11 things to consider when implementing a system to manage your leases in the IFRS 16 era.

Blog Post – As most of you working with financial accounting know, the IFRS 16 standard is just around the corner. This means that as of the 1. January 2019 you will need to show all your lease and rental agreements on the balance sheet.

This is a welcome change as now accounting treats all financing options equally. Which means that when a company is thinking of purchasing an asset there are basically three ways to finance the purchase:

  1. with cash,

  2. with borrowed money or

  3. 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.

Practical Implications

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 to take into consideration when selecting a system to manage your leases in the IFRS 16 era.

  1. Easy to get started

    You should expect that you are able to upload all your current leases into the system via excel spreadsheet.

  2. Intuitive user interface

    There are many ways to build a system to manage financial instruments. The best ones have as much information as possible in one place to simplify lease management.

    UI Leasing instrument view ZenTreasury Leasing (IFRS 16) Module
  3. Clear and searchable lease register

    You really need a system where you can search specific leases using many different criteria.

    Portfolio Leasing portfolio ZenTreasury Leasing (IFRS 16) Module
  4. Currency conversion

    You will probably find that some of your leases are nominated in other currency than your reporting currency. In this case you need to be able to convert all your leaseflows in to your reporting currency. This means the system must have the ability to valuate your liabilities in your reporting currency at any point in time. Nb! All changes that affect your liability balance need to be taken correctly into the currency calculation.

  5. Different depreciation terms

    In some cases, when you know that a leased asset will stay on your balance sheet after the lease term, you probably want to depreciate the asset to zero on some other term than the lease term. The system should allow you to do this.

  6. Accrued interests

    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.

  7. Changes during lease term

    All changes that have an impact on 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 kinds 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.

  8. Keep track of the history

    Many systems can create new liability and asset values from a change, but keep in mind that you also need to have the historical data readily available. It is essential that you are able to run your accounting reports from whatever date in history you wish.

  9. Audit trail

    Audit trail is essential; the system needs to save all changes to your lease agreements and easily create audit trail reports from the system.

    Audit trail ZenTreasury Leasing (IFRS 16) Module
  10. Document archive

    It would be very beneficial to have all your lease agreements attached to your lease instrument, so that everything is in one place.

  11. Alerts on maturing leases

    To avoid manual bookkeeping it would be advantageous for the system to have automatic or customisable alerts on maturing leases.

So, when you are selecting a system to manage your lease under the new IFRS 16 standard, keep these things in your mind. And, if you want to make your life a little bit easier, just request a demo and I can show you a system that does all this and more.