The deadline for IFRS 16/ASC 842, the new lease accounting standards, is approaching fast, with public companies needing to be compliant for reporting periods after 15th December 2018 (ASC 842) or 1st January 2019 (IFRS 16.) Private companies have an extra year's grace for ASC 842 compliance. The new directive will change the way leases, both finance and operating, are accounted for, and hopefully lead to improved financial transparency.
For many companies this is a daunting task, as leases are often scattered across different business lines, countries, departments, systems and desk drawers. What’s clear is that for all but the smallest organizations, any efforts to develop manual processes to cope with the new rules is just not going to suffice. One of our customers calculated that the new rules will require 66 times more journal entries than were previously required. This could equate to a huge increase in operational burden and for some, to billions of dollars being added to the balance sheet. Without a robust solution this additional workload will challenge any finance team.
With challenges often come opportunities. Some companies will review their leasing strategy, look to update and automate their business and financial processes whilst achieving compliance. Companies are looking to technology vendors to support them through this lease accounting change and help them future proof their accounting.
Recently, Alan Berkley, Senior Finance Specialist at Aptitude Software, was asked to present at an event hosted by Bloomberg Tax and Deloitte & Touch, focused on the upcoming leasing standards. One of the areas in the presentation that seemed to resonate most with the audience were his tips on choosing a technology vendor to support the transition to compliance. We've summarized some of those tips here in the hope that it will provide a useful guide to many others who are now approaching this regulation with haste.
Three things to consider when choosing a technology vendor for IFRS 16/ASC 842 compliance:
1. Accountancy problem? Accountancy solution.
It’s no secret that the IFRS 16/ASC 842 regulation brings with it complexities. Becoming compliant requires the unification of leasing, subleasing, lessee and lessor data from various sources, silos and business entities. Not only that but records and data may currently be reported in different formats and in different currencies. Dealing with these sorts of complexities takes a specialist. Hence, we advise if you have an accounting problem – use an accounting solution. Select a software solution that is purpose-built to address the complex accounting requirements of the standard rather than a generalist solution that requires significant customization and workarounds.
Approach the supplier shortlist with a list of questions and requirements based on your number of entities, business lines, countries, leases etc. Some solutions are better able to handle large lease volumes and complexity than others. Does your organization have sub-lease or embedded lease structures? If so you will need to make sure the supplier has the capability to support this area too. The more you know about what you need, the quicker you will be able to discount suppliers who cannot meet your requirements early on, saving you time in the process.
2. Plan for the future
Although the deadline is approaching fast, that doesn’t mean you should chose a software solution just to solve this issue. Think about the life of your lease portfolio. What will your requirements be when they mature? In choosing a software vendor, don’t just think about the problem you need to fix right now. Think about how your business might change in the next few years.
Where will your business be in the next 8 years? New countries? Any M&A activity? How will emerging technologies affect your lease accounting? Will driverless car hire be considered leasing? Will hiring of virtual staff be considered leasing? How can you ensure the chosen solution is robust, agile and flexible enough to adapt with you? Talk to vendors – make sure they have their product roadmaps firmly pointed to the future.
3. Time is short
The time to act is now. At Aptitude Software, we are finding that a lot of the companies we are talking to are delaying kicking off the process until they have all their lease data centralized and standardized. However, we advise you to get started on the vendor selection process soon as possible. Many vendors may even be able to help you with the data collection and standardization process. Selecting a vendor and resourcing a project will take time so by doing these things in parallel you can ensure you are moving toward the end goal without wasting time. On this note – some countries and organizations are struggling to find qualified and experienced resource to deliver projects. When talking to potential vendors, be sure they can deliver the project in the time required. Pay attention to their implementation partner relationships which are usually the key to being able to deliver projects at scale.
With just a matter of months to comply, accounting change expertise, a packaged product and a proven ability to deliver are key factors to take into account.
Non-compliance is not an option. The ripple effect of non-compliance could impact your business and for some that impact could be severe. In February, KPMG reported that just 15% of companies had completed the process to implement the new accounting. Deloitte noted in March that only 21% of companies it surveyed were “prepared” for the standard. It takes a company between four and 12 months to complete the project.
The time to choose your vendor and embark on your IFRS 16 / ASC 842 compliance journey is now.
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