If you haven’t been paying attention to complying with IFRS 16 and FASB ASC 842, there really is no time to delay.
In early 2016, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued new reporting standards for leases. Their IASB IFRS 16 and FASB ASC 842 regulations enact significant changes in how businesses disclose their equipment lease liabilities.
These regulations are designed to satisfy the investment community, which wants corporate debt to be made more transparent. The new rules should enhance visibility in this asset class and create more consistency between different global accounting standards.
Imran Mia, accounting manager for Nakisa, a provider of human capital management and finance solutions, cautions that companies may be underestimating the challenge they face in meeting the requirements. For example, IFRS 16 and ASC 842 classify leases differently, he notes. IFRS 16 includes an exclusion for low-value assets, while ASC 842 does not. Sorting out these differences will be particularly difficult for multinational companies that must follow both standards when reporting assets and liabilities.
Making the transition typically requires 18 months
While companies have until January 1, 2019 to become compliant, a reasonable timeframe for updating accounting-related processes and systems is 18 months, says Pete Graham, director of Finance Solutions and Mobility at SAP.
“Accounting rules in this area have not changed in a long time,” Graham says. “To ensure that they have the information ready and organized to comply, organizations need to start considering how to prepare now.”
Companies will have to review existing policies, processes, controls, and accounting software systems, says Richard Cebula, director, PricewaterhouseCoopers (PwC). Organizations that are heavily invested in leases will need a lot time and resources to implement these changes and meet the deadline.
Capturing two years of look-back data is equally important
Cebula also notes companies must provide comparative reporting for the previous two years when the new regulations go into effect in 2019. Comparative reporting is being required so that third parties such as investors and regulators can easily compare an organization’s old and new accounting practices.
This look-back requirement is one of the reasons why decision-makers already should be working on adopting means of complying with the new regulations. “We are in the window of time where we need to start showing and aggregating that information,” Cebula says.
Compliance will be easier with purpose-built technology
In response to the new regulations, technology providers are delivering new applications to validate leases, ensure compliance, optimize assets, and manage portfolios. These solutions help customers collect equipment lease contract information from various sources and consolidate it into a single system. They also enable corporate compliance with global accounting standards and improve decision-making for equipment lease portfolios.
Solutions typically cover the requirements for IASB IFRS 16 and FASB ASC 842. SAP Lease Administration by Nakisa, for example, is one such purpose-built technology that leading companies are already adopting to comply with both regulatory changes.
Want to learn more? Listen to the SAP Radio show Your Balance Sheet 01/01/19: $3 Trillion Worth of Leases, and follow @SAPPartnerBuild on Twitter.