Jackie Shelton, RVP UKI, Anaplan
In today’s business world, accounting changes approach rapidly. IFRS 16, an accounting standard effective on January 1, 2019, will soon modify the methods that businesses can use to manage their leasing contracts. It stands to impact nearly every business, most notably those that rent onsite premises, such as retailers and hoteliers, and companies that lease transportation, equipment, and patent portfolios.
The standard is intended to provide investors with greater visibility into business performance across different companies. It will affect accounting processes in several ways, as it eliminates nearly all off-balance-sheet accounting for lessees and impacts commonly used financial metrics such as earnings before interest, tax, depreciation, and amortization (EBITDA) and gearing ratios. Additionally, it could affect borrowing costs, credit ratings, and company perceptions from stakeholders.
With the deadline now ominously looming around the corner, businesses are working with a limited amount of time to ensure that future accounting processes will meet compliance. For companies addressing these changes through spreadsheets and aging technology, this can result in a lengthy, burdensome, and complex undertaking—one that could potentially miss the deadline. Fortunately, agile, cloud-based technologies can step in to help organizations meet end-of-year compliance before the CFO feels the pressure to hit the panic button.
The time for change is here
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Although the IFRS 16 standard doesn’t go into effect until early 2019, it is important that organizations proactively and thoroughly understand its changes and impacts on business processes. Many companies currently use spreadsheets to manage and account for leases; however, the complexity of the new standard can quickly turn this process into an inefficient, error-prone, and costly approach.
Alternatively, an asset management system or the contract management modules of a core enterprise resource planning system can be used to help manage these new calculations. These types of technologies are not only more expensive than spreadsheets, but they are notoriously difficult to build, maintain, and connect to leasing plans.
To determine the ideal approach to IFRS 16 compliance, there are several considerations that can help businesses identify where process or technology changes are needed, such as:
- How does the business handle intercompany subleases?
- How does the business reconcile anticipated lease payments to actual lease payments?
- How does the business upload lease contract information into the IFRS 16 solution?
- Does the business prepare comparative data and reporting year-over-year?
The most effective solution for complying with the IFRS 16 standard will be inherently collaborative, simple to use, and capable of accommodating complex financial and accounting components. Agile, cloud-based technology can help organizations adjust nimbly and accurately to the multifaceted changes of IFRS 16.
Finding compliance in the cloud
As IFRS 16 brings about a need to solve for new financial complexities such as lease and non-lease components and tax-related considerations, cloud-based technology can help provide businesses with greater transparency and visibility into performance data—and can do so with greater speed and efficiency than traditional systems.
Unlike legacy software, most cloud-based solutions have built specific applications for compliance. This makes the rollout of the technology easy and streamlined, with minimal effort to comply with the deadline. These comprehensive applications are simple to use, providing businesses with immediate access to workflows and analytical capabilities without any cumbersome customizations.
As time begins to run dry on the impending compliance deadline, companies relying on spreadsheets and legacy software are under enormous pressure to implement an effective solution in time. Companies that turn to agile tools will not only better accommodate the changes in their current leases but will also be well-equipped to implement any new ones in the future.