other benefit, therefore, is that at the corporate and operational levels, they get to know the real business impact of these leases."

CCH Tagetik's tailored solution for IFRS

Van der Kooij is referring to implementations of the Lease Accounting Solution that forms part of CCH Tagetik's IFRS software portfolio. It is a cloud-based, end-to-end solution that provides a centralised repository for a company's lease contracts, as well as automated adjustment calculations, workflow and process controls, and detailed audit trails. The solution, which can also be used for ASC 842 reporting as required by companies doing business in the US, provides a single source of truth on leasing contracts to ensure a quick, efficient and reliable compliance process.

"The impact of the new standard will depend on the situation of each individual company. IFRS 16 has thresholds that mean contracts of less than 12 months, and below $5,000 in value, are exempt, although some companies are trying to raise those thresholds to make fewer contracts material to the business in terms of what they have to report," Van der Kooij says. "CFOs need a system like CCH Tagetik, because most companies do not have a central repository to store and evaluate the accounting impact of leasing contracts. Our system can store that data, along with a PDF of the contract to enable its parameters to be checked, and it is an out-of-the-box solution for all calculations. It can then provide all of the adjustments that are needed to feed that data into the general ledger or country systems."

One of our lead clients has 14,000 contracts, and the data was prepared with our input file and then automated, so that the whole process could be done very quickly.

He adds, "It is very easy to collect the data, perform the calculations and export it. We provide a fixed-format input file that is prepared exactly for how the data needs to be entered into the system. You can clearly see the fields that are needed to input each contract. One of our lead clients has 14,000 contracts, and the data was prepared with our input file and then automated, so that the whole process could be done very quickly."

Fast input and automation

The client in question is Randstad Holding NV, the world's second-largest HR services provider, which operates in 39 countries and has around 36,000 employees. The company is using CCH Tagetik's IFRS 16 Lease Accounting Solution for compliance reporting, and as a centralised repository for more than 14,000 property and automotive lease contracts. The company was one of CCH Tagetik's first customers to move to the cloud and is now in the vanguard of clients to use its solution for IFRS compliance, with the advice of CCH Tagetik Strategic Partner PwC.

"The speed of data collection and transparency are the key advantages of using the system," says Van der Kooij. "Because we have implemented the regulations into the system, we have also created the evaluation criteria and checks to guarantee a level of quality for the data. For example, we check that the end date of the lease is not before the start date, which sounds simple, but is important. Complex contracts may need to be entered or adjusted manually, but this can be done through input forms, where all of the necessary items can be clearly seen."

Van der Kooij adds, "We are one of the front runners in this field. We understand that the solution needs to support the company at group level for external reporting, and at the operating level, where business entities provide information to the group."

Time is of the essence

The case of Randstad is an exceptional one, given the huge number of leases that the company has had to bring into its central data repository to ensure compliance with IFRS 16. Most companies will have far fewer leases to review, but it is nevertheless essential that they start to look at the implications of the new standards sooner rather than later. Randstad's compliance may be much greater than most, but it began its work on tackling the issue a year ago.

"Companies should be proactive about compliance. We find that they often underestimate the effort that is required to prepare all of the data before technical implementation of the solution. That preparatory phase is what takes the time, especially if you have thousands of contracts to review. There are vendors out there that provide machine learning applications that can scan the contracts and derive the relevant information, but we find that many companies do not even know how many contracts they have. That means that they only know the size of the job when they start it," says Van der Kooij.

He also looks ahead to IFRS 17, which establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts, and he urges a similarly proactive approach to assessing and preparing the data.

"For IFRS 16, because we already have implementations under way, we have the experience and know-how to see our clients through the process. We have also identified some of the challenges that arise with projects of this kind, so we can help businesses to prepare. The key thing is to begin the process early," he says.