What should treasurers be doing?
Naturally, the first step for treasurers is to understand the requirements under the new leases standards. “Compared with the existing accounting standard on leases, there is detailed guidance under IFRS 16 on the definition of a lease, identifying and separating lease and non-lease components, recognition and measurement of lease liability, and the right-of-use asset on initial and subsequent accounting, as well as presentation and disclosure requirements,” says Chan.
“Achieving greater visibility into companies’ leasing programmes can bring opportunities for treasurers to identify unnecessary costs.”
He adds that the second step should be to evaluate how the new leases standard would impact the financial statements both of the entity and of its peers, including the impact on financial ratios and credit profile. “Corporate treasurers also need to ensure that banks and other lenders understand the impact of IFRS 16,” he adds, pointing out that it may be necessary to negotiate revised covenants with lenders if the impact from the implementation of IFRS 16 will be significant.
The final step, Chan says, should be to evaluate how the new leases standard would impact the financial statements of the entity’s customers, and to update the entity’s model and process for evaluating the creditworthiness of its customers.
Overcoming the challenges
Treasurers should be aware of the challenges that may arise while adopting the new standard. Chan says that implementing IFRS 16 may require a closer look at the new standard’s transition provisions. “For example, the standard allows for transition fully retrospectively or using a modified retrospective approach (with various practical expedients) that does not recast prior years,” he explains. “Therefore, comparing financial statements may require carefully considering the transition-related disclosures to understand the impact of the new leases standard across a sector.”
Keeler observes that data capture is considered to be the largest challenge, noting that corporations will need to capture up to 100 data fields per lease, including information on payments, expenses and end-of-term options.
This may be not be a straightforward exercise, as Keeler explains: “At many large organisations, this data is scattered around systems, spreadsheets and file cabinets in different business units and cost centres around the world,” he says. “Some of the information may not even exist in the corporation’s records.”
“Corporate treasurers also need to ensure that banks and other lenders understand the impact of IFRS 16.”
As a result, Keeler says that the project team is unlikely to focus on establishing long-term processes or controls, such as a lease versus buy analysis, or on optimising the use of capital and maintaining lessor relationships. “It will be up to treasury to explain the importance of these policies to the leasing programme and the company as a whole,” he notes.
According to Keeler, this could include pointing out that a lease versus buy analysis control “not only helps optimise the use of capital, but also serves as a data capture point which can be used to prove completeness of lease data in an audit”.
Positive lessor relationships
Finally, maintaining positive relationships with lessors can provide another way of tracking down lease data. Whereas many companies do not have access to all the data fields they need to properly complete the accounting under the new standard, Keeler points out that lessors “have built their business off tracking this information”. He adds, “having a strong relationship with the lessors will allow the treasury group to reach out, should there be a question about a lease or a missing data field.”