The new International Financial Reporting Standard (IFRS) 16 coming into effect on the 1st of January 2019 is set to change the way long term leases are treated on balance sheets and requires the attention of legal departments, not just accountants.
IFRS 16 imposes a single lessee accounting model which requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Under the new standard, all lessee leases will need to be recorded on the balance sheet as both assets for the right to use that leased item and as a liability for the present value of its lease payment.
The impact on a lessee’s financial reporting, asset financing, IT, systems, processes and controls could be significant. Many companies lease a vast number of high-value items, including cars, offices, retail, power plants, retail stores, cell towers and aircraft. Therefore, in order to put a correct value as a liability on their balance sheet, companies will need to have detailed insight into their lease agreements.
This is where the Legal Counsel comes in as risk managers and strategic advisors to the board. Working closely with the CFO and/or external parties, the legal department is instrumental to providing the insight around leases to help calculate the associated risk of IFRS 16.
The resulting risk analysis can be used to influence the company’s leasing strategy moving forward. For instance, depending on the findings, the board might opt for short term lease terms to mitigate financial risks identified such as higher taxes. Or, if this option is too risky, you may opt for long leases and bear the costs, to reduce the uncertainty of renewing leases.
An enterprise legal software like effacts can help in the risk assessment and compliance aspects of such an analysis. By allowing you to create and store your rental agreements centrally you gain an accurate overview of costs, liabilities and risks across different countries.
Here’s how a fully comprehensive legal repository like effacts supports companies to achieve the detailed insight they need:
- With all your real estate information in a central database, companies can distinguish which leasing agreements are targeted by IFRS16
- Companies can store, visualize and export leasing information for auditing purposes and risk assessments to easily share with the different stakeholders such as the CFO and auditors
- Better collaboration between the financial department, external accounting parties liaising with the legal department with managed access rights
- Simple creation of reports and charts allows you to communicate relevant information to internal and external parties during the IFRS16 project and implementation phase.
- Keep relevant information necessary for tax appraisals, including information necessary for IFRS 16.
If you are curious about how better insight on leases could benefit your business in the lead up to IFRS 16, why not schedule a short demo to see how effacts works first hand.