By Nick Nesbitt, managing director, Tagetik UK
Like it or not, IFRS 16 is coming on January 1 2019. Though it seems like we’ve only just rung in 2018, the deadline will be looming large before we know it. There are countless reasons why preparing for IFRS 16 gets put off – competing priorities at group level and lack of resources – to name just two. And let’s be honest, UK PLCs don’t tend to prepare early to comply with new regulations which, on the surface, provide no intrinsic value.
But here’s the stick: getting IFRS 16 compliant is not something your team can afford to leave to the last minute. Preparation is labour-intensive and needs significant attention to detail. Building in enough time to locate all your relevant leases is only the first step. Team members then need to pore through those legal agreements to extract data on things like subletting, break clauses, expiry dates and many other characteristics.
Tracking down all your lease agreements and the relevant data points within them is only half the battle. The other half is assessing the impact of IFRS 16 and taking remedial action. Investors will be looking at how IFRS 16 affects your key financial measures like EBITDA and ROCE when comparing you to competitors. IFRS 16 will definitely affect your credit ratings and borrowing costs. This is why the most proactive companies are building in enough time to iron out the kinks in the process and adjust their leasing strategies and agreements if necessary. This may include deciding to exit certain leasing agreements.
Many finance teams will conclude that it makes sense to evaluate software applications and modules designed to help comply with IFRS 16 and see how the legislation will impact corporate performance. Spreadsheets, which many companies think they can use to capture IFRS 16 data, are dangerously error-prone and are notoriously difficult to tie in with your financial systems. Equally unsuited to the task are legacy ERP applications, which will likely take more time and expense to tailor than you have at this stage in the game.
Fortunately there are better options. Lease management software is one way to go, but standalone systems that aren’t tied into corporate performance management software won’t provide that crucial impact analysis. The best option for companies just getting started now are corporate performance management software packages that provide an IFRS 16 module. Look for a cloud-based system that requires minimal setup and training so you and your team can hit the ground running.
A $23 billion global services company, operating in 39 countries uses the cloud version of our software for IFRS 16 compliance reporting and as a centralised repository for more than 14,000 property and automotive lease contracts. This level of lease volume would be incredibly difficult and risky to manage using spreadsheets or other legacy systems not designed for this purpose.
There’s no escaping the fact that IFRS 16 will initially affect your assets and liabilities, making some financial measures look considerably less rosy. Once the hard work is completed, however, the added visibility will give some upside. Understanding the full extent of your lease exposure can provide insights to drive better decision making, improve your negotiating power and help you prevent unexpected surprises. On a practical level, setting up a system to automate IFRS compliance will have been a valuable exercise. The really heavy lifting only needs to take place once.
Most importantly however, if you have been proactive in preparing for and complying with IFRS 16 you will be able to confidently articulate the legislation’s impact on corporate performance during your next earnings call. This will position you well against competitors.
The bottom line: starting now gives you time to track down your data, revise your leasing strategy if necessary, and will reduce your and your teams’ stress levels.