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The 3 things you need to do about IFRS 16 right now

Are you using the new lease accounting standard? These tips will help you to get on track

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Line of white company trucks parked side-by-side in docking lotThe new standard applies to leases of almost all assets—not just real estate—with only a few exceptions (Shutterstock/anek.soowannaphoom)

Even though the IFRS 16 Leases rules requiring companies to recognize most leases on their balance sheets came into effect on Jan. 1, 2019, many companies have not yet completed the work required for transition to the new standard.

In fact, according to a recent Deloitte survey of 207 participants from public and private companies in 21 countries—76 per cent of whom are from mid- and large-sized firms—as many as 34 per cent of them didn’t expect to finalize their implementation of the new standard until sometime in 2019.

And smaller companies may be even farther behind, says Linda Mezon, FCPA, FCA, CPA (MI), CGMA, chair of Canada’s Accounting Standards Board (AcSB).

“In Canada, we have a lot of small- and medium-sized companies and those are the ones who probably haven’t done the work,” says Mezon.

So what can you do if you are behind? Mezon suggests three steps you can take right now to get back on track.

1. READ THE STANDARD

While it seems obvious, some people don’t read the standard, says Mezon. They may ask their auditors, but reading the text is helpful for understnding the business implications. 

“The key is to understand how the standard defines a lease as opposed to a service agreement—to make sure you know all of the contracts you need to review,” she says.

2. COLLECT ALL AGREEMENTS

Currently, lease information may be dispersed across the organization. It must be gathered to a central location. 

“This is the aspect of implementation that most companies have found takes more time than they anticipated,” says Mezon.

Companies that have only a few leases may be fine using a spreadsheet, she says, but those with many leases may need to consider software solutions. With many vendors in the marketplace, choosing and implementing the right solution could be another time-consuming part of the process.

3. DO YOUR HOMEWORK

Mezon suggests preparers and users of financial statements educate themselves on the diverse points of view aired in meetings of the IFRS Discussion Group, whose members range from auditors to representatives from industry, government and academia. 

The AcSB established the group in 2009 to maintain a public forum for dialogue about applying IFRS standards; it meets three times a year in a public setting. Since IFRS 16 was released in 2016, the group has discussed the standard at six different meetings. Its reports and audio files provide a rich source of practical information about implementation of the new standards, as well as other IFRS topics.

A searchable database of meeting reports is available on the AcSB’s website. The group’s discussions are not official conclusions about acceptable interpretations of the standard. Only the IASB or the IFRS Interpretations Committee can make such a determination. 

WHY UNDERSTANDING IFRS 16 IS IMPORTANT 

The implications of the new standard are not limited to accounting procedures. Putting leases on the balance sheet may change the way some companies do business, particularly those who hold many leases. The new standard applies to leases of almost all assets—not just real estate—with only a few exceptions (such as “small-ticket” items and leases of 12 months or less).

Processes will change in many departments, and leaders will need to understand how IFRS 16 will affect their income statements, debt covenants and credit ratings, real estate management, remuneration and bonuses, IT systems and taxes. 

Participants in the Deloitte study identified a wide range of challenges to transition, including data collection and extraction, developing adequate skills for implementation, information technology issues and cross-departmental co-ordination of the effort.

But the organization-wide, labour-intensive project may also hold opportunities. As companies gather lease information that was previously stored in disparate locations across the organization, they gain access to data that will provide valuable insight into leasing decisions.

PUT A PLAN IN PLACE

Now’s the time to take action. CPA Canada’s webinar on the new lease accounting standard highlights the basic requirements of IFRS 16 and discusses reporting implications and implementation challenges.