Nowadays there is a lot of information about a new accounting standard for leases – IFRS 16 released by the IASB (International Accounting Standards Board), and ASC 842 by the FASB (Financial Accounting Standards Board). You can find many useful illustrative examples and tutorials, which explain the concept well. Although the practical implementation of the IFRS 16 standard still leaves some questions unanswered, once new the lease standard requirements are clear, your “practical” topics will be:
- What tools should I use for lease calculations under the IFRS 16 standard? Does my current accounting system have the required features?
- Which G/L postings need to be produced monthly? (most of examples you may find are very simplified).
- How much work will this add to my accountants? Can it be handled manually, or does it require automation?
Once you figure out how your lease accounting will be setup under the new rules, your further questions may be:
- How exactly can the transition to IFRS 16 be accomplished or implemented? OK, in theory, you know what your options are – retrospective vs cumulative catch-up – but then you’ll need a tool to model the impact on your balance sheet, impact on your P&L, and on your key performance indicators – as all these will change.
- Is your “to-be” process flexible enough to accommodate variations to lease agreements, as the circumstances may change? How complex will it be to account for any changes?
To make the right decisions, at some point in time, you may need to play with your lease figures and model your accounting transactions to see the impact on your balance sheet – as the essence of IFRS 16 is a requirement to disclose the operating lease liability on the balance sheet, together with the Right-of-use asset. In order to do that, you will need a “sand box” tool to perform your calculations. This practical exercise will give you a better insight into the coming changes from two perspectives– changes in accounting and changes in your software.
Here, I’ll share my excel based IFRS 16 calculator with you. Feel free to use it as your “sand box”. Have a go at trying it out and if you have any questions, contact us by email at: [email protected]
This IFRS 16 Calculator was tested against calculation samples published by well-known consultancy companies (Deloitte, PWC, Ernst & Young) then we used it in testing our comprehensive lease accounting software package.
For businesses who have just a handful of operating leases – the excel calculator and manual journal postings may work well. Those who have hundreds of leases, or have complex lease agreements (e.g. variable leases, leases in foreign currency), should consider a transactional system.
Note: The Excel-based calculator is suitable for companies that have about 100 lease agreements. Those that manage more should consider a more sophisticated software solution – Soft4Lessee. Read more about the Soft4Lessee features here.