KPMG’s survey on IFRS 16 implementation efforts highlights the need for greater effort and a longer lead time than expected.
While companies are making progress in their IFRS 16 implementation efforts, KPMG’s survey highlights the need for greater effort and a longer lead time than expected. This is especially true for dual reporters because of significant differences between IFRS 16 and ASC 842.1 As with all major accounting change projects, understanding the key practical issues is the first step to a successful implementation.
KPMG recently released the results of our 2017 Accounting Change Survey, which includes companies’ feedback on their implementation of the new leases standard. Although focused on US GAAP, we believe that the results are equally informative about likely implementation experience under IFRS.
The survey shows that most companies have now started implementation efforts, although projects are still being hindered by competing priorities with the new revenue standard implementation efforts.
Noteworthy is that 60 percent of companies indicated that they have been surprised by some of the challenges they are running up against, including identifying leases and selecting and deploying an adequate lease tool. And nearly 40 percent of companies reported more intensive implementation efforts than planned – the top reason being the need for new lease accounting software.
Because the IFRS and US GAAP versions of the new leases standard are different, US companies that report under both GAAPs face an even bigger challenge. With that in mind, we summarize here the key practical issues that dual reporters should consider in the early stage of their lease implementation project.
What is the population of leases?
A critical issue is to identify a company’s complete population of leases. Some companies may have good repositories of lease agreements in place. But it may not be readily apparent that many arrangements not explicitly called ‘lease agreements’ may include embedded lease components that need to be included in that population as well.
This step is equally important for implementing both the US GAAP and IFRS leases standards because the definition of a lease is converged, and the need to identify embedded leases is pivotal to both US GAAP and IFRS. However, the number of leases accounted for on-balance sheet under IFRS may be smaller because of the ‘low-value items’ practical expedient in IFRS 16, which is an exemption a company can take on a lease-by-lease basis. Because there is no equivalent of this practical expedient in ASC 842, some dual reporters may decide not to take this exemption under IFRS to decrease the number of differences between US GAAP and IFRS reporting.
What will be your approach to implementation?
As with any accounting standard implementation, even before identifying the lease population, a company needs to decide how to approach the project: using a centralized, decentralized or hybrid approach.
The answer mainly depends on the company’s organizational structure and corporate culture, as well as the number of locations and complexity of potential lease transactions.
What technology will you deploy?
Another challenge is to find the right technology solution that will address both operational and accounting concerns. Historically, many companies may have had a lease administration tool for real estate leases, but non-real estate leases may not be in any coordinated accounting-based solution. Depending on how (or whether) relevant data are currently captured and stored, a company may need to determine whether the technology can be used to recognize and capture key lease terms, and handle accounting and reporting under both US GAAP and IFRS.
The answers will affect how the project implementation is conducted and staffed. For dual reporters, finding the right technology solution will be an important consideration because there are significant differences on day two lessee accounting for operating leases that will require separate tracking for leases that have a different classification under US GAAP versus IFRS.
Have you started education and communication?
Because of the challenges involved in the implementation process, it is very important to start education and communication with key stakeholders early. Timely education and communication will be the critical step in decision-making about the right technology solutions, respective budget approvals and allocating the right resources to the implementation project, which will have a direct effect on the success of the project.
What KPMG resources are available?
KPMG’s 10 quick questions to get a feel for the scale of the IFRS 16 implementation challenge ahead.
KPMG’s overall insight and analysis on the impact of IFRS 16.
KPMG’s in-depth guide to help determine the best option for transitioning to the new standard.
KPMG’s in-depth guide to assess whether a transaction is, or contains, a lease and to understand differences to current practice.
KPMG’s in-depth guide focused on the appropriate discount rate (lessee and lessor) and how this will affect a company’s financial statements.
1 IFRS 16, Leases and ASC 842, Leases. See our article, Leases: Top differences between IFRS 16 and ASC 842 published in IFRS Perspectives – August 2017.
2 Lessees may elect to apply the recognition exemption for leases of ‘low-value items’ – i.e. underlying assets with a value ≤ $5,000 when new, even if they are material in aggregate.
3 IFRS 16 uses a single lessee accounting model that treats all leases as financing arrangements, whereas ASC 842 applies a dual classification model for lessees (finance leases and operating leases).
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.