The deadlines for the new IFRS 16 and US-GAAP ASC 842 regulations are looming closer. Soon leases will have to be handled very differently – to enable investors, lenders, and analysts to better understand all the financial obligations of an organization in this regard. These regulations add a great deal of complexity to provide this required visibility.
According to a Deloitte survey with C-suite executives completed in April 2018, 29.5% of respondents stated that they felt their organizations were unprepared to comply with the new leasing standards. Interestingly, this number increased by more than 7% from the January 2018 survey. The bottom line: these regulations are more complicated than most respondents originally expected.
Perhaps one reason so many respondents to the Deloitte survey feel so unprepared is that they continue to use spreadsheets to manage their leases instead of a leasing solution. Specialized leasing solutions calculate the valuation of contracts (determine right-of-use asset values, periodic depreciation, and interest amounts) and support correct and efficient handling of contract modifications. The most sophisticated solutions properly post all valuation entries over the lifecycle of the contract – ultimately supporting better business performance.
Figure: A comprehensive view of contracts
When it comes to the new lease accounting standards, calculations and postings must be correct to ensure proper P&L and balance sheet reporting. To provide customer confidence around such an important topic, SAP engaged PwC to evaluate contract and lease management solutions. During this engagement, PwC manually calculated the expected results for each illustrative example of IFRS 16 and ASC 842-10. The lease was then created in the software, lease valuations were calculated and posted, and the actual results compared with the expected results. PwC then issued a report assessing the calculation and posting the illustrative examples in accordance with its criteria, when adequately executed in an appropriately configured ERP software environment.
On request, you can get your own report from PwC. Please contact your SAP representative.
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