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IFRS 16 is coming into effect on the first of January 2019 and companies of all sizes are rushing to ensure they are compliant. A cloud-based approach means businesses can go to market sooner than their competitors with a compliant approach.
- By Sarah George, ERP/EPM Cloud Applications Business Development Manager and Product Leader at Oracle
Last year, the International Accounting Standards Board (IASB) introduced the IFRS 16 lease standard that requires nearly all leases to be reported on the lessees’ balance sheets as assets and liabilities. Coming into effect on January 1, 2019, the rush should be on for companies of all sizes to ensure they are compliant.
The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value.
Unfortunately, organisations are taking a more considered approach. Only a handful of companies (estimates vary, but 20 percent is generally considered to be reasonable) are looking at addressing the associated requirements with many opting for a manual approach.
With companies still gearing up and fleshing out their systems, the market readiness for IFRS 16 is likely to be sitting at only 60 percent next year. Why has this been such a challenge and what can be done to turn this around?
IFRS 16 applies to every industry and reflects how business models are evolving to meet customer satisfaction. The digital world is focused on reaching customers more effectively and delivering services more accurately. For millennials (or anybody who is familiar with a connected environment), everything needs to happen instantaneously. Information is readily available, ultimately driving the need for change and bringing policies and business processes in line to do so.
The objective of IFRS 16 is to report information that faithfully represents lease transactions and provides a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease.
Certain companies like telecommunications operators, retailers and banks are more likely to be compliant. But for those in other sectors, it is still very much a case of catching-up to compliance regulation.
IFRS 16 ‘forces’ them to bring everything in line from a reporting structure. This is done to ensure assets are being used and charged appropriately from a rental perspective. Despite concerns around how best to do this, compliance presents businesses with the opportunity to be more digital-centric. As is the case with other regulatory requirements (think the Protecting of Personal Information Act and the General Data Protection Regulation), much of the structure behind IFRS 16 lies in the proliferation of data in a digital world.
From an Oracle perspective, companies need to look at their lease contracts and the terms of leases and apply changes to the new IFRS 16 business rules that see leases placed on balance sheets.
With Oracle’s Financial Management Solutions (Enterprise Resource Planning ERP Cloud or Financials Consolidation and Close), users can import and/or input data including leasing contract information, asset details as well as fixed and variable lease parameters. Creating a single lease data repository is one of the most critical aspects of achieving full compliance under IFRS 16 / ASC 842.
Financial users can calculate right of use, interest expense, amortisation and repayments. Oracle’s cloud-based solution delivers visual models and provides the flexibility to configure and maintain calculation logic and rules within a simplified user interface. The solution provides robust reporting and in-built dashboard capabilities to meet every IFRS 16 & ASC 842 reporting requirement. In addition, users have a secure, collaborative, process-driven approach for defining, authoring, reviewing, and publishing IFRS 16 & ASC 842 disclosures.
The system is designed to easily import data from external solutions and output data for journal entries and other required adjustments. The Oracle IFRS 16 solution integrates with a company’s key IT and business processes. Whether it is a business’s ERP or consolidation system, the Oracle IFRS 16 solution leverages existing investments and complements the company’s IT strategy.
Oracle has developed tools that enable quick deployment and easy integration to help drive compliance much faster. The benefit of a cloud-based approach is that there is not a lengthy deployment cycle and businesses can go to market sooner than their competitors with a compliant approach.