From 1 January 2019, International Financial Reporting Standard (IFRS 16) requires lessees to account for contractual lease liabilities as non-current liabilities when the lease term is longer than twelve months and the lease price exceeds a specified period.
Long-term liabilities under a lease contract are calculated and recorded as the net present value of future cash flows, discounted at the contractual discount rate. The contractual lease price is divided into two components – value coverage, which consistently reduces the registered long-term liabilities, and interest, which are accounted as expenses. All of these calculations can be done in Excel, but companies with a large number of lease contracts understand very well that such calculations in Excel and accounting at the level of each contract will be cumbersome. This requires a flexible solution that specifically meets the requirements of IFRS 16.
However, is a truly specialized IFRS 16 solution relevant and applicable only to large companies? Consider the benefits of a solution developed specifically for IFRS 16 that is likely to be relevant to all those accounting for long-term lease liabilities.
Accuracy
For companies with only a few leases, Excel may suffice, but having more leases poses an operational risk, where a “jump” in one place in the formula can lead to an error that will affect all calculations, and this could lead to inaccuracies in accounting.
Change Management
ATEA: “Created solution is intuitive – user friendly and allows to manage lease contract with minimum efforts”
With regard to IFRS 16 and its compliance, the initial stage of accounting for a contract is usually considered, i.e. when a new contract is signed and regular payments are made each month. In practice, however, additional steps emerge: the terms of the contract change (especially for renting premises, where the price may change each year depending on the CPI), and the contract may be extended or terminated. All of these additional steps without a specialized solution complicate accounting because it requires additional formulas or extensions. The IFRS 16 solution considers such nuances so that the company would not have to worry about it.
Periodic Data Transfer
With the IFRS 16 solution, it will be integrated with the most important modules of the accounting system – Ledger and Fixed Assets module, which means that manual technical work, that is periodic transfer of data from Excel to the accounting system, will be avoided, since all data will be transferred automatically and in real time to the main system. This will save staff time, and perhaps even part of their work hours, and eliminate the operational risks mentioned earlier.
Reporting
For companies, especially those with a large number of lease contracts, it is very important to ensure the need for reports and analytics. An audit may ask for retrospective detailed information at the level of the contract and groups of contracts, which may be difficult to do from Excel, as opposed to a tailor-made solution.
Historical Contracts
The IFRS 16 solution is not only able to deal with new contracts, but also has several options and the same technical tool to help migrate historical contracts (in full or partial retrospective). Again, using Excel at this point would require the creation of additional formulas. The IFRS 16 solution is not only able to deal with new contracts, but also has several options and the same technical tool to help migrate historical contracts (in full or partial retrospective). Again, using Excel at this point would require the creation of additional formulas.
Solution know-how
While implementing IFRS 16, not only the tool is acquired, but also the know-how of the partner who developed it is provided. If you have seen IFRS 16 standard yourself, you should have noticed that it contains quite general information/requirements, with little detail there. So when keeping an account in Excel, you should first be familiar with the details of IFRS 16: how and what does it count. You probably wouldn’t even avoid consulting with a consultant and the like. On the other hand, by purchasing a specialized solution, you get a complete package – a solution in the system and the know-how of the partner.
However, when it comes to the benefits of the IFRS 16 solution, it should not be forgotten that they are designed for companies not as an additional functionality to the core system, but as a necessity for prompt and accurate compliance with IFRS 16, which is mandatory. And the larger and more regulated a company is, the greater the need for calculations to be accurate, traceable, and easily reported.
Find our solution on Microsoft AppSource
Solution helps the lessees to support and ensure lease agreements accounting according to IFRS16.
Aušra Urbonienė
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