What has changed?
On 13 January 2016 the IASB published the changes relating to the accounting management of finance leases.
The new standard, IFRS 16 Leases, which will come into force on 1 January 2019, requires that lessees must account for all their contracts in a single accounting treatment, bringing almost all lease – rental contracts into the balance sheet and therefore defining the right of use with evidence of present and future liabilities. The changes will affect approximately 50% of the companies subject to audit and in particular the listed companies and will have a significant impact on companies that currently use the IFRS to represent the management of leases and leasing contracts.
What are the new implications?
Leasing is a significant and alternative form of financing for many organisations. It provides companies with a means to obtain the right to use an asset without incurring a large initial cost associated with purchasing the asset outright. Almost every company that uses leasing as a form of financing will be significantly affected by the new standard.
In addition to bringing assets and liabilities onto the balance sheet, the new standard will also impact financial ratios, performance and other financial metrics. The IASB estimates that by bringing the management of these contracts onto the balance sheet we will have an increase in profits before taxes, taxes, depreciation and amortization (EBITDA) of at least 10%.
Additionally, there is also complexity surrounding the new definition of a lease that determines whether a lease is a lease in the first place. Under the new standard, a lease is defined as “a contract or part of a contract that conveys the right to use an asset for a certain period of time in exchange for consideration.” The new definition, in practice, may mean that contracts formally recognized as leasing – rental are now recognized as services and vice versa.
The practical implications of the new standards provide lessees with the incentive and opportunity to benefit from the transition to the new standard by improving operational leasing management decisions. Departmental transformations, changes to IT infrastructure, processes and applications are just some of the considerations that key decision makers in administration and finance, legal departments, general services, Asset – Property and Facility offices and purchasing departments will have to make and which will have long-lasting effects on all leasing activities of a company.
Even though the time horizon of January 1, 2019 seems a long way off, businesses should start preparing now. In fact, dealing with the volume of leasing contracts and rental agreements in place together with the budgetary implications and the new corporate organizational procedures realistically means that a company has a time frame of at least 12 months to identify and analyze each lease affected by the new standard.
How can we help you prepare?
Achieving full compliance with the new standards, together with the complexity of applying the guidelines associated with the business lines, is complex and challenging. Our analysis services and the software we provide help companies overcome this challenge in various ways:
INITIAL ANALYSIS
Our team of experts have been monitoring the new rules since they were first proposed and introduced and have the knowledge and expertise to help you better understand the changes, identify how they will affect your business and what will need to be done to achieve compliance.
DATA CONSOLIDATION
We can help consolidate details and documentation onto a data repository. From here extracting data and information necessary for the budget will be easy. With Easy Pro, it will be possible to perform all the data extractions to carry out all the complex calculations, maintaining full compliance with what has been processed.
PORTFOLIO ANALYSIS
With the changes to contract management and the full adaptation to the definition of a rental contract, the renegotiation of certain rental contracts and the evaluation of existing contracts will become an easy and natural step. Our experts can help you assess the implications and threats associated with your portfolio and identify potential optimization and cost saving opportunities.
BUDGET MANAGEMENT AND ACCOUNTING SOFTWARE
To meet all requirements, many companies will need to implement new control measures, systems, processes and software. Easy Pro has been developed with the complexities of rental management in mind and can provide all the tools needed to facilitate compliance.