A new tool from EY aims to give corporates a helping hand preparing for the forthcoming IFRS 16 lease accounting rules.
On 1st January 2019 the new IFRS 16 lease accounting standards will come into force. The new standards are set to bring more than US$2.8trn of assets globally on the balance sheet for IFRS and US GAAP reporting firms. In doing so it will create a major upheaval for all affected businesses. The impact of the new rules will also have ripple effects on expense profiles and financial KPIs, such as leverage ratios and EBITDA.
Businesses will be challenged by the changes in the definition of a lease, the recognition and measurement and the disclosure requirements that IFRS 16 brings. This means that organisations must have a clear visibility over all their lease agreements, which could range from 500 to 250,000 contracts, to ensure they have captured all the required data to be able to apply the standards.
According to Detmar Ordemann, Global FAAS Innovation Leader at EY, corporates are making progress in becoming compliant with the rules. But for now they are mainly concerning themselves with the accounting impact and external financing aspects.
“As the conversation continues, companies will quickly realise that the new standard impacts many of their systems, processes and overall internal organisation,” warns Ordemann. “The contract data aspect is one of the areas where organisations are currently struggling – whether it is through data capturing, extraction, collection, cleansing, or sorting, which is required to assess the accounting impact. They require assistance in reducing the long manual processes to identify the affected leases and extract the relevant contract data.”
It is this understanding that is behind EY’s new Lease Reviewer solution, which aims to help companies attain a better structured oversight over all their leases. It does this by leveraging artificial intelligence (AI) to convert unstructured lease contracts into structured data.
“The tool acts as a smart assistant, helping corporates to identify and extract information such as the lease commencement data, payment amounts, renewal and termination options that are required for transitioning to the new standards and for future lease accounting,” explains Ordemann. “It can help corporates improve the efficiency and accuracy in assessing a high number of complex lease contracts, pinpointing the critical components.”
The tool also creates a data file that can be uploaded into EY’s other proprietary lease software used to evaluate the financial statement implications and disclosures at transition and beyond.
Ordemann is keen to stress that the tool is not a silver bullet. “While we believe technology is most needed to cope with the volumes of data, an accounting change project is not an excuse to buy a piece of software”. He compels corporates to think about how the new rules will impact other departments in their business.
“Corporate treasury, for instance will play a key role not only in revisiting company-leasing strategies, but managing lease capital expenditure, and reporting and communicating KPIs such as debt covenants to stakeholders,” he says. “And it is here that the Lease Reviewer solution can help by giving companies the ability to easily revisit and evaluate their lease strategy, deciding whether to lease or buy more in the future, impacting the cash flow needs of the company.”
Time to start
When it comes to being ready for the 1st January 2019 deadline, time is of the essence. Even for a business that doesn’t have many leasing contracts, these might be complex and therefore more difficult to prepare for compliance. Ordemann believes this may be the case for companies in the retail, telecommunications and transportation sectors.
Companies should now be asking if they have appropriate resources such as systems, processes and internal organisational capacity to extract, cleanse and process the lease data required for the new standard.
“From our experience, typically the whole implementation of IFRS 16 takes one year,” says Ordemann. “It typically takes three months to identify objectives and perform project diagnostics. Then there is another four-month period spent designing implementation before a three-month implementation period. There really is no time to waste.”