IFRS 16 implementation: Are you ready?

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IFRS 16 implementation is compulsory starting 1 January 2019.

Are you ready?

That's the question 50% of listed groups have to ask themselves because they list off-balance sheet commitments and must therefore apply the new standard.

With the shelving of IAS 17, all lease contracts will now have to be restated in the consolidated accounts. As a result, the properties in question must be recorded in balance sheet assets with a liability corresponding to the financial commitment made by the company. There is also an impact on the income statement and the cash flow statement.

Certain difficulties, which must be anticipated, will arise even before doing any consolidation.

The six questions you must address now:

1. Identification:

do you know all of your lease contracts? This can be problematic even for medium-sized companies. For example, it's possible that leasing services are recorded as service contracts and are not identified as lease contracts.

2. Centralised information:

Major inventory work is required because all of your contracts aren't necessarily centralised and the people able to identify them don't necessarily work in a finance department. Don't forget to consult the legal and purchasing departments.

3. Financial reporting:

You will have to identify and assess the impact of taking the contracts into consideration starting now, without waiting for the deadline. It can be valuable to prepare your reporting, notably on your group's performance indexes, and implement an investment strategy or review the current one. It may become apparent that the impact goes beyond simple accounting or consolidation processing.

4. Software selection:

Do you have the right computer tools? Will they enable you to inventory, record, update, centralise and process your lease contracts? Can you use your consolidation software to manage transactions, store contracts and assess their impact? Can this be done in your ERP system? If so, in which one? Wouldn't a dedicated IFRS 16 software be better? These are some of the questions you have to ask yourself now to have the time to make a choice, configure the system, test it and be ready in time.

5. Training:

Don’t forget to train, as required, all of the people who will be involved or, at least, be sure that they have the information needed to help you identify and correctly process your contracts.

6. Strategic choice:

Lastly, don't underestimate the time required to prepare yourself for the standard or the impact that it will have on your organisation, your future investments and your investment policy, your financing strategy (lease or buy) and on your agency ratings. This information may be necessary, or even strategic, in the event of an IPO, buyback or other exceptional transactions.