Accounting for Leases: Impact of IFRS 16 and ASC 842
Introduction
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
Leasing has emerged as an integral mode of financing assets across
industries globally. However, previous accounting standards failed to provide
faithful representation of assets and liabilities arising under lease
agreements. IFRS 16 and ASC 842 brought uniformity by establishing
principles to recognize lease obligations on balance sheets.
This paper aims to analyze the key changes introduced by IFRS 16 and ASC
842 from previous standards IAS 17 and ASC 840. It also discusses practical
challenges companies face in transitioning to the new model and suggests
implementation strategies. The first section highlights core differences
between old and new standards. Next, challenges pertaining to identification,
measurement, systems and processes are explored. Finally, strategies to
drive effective transition are presented.
Major Differences from Previous Standards
The new lease accounting standards IFRS 16 and ASC 842 eliminate the
dichotomy between operating and finance leases. They require "right-of-use"
assets and associated liabilities arising from all lease contracts, with limited
exceptions, to be recognized on balance sheets.
Some key differences from IAS 17 and ASC 840 include:
- Lessee Accounting: Old standards required finance leases to be capitalized
while operating leases to be expensed. New standards mandate capitalizing
both as lease liabilities and right-of-use assets on commencement.
- Lessor Accounting: Principles remain largely similar to previous standards
with operating and finance lease classifications. However, definitions are
aligned for consistency.
- Renewal and Termination Options: All extension and termination options
reasonably certain to be exercised need consideration unlike previous
'binding commitment' criteria.
- Discount Rates: Measurement of lease liabilities uses incremental borrowing
rates rather than implicit interest rates wherever not readily determinable.
- Short Term and Low Value Leases: Can opt not to capitalize leases 12
months or less and leases of low value items (~$5,000). Straight line
expensing permitted.
- Disclosures: More robust and quantifiable disclosures mandated around
amounts, maturities, interest expense etc. to improve transparency.
Implementing these changes require refined implementation approaches by
companies to reap benefits of fidelity and consistency. We will now explore
challenges typically faced in transition.
Challenges in Transition
Lease Contract Identification
Scouring millions of pages of contracts, master service agreements, side
letters spread across subsidiaries and geographies puts strain on internal
resources.
Determining whether arrangements contain or are contracts introduces
subjectivity. Distinguishing embedded leases and allocating components add
complexity. This represents one of the biggest implementation hurdles.
Lease Term Determination
A considerable amount of judgment is required in assessing periods covered
by options to extend or terminate that are reasonably certain to be
exercised. Changes to such assumptions later require remeasurements.
Regular reassessments throughout lease terms magnify compliance burden.
Lack of historical data and changing business scenarios worsen the
challenge.
Rate Determination
Absence of readily determinable rates pushes use of incremental borrowing
rates introducing concerns around consistency and auditability of
assumptions used.
With varied international operations and diverse asset classes involved,
adopting standard methodologies across entities remains a critical
implementation challenge.
Systems and Process Changes
Retrofitting aging ERP systems or developing custom solutions to manage
increased volumes of data on recognition, measurement, remeasurements
and disclosures impacts productivity.
Integration with various IT systems like procurement, fixed assets, payroll
etc. magnifies the challenge. Streamlining processes across functions like
finance, assets, tax also takes time and resources.
Data Management and Reporting
Tracking vast amounts of lease specific data on commencement dates,
variable rents, options, residual value guarantees, covenants etc. for
hundreds or thousands of individual leases strains capabilities.
Regular remeasurements and recalculations due to contract changes during
transition demands robust data infrastructure and reporting mechanisms
increasing costs.
Training and Change Management
Equipping diverse stakeholder groups like finance, tax, IT, procurement,
controllership with technical knowledge and new mindsets demands
extensive training.
Changes to organizational structures, key performance indicators and
approval hierarchies require thoughtful change management to ensure
efficient transition. Lack of skills and inadequate management impacts
compliance.
To address these challenges effectively, a well-structured implementation
approach is required aligned to industry best practices. Key strategies are
discussed next.
Key Implementation Strategies
Project Governance and Timelines
Establish a cross-functional steering committee and working groups with
clear mandates, owners and timelines for workstreams like assessment,
implementation, systems, controls, training etc.
Assign responsibility at CEO/CFO level and seek periodic updates to address
risks proactively. Drive continual monitoring of deadlines to successfully
transition within planned timelines.
Policy Formulation
Develop comprehensive accounting policies and position papers around
critical elements like identification, measurement, classifications,
reassessments, presentation, impairment, etc. based on new standards.
Ensure policies are reviewed by all stakeholders and approved by highest
governance bodies like audit committee. Regular updates ensure
consistency.
Risk Assessment and Data Audit
Conduct risk assessments to identify complex portfolios, contracts, entities
warranting additional scrutiny. Analyze completeness, reliability of lease
related data.
Identify requirements for extraction of missing parameters from old
contracts, master data cleansing exercises, surveys with business teams for
ensuring implementation quality.
Lease Accounting Solution
Evaluate in-house ERP capabilities, bolt-on solutions and managed services
available. Implement custom Excel based or cloud-hosted SaaS applications
enabled with workflow automation, reporting functionalities, integration and
controls.
Ensure solution encompasses entire lease lifecycle from identification to
impairment. Integrate with other IT systems for seamless financial reporting.
Change Management
Drive planned change management involving senior management advocacy,
stakeholder alignments, customized trainings, refresher programs to address
process changes effectively across all functions.
Institutionalize new roles/responsibilities, accountability mechanisms with
adapted KPIs and approval hierarchies to reinforce compliance as business-
as-usual.
Third-party /IT Validation
Leverage external technical experts and auditors to validate critical
accounting judgments, assumptions, calculations, integration testing and
internal controls assessment of new systems.
Address control deficiencies expeditiously to establish requisite compliances
before transition date or adopt controls reliant approach.
Continual Improvements
Establish regular monitoring mechanisms to assess system efficacy, process
efficiencies, control effectiveness and emerging practices.
Benchmark against industry and promptly incorporate technology
advancements, audit insights, feedback on regulatory clarifications for
sustainable compliances going forward.
Disclosure Dashboard
Develop role-based disclosure dashboards fed with automated data from
systems to simplify capturing qualitative and quantitative information on
transition impact, judgments, uncertainties etc.
Facilitate timely preparation of comparative financials, note disclosures,
MD&A presentations with granularity and insights for investors and
regulators.
Project Closure and Way Forward
Close project tracking all risks, achievements against timelines and budget.
Carry out post implementation reviews with learnings documented.
Align processes and systems with leasing needs as the business evolves to
derive long term benefits sustainably. Retain ongoing advisory support.
Conclusion
Adoption of IFRS 16 and ASC 842 reforms lease accounting significantly.
While obligations now reflect on balance sheets promoting transparency,
transition poses substantial challenges. Adopting a structured, phased
implementation approach is key to overcoming them successfully.
Robust governance, refined policies, data-centric solutions, change
management reinforce compliances seamlessly. Ongoing assessments and
improvements ensure sustainable benefits. With commitment, companies
can streamline transitions to realize true spirit of converged standards.
