The Importance of a Strategic Approach to IFRS 16
6 November 2018
From the 1st January 2019, the IFRS 16 Lease Accounting standards will start to come into effect. As the actual deadline will vary with each company’s reporting period, many companies haven’t yet started their journey to lease accounting compliance. While procrastination is attractive because on the surface compliance doesn’t bring shareholders additional value, there have already been cases where overnight falls in shareholder value have followed a perceived lack of leasing compliance.
Three approaches to IFRS Reporting
As the deadline approaches and external scrutiny around International Financial Reporting Standards increases, there is an option for organisations to look for ‘quick fixes’. Whether it involves hiring an extra 2 or 3 accountants, customising your ERP, building a complex Excel workbook, or all of the above, ‘quick fixes’ are often neither ‘quick’ nor a ‘fix’. Like using duct tape to seal a pressure hose, while it might work in the short term, it is only temporary. When the exceptional accountant that created the fix leaves the company and nobody can remember the password to the Excel macro, the fallout can be catastrophic. ‘Quick fixes’ might not require a capex but the long-term risk and governance costs can run into millions.
Another approach is to implement purpose-built technology solutions that were designed for the express purpose of the IFRS reporting requirement. There are many start-up technology companies that have developed lease accounting solutions in the last 24 months that claim to meet the compliance standards, are cost-effective and are easy to implement. The danger is that many of these start-ups have a very narrow understanding of business goals and their solutions are limited to simply attaining the IFRS reporting format. Customers that engage with these solutions gain some level of compliance, however this compliance becomes limited in complex situations and the investment in these tools only provides return in the alleviation of risk.
A third approach to the lease accounting changes is to view the IFRS standards as an opportunity to invest in something that will bring additional company value, not just compliance. This idea isn’t new and compliance investment has been used to successfully lever value in the past (KPMG published an article on this over two years ago). This approach can also give quick and cost-effective compliance, but the benefits aren’t limited to risk alleviation. Instead, a proactive and strategic approach to this investment can return wider business value leading to revenue growth.
Looking to the future of IFRS 16
When it comes to IFRS accounting, this might mean investing in a software solution that can not only streamline, automate and provide control but also one that will use this data to build predictive analysis. What if your company could use data and technology to make better decisions about how to structure lease contracts? What if you could model the exact impact that a new acquisition, including its lease approach, would have on your accounts? What if you could look five years into the future and see the benefit, or detriment, of the decisions you make today? What if the platform you set up for lease compliance can be utilised for future compliance changes and wider across the business for other strategic initiatives?
As your organisation continues the journey to lease accounting compliance, and maybe also insurance contract compliance, international tax compliance and intercompany trade compliance, don’t rush in and roll out a quick fix solution. Investigate the variety of BI, CPM, EPM and predictive analytical tools that could bring compliance as part of a wider solution. Redirect your journey from meeting compliance to making strategic decisions and take your organisation to new heights.