Companies warned of financial bombshell of IFRS 16 Leases

Ahead of the introduction of IFRS 16 Leases next year, there are warnings of a potential ‘leaseberg’ of liabilities, while many companies have yet to start implementation work on the systems needed to record thousands of leases coming onto the balance sheet for the first time

The cost of lease commitments that currently do not sit on the balance sheet can be upwards of 62% of existing balance sheets, according to new analysis by Aptitude Software, a global financial software provider.

Ross Chapman, Aptitude Software global marketing director, said: ‘Many investors, CEOs and business managers are on course to hit the unforeseen impacts of new lease accounting rules. The financial effects of the new rules are largely unknown as most companies have yet to implement systems that can deliver control and transparency over lease accounting.’

The company’s analysis shows that the total value of lease liabilities is only a small part of the issue when it comes to complying with the new standard. A wide variety of leasing arrangements complicate the compliance with new rules including intra-company lease transfers, sub-leasing and embedded options. Furthermore, US and IFRS 16 lease accounting rules are distinctly different, challenging multinational companies to deliver multi-GAAP financial reporting.

All leases over $5,000 (£3600) need to be disclosed. For global companies, leased assets need to be accounted for consistently regardless of where assets are stored. Some companies have reported that the new lease accounting standard will necessitate 66 times more journal entries than were previously required.

Chapman said: ‘Some leading multi-nationals have realised that they were on course to hit a “leaseberg” and have mobilised their teams to achieve compliance with new lease accounting capabilities.’

Jeremy Suddards, Aptitude Software chief revenue officer, cited the example of a global technology brand which has over $2bn of operating leases.

‘After a series of mergers and acquisitions, this business has multiple ledgers and numerous different lease management systems. With over 50 entities around the world, the combination of multiple currencies, embedded equipment leases and other complex arrangements made achieving compliance and gaining control of lease accounting a priority,’ he said.

Separately, research by KPMG in the US has found that with the January 1, 2019, deadline looming for compliance with the Financial Accounting Standards Board (FASB) lease accounting standards, only 15% of companies have completed their implementations to date.

Another 45% indicate that they are in the process of implementing, with an overwhelming majority of companies relying on assistance from Big four accounting firms to comply.

Marybeth Shamrock, KPMG's advisory lead for leasing, said: ‘We have seen companies start their projects around the lease accounting standards as they complete their implementation projects for the revenue recognition standards, however, companies still have a lot of work to do in order to achieve compliance with the lease accounting standards.’

Respondents to the KPMG survey included 150 finance and accounting professionals in financial services, manufacturing, retail, telecom, and media industries. Nearly half of those polled have at least 1,000 leases. Over half (57.3%) have annual revenue of $500m to $50bn.

The KPMG survey also revealed that companies expect significant implementation costs, ranging from $250,000 to more than $500,000 – more than a quarter of respondents expect costs to exceed $500,000.

Shamrock said: ‘The new requirements call for a substantial change in the way companies account for all their leases—from office space to heavy equipment, trucks and airplanes—and will have implications throughout the organization, including tax, reporting, and technology.’

Aptitude Software’s Leaseberg Index is here.

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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