Brembo treasury uses IFRS 16 compliance to create robust automatic links with accounts payable
IFRS 16 came into force on 1st January 2019. This accounting principle effectively eliminates the difference between operating and finance leases and all contracts should now be accounted on the balance sheet.
On 1st January 2019, all the lease contracts that Brembo had in force with a residual lifetime greater than 12 months and a fair value (the value of the leased asset at the beginning of its life) higher than US$5,000 were affected.
Group treasury implemented and coordinated centrally on compliance. The real complexity is connected with two flows that follow different dynamics: the account payable (AP) management of invoices issued by lessor against lessee’s purchase order (PO)/contract; and the lease plans calculated according to IFRS 16 principles.
The implementation of IFRS 16 requires traceability between the leasing contracts, the related invoices, and the IFRS 16 accounting records, in order to perform a reconciliation between these elements.
The project focused on enabling the ERP system to allow Brembo to manage IFRS 16 from an accounting perspective and guarantee traceability by reducing manual management.
Every asset under IFRS 16 is now managed in the ERP, with the creation of a specific ‘agreement card’ containing data related to each asset leased. Every card is characterised by a unique identifier code, created by the system. This identifier is used to mark the PO and invoices related to each item, creating a link between elements for easier reconciliation.
The agreement cards are approved through a specific workflow before being submitted to an IFRS 16 tool, integrated within the ERP, which generates related accounting records (which are also marked by a relevant unique identifier code).
The IFRS 16 agreement card Workflow is:
Submitting user > Buyer > Responsible Manager > Accounting Department > Treasury Department
After approval by the responsible manager, the system generates a PO. Treasury as the last step in the workflow, is charged with exporting agreement cards into the ‘TOOL IFRS 16’.
TOOL IFRS 16 creates accounting opening records to post the ROU (right of use of a fixed asset), the related financial debt, booking transactions of amortisation of financial debt and also accrual of interests and calculation of ROU depreciation. Amortisation of financial debt is managed using a GL transitory account.
Booking of the invoices in the ERP will be performed by an AP specialist, and an automatic write-off of the cost on the same transitory account mentioned above, will be generated by the system.
A specific reconciliation tool, developed in the ERP, provides accounting reconciliation between the rent invoice booked and written off in the transitory account, and the accounting records generated by TOOL IFRS 16 connected with amortisation of financial debt also using the transitory account. Reconciliation rules consider as key fields the unique identifier code, amount and date.
Best practice and innovation
The solution creates a strong link between AP management and the financial management of lease plans. It removes manual reconciliations between two flows, thanks to the unique identifier code written on all transactions connected with specific assets captured under IFRS 16 principles.
The transitory account is where reconciliation occurs. This implementation therefore focused on: automation, traceability, easy reconciliation, and the reduction of manual management. A strong automated link between AP and treasury/finance environments now allows Brembo to mitigate the impact of IFRS 16.
Qualitative: traceability of flows and easy reconciliation; low manual processing.
Quantitative: automation of processes allows management of IFRS 16 with no need to increase FTEs.