Top 5 Challenges Of IFRS 16 Leases For Companies

Many companies are only just starting to encounter difficulties as they submit their first set of financials for which IFRS 16 applies.

The International Accounting Standards Board's IFRS 16 standard was introduced on 1 January 2019 to enhance transparency for lessees, eliminating the distinction between finance and operating leases. If you're experiencing any of the below challenges while preparing your 2019 lease accounting, get in touch with our global experts.

1. Collecting lease data - is the underlying data complete and accurate?

   There is far more to implementing IFRS 16 than moving operating lease commitment disclosures that were previously off balance sheet onto the balance sheet. For example, as the definition of a lease has changed, service and energy supply contracts not previously accounted for as 'leases' may now be caught up in the IFRS 16 net. Leasing contracts must be separated into lease and non-lease components - the latter may include items that were commonly bundled into rental expenses under IAS 17 and may prove difficult to carve out if the relevant data has not already been extracted.

   The challenge of collecting lease data is even greater for multinational corporations whose oversight of real estate and other leases is not centralised, especially where a large volume of leasing documents is maintained in different systems by local management. Many companies do not have standard contractual terms in their lease contracts. If they are denominated in various foreign languages, it becomes even more complicated.

   The availability of the relevant lease data for current and comparative periods not only affects the accuracy of companies' lease accounting, but the choice of relevant transition options. Companies should start collecting and evaluating data as soon as possible. The table on page 12 of this TMF Group report outlines the options.

2. Cross-functional involvement - you need more than accountants in your team

   Some companies believe that IFRS 16 implementation concerns accountants only. The task of reviewing a contract against the definition of a 'lease' under IFRS 16 often requires input from procurement and operational teams, particularly for companies with a large, multinational and complex lease portfolio. IT personnel may need to...