Is it really essential to use dedicated software to implement IFRS 16?

By Bruno Leblanc, EMEA Managing Director Planning, Sigma Conso

According to the KPMG study (1) published in January 2019, only 3% of companies worldwide had completed their IFRS 16 project by the effective date of this standard.
Does this mean that the standard is so simple that there is no urgency and that groups have no need to resort to a software solution?
What we observe for some of our clients and even more so for the companies we are currently in discussion with, is the “underestimation” of the impact of IFRS 16.
The principle of this standard is in fact rather simple: companies must value leases in order to recognise an asset on the balance sheet and a fictitious debt on the liabilities side, recognising depreciation on the asset in the income statement and the financial expense corresponding to this loan.
The “underestimation” of the impact of the standard is twofold:

  • for fiscal years beginning in 2019 for which there is a first application of the standard;
  • and especially for subsequent years, which require a close monitoring of contracts and of the numerous events that may affect these contracts

Once the project is launched, companies immediately meet two challenges: identifying the contracts on the one hand and understanding them on the other hand.

Identifying contracts

The first challenge is little anticipated.
All our contacts expect to have all contracts available on request, especially in centralized structures.
While this sounds simple, the reality is much less so. Few groups have a department that centralizes all contracts. They are spread across several departments.
The legal department is the first to come to mind, followed by purchasing, finance, IT and operational departments, which may have lease contracts.
There are therefore many different people to deal with, with varying degrees of rigor when it comes to archiving processes.
It is at this point that we discover contracts for which the rules of signature or authorization limits have not been respected, and of which no one was aware until now.

Understanding contracts

The second challenge, over and above the procedural and inventory aspects, is about understanding contracts:
– What rate for the fictitious loan?
– Over what duration?
– What conversion rate for foreign subsidiaries?
– What to do with type 3, 6, 9 contracts?
– What to do with renewal type options? And so on and so forth.
Leaving aside these initial disappointments, and despite the permanence of the methods of the general accounting principle, comes the tedious question of monitoring from 400 up to 100,000 contracts (volumes recorded and managed by our clients).

Use a dedicated software application for quick results

The digital transformation of the entire lease management process therefore makes sense and brings immediate results.
Indeed, in the very short term, a digital solution helps:

  • Ensure the accuracy of the calculations from an auditable basis;
  • Ensure a follow-up over time of the contracts and the life of the contract;
  • Ensure the permanence of the methods and avoid the Excel-linked errors;
  • Benefit, as one chooses, from a centralized or decentralized database;
  • Reinforce controls on all contracts;
  • Avoid having to redo all the work at each closing;
  • Carry out simulations; not to forget elements since they are listed in an application;
  • Benefit from a documentary base with all contracts, amendments and contractual documents.

Last but not least, beyond the quality of the software application, a good support is necessary in this type of project for several aspects:

  • To benefit from an outside viewpoint. Since it is a new standard, this is often necessary,
  • To benefit from “best practices” by having a complete view of the practices of other market players,
  • and Not to waste time in finding solutions to issues already resolved by the early adopters of the standard.

Finally, the professionals who will help you in this transition will answer your questions, allowing your company to pass the 2019 deadline, and to consider the possible evolution of the standard in a serene way.

(1) https://home.kpmg/in/en/home/insights/2019/01/ifrsnotes-lease-accounting-survey-ifrs-16-asc-842.html

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