IRFS 16 requires companies to recognise leases, including rental agreements, in the balance sheet. Below we give you some of our own and other experts’ advice on how you as CFO should prepare – so you can do your job even more accurately and efficiently.
House of Control has launched a dedicated module for listed companies and other enterprises that prepare financial statements in accordance with IFRSs. This module is a precise and effective tool that will enable you to accurately calculate figures for leases in the balance sheet, as required under IFRS 16 from 2019.
More and more new customers are starting to use the module each week. We have gained much useful experience from our work on implementation of the new IFRS standard. We have also studied Norwegian and international publications from the “Big Four” audit firms – Deloitte, EY, KPMG and PwC. The advice below is a mixture of our own experiences and input from the above companies.
1. Establish an overview. How many rental agreements/leases does the enterprise have? Once you start to look, you will often find there are more than you think. Most leases relating to the company’s core activities are generally treated in a satisfactory manner. But what about rental agreements? Computer equipment? Licences? Vehicles? In reality, many leases are not handled by the finance department and can span multiple business areas, without anyone retaining a general overview.
2. Identify leases that have not yet started. A historical overview is fine, but don’t forget to consider agreements that will be signed in the near future.
3. Link leases and responsibility. Who possesses information about the rental agreements/leases? Are the agreements registered in a central database or spreadsheet, or are they spread around different parts of the company?
4. Establish figures for the obligations. Is the data for the leases complete and accurate? Will the lease cost change in the future? How do you show changes in the lease terms?
5. Select transitional rules. Full retrospective application? Or modified retrospective application? Here we need to establish the date of right of use, the implementation date and the lease obligation. The more work you do now, the more comparable the figures will be in future; however, this will also push up the implementation costs.
6. Define the interest rate. What discount rate or capitalisation factor will you use to calculate the present value of your rental agreements/leases?
7. Establish what you need to tell the bank. How will the new accounting treatment affect our covenants with the bank? The total assets figure in the balance sheet will increase and key ratios such as the debt ratio and net interest-bearing liabilities will be changed.
8. Establish any impact on bonuses. Many companies have bonus agreements linked to accounting ratios such as EBITDA. The new accounting rules should be reflected in new rules for bonuses.
9. Remember that there are exceptions to the rules. Are you aware of the exceptions to the regulations, such as exemptions regarding the requirement to recognise short-term and smaller contracts in the balance sheet?
10. Financing models could be impacted. How will the profitability of the company’s sale-and-leaseback plans be affected? The new model could have a significant impact on lessees – not just on the figures in the financial statements, but also on how lessees will finance assets and adapt IT systems, processes and internal control in future.
The deadline for implementing IFRS 16 is fast approaching. Would you like to have a chat about the best possible way to implement the standard?