Getting ready for IFRS 16? You may need to review your existing processes

  • Companies may consider maintaining the status quo, such as using typical spreadsheet accounting. Unfortunately, this solution is likely to be a painful one if your organisation has a large volume of leases (jn excess of 100) and lease complexity exists.

  • Accounting firms do provide bolt-on or standalone solutions that can align internal systems. However, these can often be inefficient, costly and cumbersome to manage over the long term.

  • If you’re an SAP customer, there’s good news. SAP has developed an IFRS 16 solution using the Real Estate Contract in SAP Flexible Real Estate Management (RE-FX) – and it’s already proving to be revolutionary for lease reporting and IFRS 16 compliance.

The arrival of the new accounting standard IFRS 16 Leases (AASB 16 being the Australian equivalent standard) – may seem sudden. In fact, the standard, which comes into effect in January 2019, was released as a standard in 2016. A lot of organisations have postponed their path to compliance with IFRS16 due to the introduction of other standards and/or merger and acquisition activity. The change is understandably causing concern with many finance leaders who feel overwhelmed by both its complexity and imminence.

What are the options when working towards IFRS 16 compliance?

There are a couple of options companies may be considering. The first option is to continue working the same way as before – which is often via spreadsheet accounting. Unfortunately, this solution is likely to be a painful one, on a number of grounds.

Reason one: Tracking lease activities through spreadsheets is inadequate when handling large amounts of information accurately. This process fails to provide:

  • Collaboration and communication between the lease administrator, fixed assets administrator and finance

  • Consistent management of leases across complex and varied business units

  • Automated financial postings arising from new-standard-compliant lease transactions.

Reason two: Spreadsheets are complex, time-consuming and reliant on the absence of individual error. They often rely on the in-depth knowledge and accuracy of one or few individuals with holiday and sick leave entitlements – what happens when they are not around?

Reason three: Whilst spreadsheet reporting may have been adequate to calculate the initial impact of IFRS 16 on the Balance Sheet, it is not a workable solution going forward, as, IFRS 16 requires calculations to occur on an ongoing basis. It won’t be possible to work with spreadsheets if there are numerous leases and the following changes will need to be included:

  • Changes need to be reflected to lease payments as a result of Consumer Price Indices or Market Review.

  • Changes to the lease term – reducing or increasing the lease term

  • Discount Rate Changes

  • Changes as a result of changes in scope (increase or decrease in the space let)

  • Accurately reflect lease payments made to the lessor

Reason four: Spreadsheets are an audit risk, as they provide no audit trail, and can easily be changed.

The second option companies may be considering is using a bespoke solution provided by their accounting firm. Accounting firms often have bolt-on or standalone solutions, which can be connected to internal systems. The downside of this option is that there will be another solution for companies to manage in terms of extra licensing, additional support costs and overall investment . It also encourages a potential longer-term dependency on accounting firms for a process that could be more effectively managed and administered in-house.

SAP customers have a third option

If you’re already an SAP customer, there’s good news for you. SAP has developed an IFRS 16 solution using the Real Estate Contract in SAP Flexible Real Estate Management (RE-FX). This solution allows organisations to seamlessly manage both property and non-property leases.

If you’re running SAP already, it’s integrated within your current environment and can be implemented in both SAP ECC and SAP S/4HANA. All you need to do from a system perspective is to undertake project to switch on the functionality. With the SAP solution, you’ll discover the following benefits.

  1. SAP Flexible Real Estate streamlines the portfolio of assets and offers centralised repository of contract data. It also triggers financial postings derived from valuation calculation in real time into Finance and Fixed Assets.
  2. It enables Finance to evaluate the impact of each lease on financial statements and generate valuation postings in accordance with IFRS 16/AASB 16 and ACS842. With the present value of the lease calculated by the system, a Right of Use Asset and Lease Liability is created automatically. With subsequent postings, the system recognises monthly depreciation of the Right of Use Asset in addition to the lease payment and interest portion of the payment. Any changes made to the lease due to changes in CPI or Market Reviews will immediately revalue the leases providing users with visibility over any changes and posting made.
  3. Furthermore, SAP Flexible Real Estate Management’s real-time valuation of Finance Leases and integration with SAP Financials minimises the risk of data inaccuracy and non-compliance. The solution calculates the lease contracts using the new rules, helping to ensure compliance with the IFRS 16 / AASB 16 accounting standards.

In a nutshell, SAP enables you to streamline your business processes all in one place, and in an auditable, robust, integrated system.

Working with the right partner

The right SAP Services partner can help you implement SAP’s RE-FX solution and expedite your compliance to IFRS 16 quickly and seamlessly. But choosing the right partner is key. In doing so, you need to focus on two things: Does the prospective partner understand the industry? And, does the prospective partner have a proven track record in providing a similar solution to other organisations?

In choosing Bluleader as your SAP partner to implement the above solution, you will work with a an accredited SAP Gold Services Partner. Our RE-FX experts hold over 20 years’ SAP experience (predominantly in Real Estate), and an excellent grasp of the requirements of IFRS 16 working with Asia Pacific and European based clients. Bluleader are currently delivering multiple IFRS 16 compliance projects spanning industries including Retail, Oil, Explosives, Insurance, Telecommunications, FMCG and Services.

Interested in finding out more about how Bluleader can help? Get in touch today. Alternatively, view our video or take our 3 minute self-assessment to help determine your organisation’s readiness for the arrival of IFRS 16.

By | 2018-07-23T05:05:05+00:00 July 23rd, 2018|Finance, IFRS, SAP|