Accounting for leases is divided into finance leases and operating leases. Prior to IFRS 16, operating leases were not included on balance sheets, and instead could be accounted for through profit and loss accounts as rent expenses.
IFRS 16 stipulates that all operating leases now be accounted for as financial leases and any lease for one year or longer must be reported as a Right of Use Asset on the balance sheet along with the liabilities.
Often, companies that lease real estate as well as real estate companies themselves employ accounting firms to handle these issues. For these accounting firms, tracking down and extracting the new standards from legacy contracts as well as from new contracts is going to be a time-consuming and effort-intensive task. Many accounting firms lack the in-house resources to design and implement ongoing processes for loading new leasing data into their systems. They will need to assess whether this resource-intensive effort is best performed in-house or with outside expertise, leveraging technology and tools to help accelerate and automate the process.
The change in standards has been on the cards for a few years now, but implementation is complex and there are a number of challenges for companies when it comes to compliance with IFRS 16. In particular, the impact of these changes will be felt by the companies’ accounting firms who are in charge of ensuring that accounting standards are met within the deadline. Specific challenges that accounting firms will face include:
Decentralized data: One of the first tasks for accounting teams is to collect lease data from across the organization. The lease details regarding real estate assets and liabilities are often decentralized and are overseen by relevant departments or by local offices. Different departments may also have a different view of what they consider as leased asset (e.g., IT equipment or heavy machinery). Recognizing and collecting this information can be a long and tedious process, especially since it was not being done in the past in the required format and due to the involvement of many departments.
Inconsistent lease formats: When companies have multiple assets across multiple regions and departments, leases are likely to be in non-standard formats or even in multiple languages. This makes lease data extraction more time-consuming and complex for the accounting firms in charge of balance sheets.
Lease data accuracy: The definition of leases has changed and companies now need to offer greater detail about their rental expenses for the accounting process. A number of different tools may also be in play to administer leases. All of these factors, as well as the previous two challenges, can lead to issues with data accuracy, quality, and relevance.
New accounting needs: The existing accounts payable process needs to be integrated with the new lease accounting process. This requires companies and their accounting firms to identify relevant items for reconciliation and drop items that may no longer be needed. This will be a significant additional workload on the accounting teams.
Lack of resources: Many companies just lack the manpower to implement these changes, as do the third-party accounting firms that are working overtime to ensure compliance by their clients.
The various components of the leases to be reported will not just need to be identified and extracted, but also remeasured based on interest rates and other factors on an ongoing basis, not just as a one-off exercise. In addition, there will be a need for continuing maintenance and extraction for new and incoming leases.
Company accounting departments or accounting firms that work with REITs and CBREs will benefit from the help of trained teams that can take over the extraction of the necessary items from leases. The use of AI-powered tools can also go a long way in terms of automating the extraction process, thereby saving companies time, money, and effort to stay on top of the lease items that are to be reported within the new accounting standards.
Investing in these options frees up the accounting departments to focus on the higher value tasks associated with compliance of the IFRS 16.
At Cenza, we have in place highly skilled teams for the lease extraction process that can be scaled up or down based on the needs of accounting firms. Our specialists are also well-versed with the leading AI-powered tools for lease extraction.