The new IFRS 16 accounting standard requires organisations to record rights of use and liabilities relating to leases on the balance sheet. On the face of it, this is a straightforward requirement, and one that will enable better comparison of performance across similar business where one business owns key business assets and the other leases them. In practice, the work required to collect the necessary data, prepare the accounting assessment and implement an IT solution is easily underestimated.
I have recently helped a London headquartered FTSE250 multinational implement the new standard. They operate in over thirty countries around the world and have around 700 leases – predominantly buildings, and some vehicles and machinery. They adopted the fully retrospective method, which of course added to both the data collection and accounting assessment complexity. Our role was predominantly to implement the IT solution, but we became heavily involved in the overall project management, the data collection, and some of the accounting assessment. It was an interesting project and a challenging one, and I’ve listed out some of the key learnings below. I hope this is useful to other organisations who are yet to prepare for the new standards (according to one KPMG report there are quite a few of you)!
Implementing IFRS 16 is not just an accounting project – unless you have few enough leases to perform the accounting assessment in a spreadsheet, then implementing the IFRS 16 standard is both an IT and an accounting project. You need to structure your team accordingly. The structure that worked well for us was to have three streams:
But it’s important that the team works closely together and have overlapping skills. For example, choose IT professionals with a good accounting understanding who have taken the time to learn the standard. Choose accountants who are tech savvy and have experience of working on accounting IT projects. Choose people for the data team who will be able to understand the accounting standard in quite some depth.
The team needs a strong project manager to ensure everyone is pulling together and has everything they need, and that stakeholders are well briefed.
Typically the lease information exists in the form of lease contracts, and these contracts are in the possession of local teams. One important task is to have the local teams inspect those contracts and pull out the key information needed to perform the accounting assessment – this data needs to end up in the IFRS 16 IT solution. There are two approaches here:
If you are using option (2) then it is really important to:
The following people need to be trained in order for them to deliver the project efficiently and effectively
They need to be trained on two things:
The best suited person to do this is someone from the project’s Accounting Stream. Take training seriously, ensure training is thorough and has 100% attendance. If you don’t do this, it will affect the quality of the data you collect, and the accuracy of the calculations performed in the IT solution.
Just don’t. We didn’t try on my project but having spent 20 years in Accounting IT I can assure you that trying to do it yourself will be a lot harder than you think.
We were engaged by our customer after they had tried and failed to implement a different software package that couldn’t meet their requirements. Your accounting stream should invest significant time in defining your exact requirements of the IT solution to form the basis of your due diligence. Ensure your chosen solution meets all those requirements, and don’t just take the vendor’s word for it. Ask them to demonstrate their solution to prove out all your requirements. Take references and ensure that there are other organisations who have requirements similar to yours that have been met by the software.
A few thoughts here:
Think through the entire impact of IFRS 16 and bake this into your project. For example:
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