Today, the biggest check in the list of compliance is the implementation of the IFR-16. An idea to recognize the right to use in the balance sheet can be a challenging aspect for implementing IFRS-16. Companies and accountants are still in the grey area to implement the IFRS 16 on account of limited integration within the accounting framework and extended reliance on the manual processes. The challenge is not implementation itself but optimization of the systems, processes, integration, and requirement of extended automation within the leases modules of ERPs.
The IFRS 16 is about teamwork across different departments, including IT, purchase, finance, and operations. Strong coordination and in-depth understanding can help in the successful implementation of the IFRS-16. The departmental coordination is required to tackle the challenges of data collection, thorough operational arrangement analysis for related documentation, and understanding of the impact on other accounting standards due to the adoption of IFRS-16. Further, some operational issues like lack of the resource and communication gaps may add to the challenge.
The challenge of data collection for IFRS-16 implementation further speeds up if the organization is decentralized and dispersed in a wider area. That’s specifically true for multinationals as a large volume of leasing documents seems to be maintained by the local management. That’s not the full stop; you get the contract to get the terms and can’t read because it’s a foreign language contract. Things are even more complicated when you start to get the data.
Qualitative and quantitative aspects
An extension in the disclosure requirement for IFRS-16 has expanded the required data to comply with an accounting standard. For instance, a lessor must disclose quantitative and qualitative aspects of the leasing activity maturity analysis, lease payment receivables, reconciliations of the discounted lease payments to investment in the lease.
Scope of implementation
The problem is that IFRS-16 is not confined to the leasing of non-current assets. It requires a thorough analysis of the contracts to identify embedded lease elements within different arrangements, including supply contracts, data center agreements, manufacturing arrangements, and outsourcing agreements. Yes, it can be more than a challenge to identify an embedded element of the lease and then get a valuation. Further, expectations of the lease terms, expected utility period, and other judgmental variables. It makes the process difficult and required extensive research and understanding of the entity’s overall processes.
IFRS and understanding
The problem of the resource is universal for companies around the globe. There might be a gap in understanding IFRS requirements, leading to financial reporting problems and overconsumption of the time during an external audit. It’s not only the resource requirement for accounting to understand finance-related aspects but several departments providing data to be valued and merged with certain assumptions.
Developing a centralized, comprehensive, integrated, and highly automated lease implementation and reporting system seems to help adequately implement the IFRS-16. If there are handful numbers of lease agreements and embedded lease elements, few controls with limited monitoring should suffice the implementation process.
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