Blog Post – As most of you working with financial accounting know, the IFRS 16 standard is just around the corner. This means that from 1. January 2019 onwards you will need to show all your lease and rent agreements on the balance sheet.
This is a welcomed change, because from now on, accounting treats all financing options equally. Meaning that, when a company is thinking of purchasing an asset, there are basically three ways to finance the purchase;
with borrowed money and
to lease the asset.
Before the new standard only the first two options had an impact on the balance. Now, this third option, will come to the same starting line.
So, what are the practical implications for companies? First, you have to gather all your leases into one pile and then determine which ones, should be taken into the standard. Then comes the decision as to how to convert your discounted cashflows into liability and asset and lease costs into loan repayment, interest cost and depreciation.
Based on my practical experience of working with both leases and treasury management systems, below I have listed 11 of the most important things you need take into consideration when selecting a system to manage your leases in the IFRS 16 era.
Easy to get started
To make your life easy you should expect that you are able to upload all your current leases into the system via excel spreadsheet.
Intuitive user interface
There are many ways to build a system to manage financial instruments. The best are the ones where you have as much information as possible in one place. So, you don’t have to click between many places to manage your leases.Leasing instrument view ZenTreasury Leasing (IFRS 16) Module
Clear and searchable lease register
To make your life easy you really need a system where you can search a specific lease with many types of information.Leasing portfolio ZenTreasury Leasing (IFRS 16) Module
You will probably find out that some of your leases are nominated in other currency than your reporting currency. In this case you need to be able convert all your leaseflows in to your reporting currency. This means also that the system must have the ability to valuate your liabilities in your reporting currency at any point of time. Note! All changes that affect your liability balance need to be taken correctly into the currency calculation.
Different depreciation terms
In some cases, when you know that leased asset will stay on your balance sheet after the lease term you probably want to depreciate the asset into zero at some other term than the lease term. The system should allow you to do this.
It is very important that the system is able to calculate the accrued interests. This is especially important for lease agreements where the payment schedule is something other than monthly payments.
Changes during lease term
All changes that have an impact into the leases discounted cashflows will trigger a lease change where the discount calculations start all over again. There are basically four types of changes increase in term or scope and decrease in term and scope. It is very important that you have all these scenarios in your system and that you also understand how to make the different kind of changes. Note that every time you are decreasing your lease you will also have a P&L gain/loss (usually gain) from the difference between the change in liability and asset, your system needs to able produce these figures also.
Keep track of the history
Many systems can create you the new liability and asset values from a change, but keep in mind that you also need to have the history data always available if you need to look back. It is essential that you are able to run your accounting reports from whatever date you wish also from history.
Audit trail is something that you must have. Basically, the system needs to save all changes to your lease agreements and audit trail reports need to be easily run out of the system.Audit trail ZenTreasury Leasing (IFRS 16) Module
It is very convenient to you if you can have all your lease agreements attached to your lease instrument, so everything is in one place.
Alerts on maturing leases
If a system can alert you of maturing lease beforehand, it will make your life a lot easier, so you don’t have to have a manual bookkeeping of all leases.
So, when you are selecting a system to manage your lease under the new IFRS 16 standard keep these things on your mind. And, if you want to make your life a bit easier just request a demo and I can show you a system that does all this and some more.