New accounting standard impact
The International Accounting Standards Board (IASB) has announced the release of IFRS 16 Leases - a new accounting standard effective as of January 1st, 2019.
For lessees, leases will have to be capitalized by recognizing the present value of the lease payments and presenting them in the balance sheet as right-of-use assets. If lease payments are made over time, the company also will have to recognize the financial liability representing its obligation to make future payments. Companies having a large portfolios of leased properties such as retailers and hoteliers will be greatly affected due to the significant increase their lease assets and financial liabilities. All commonly used financial ratios and performance metrics such as asset turnover, operating profit, net income, and operating cash flows among others will be affected. Changes may also affect loan covenants, credit rankings, and borrowing costs. Besides affecting accounting, companies may require to transform their business processes in many areas, including finance and accounting, IT, procurement, tax, treasury, legal, operations, corporate real estate and HR. Furthermore, organisations may reassess certain "lease" versus "buy" decisions going forward.
"Some of America’s best-known companies—names such as AT&T Inc., CVS Health Corp.and Delta Air Lines Inc.—likely will soon have to effectively boost the debt they report on their balance sheets by tens of billions of dollars. The total possible impact for all companies: as much as $2 trillion."
The Wall Street Journal - Nov 10, 2015.
For lessors, the accounting model remains largely unchanged from IAS 17; however, lessors are expected to be affected due to the changed needs and behaviors from customers which impacts their business model and lease products.
Lessee considerations
A lessee will recognize a right-of-use asset and a lease liability, and consequently a depreciation and interest expense in profit or loss. The limited recognition exemptions permitted are likely to be of relevance for a limited number of occupiers such as pop-up stores or those using serviced offices, given they relate to leases with a lease term of 12 months or less and leases of underlying assets which have a low value when new (for example, personal computers and small office furniture).
Many property leases include variable rentals based on inflation or interest rates, or on turnover. Variable rentals are only included in the right-of-use asset and lease liability if they are based on an index or rate, such as the retail price index, with the liability initially measured by reference to the rate on lease commencement Subsequently when the rental payments change, the liability and asset are adjusted which will mean additional complexity in terms of system requirements.
Pure sales-based rentals are simply expensed as incurred rather than being estimated up-front. Any payments for services such as maintenance or security are not included in the lease liability and right-of-use asset, but expensed as incurred.
Information System to comply the new standard
The cost to implement and continue to comply with the new leases standard could be significant for most lessees. Particularly if they do not already have an in-house lease information system. Capturing all the necessary data required to implement the new standard and ensuring that it is a sufficiently robust basis for making material accounting entries is likely be a considerable challenge for many.
How SAP and Goldinmotion can help
Even though the new leasing standards are not effective until January 2019, companies can choose to adopt the changes early and begin reporting in January 2017.
For companies running SAP Real Estate Management, the new leasing enhancements are soon to be released by SAP delivering a fully-integrated solution to comply with the new standards in an efficient way. Once available, Goldinmotion will help organizations to install the new features and to support the transition to the new model.
For companies using SAP Financials, but with no real estate leasing solution installed, Goldinmotion offers to quickly implement the leasing administration functionality leveraging our rapid-deployment-solutions for a reduced time-to-value.
For more information, you may contact us at info@goldinmotion.net and we will be happy to assist you.