Challenges of compliance and opportunities for optimisation
The IASB published IFRS 16 Leases in January 2016 with an effective date of 1 January 2019. The new standard requires lessees to recognise nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time and the associated liability for payments. PwC’s IFRS 16 Post-Implementation Survey sought to understand how IFRS 16 implementations went and where challenges continue to reside.
Our survey of 400 executives showed that many companies, post transition date, are still challenged with suboptimal implementations with limited integration and reliance on manual processes. Significant opportunities exist to optimise systems and processes with further integration of IT solutions and automation of lease processes.
Most companies to-date also have not identified benefits from IFRS 16 beyond compliance. They now have a treasure trove of lease data available, which combined with the right tools and data and analytics can be leveraged to inform improved lease versus buy decision making, reduce lease costs and better manage risks from leasing.
- Not all respondents answered all questions.
- Some questions allowed for multiple response selection.
- Not all figures add up to 100% as a result of rounding percentages.
Source: PwC's 2019 IFRS 16 Post-Implementation Survey
A race to implement
Despite the designated three year implementation period, 64% of respondents indicated they did not use the full transition time. Challenges, including resource constraints from implementing other standards and inadequate IT processes, contributed to an ultimately compressed timeframe for compliance. Fifty-five percent indicated that unexpected challenges were encountered during the process.
With the compliance deadline behind them, now is the time to reassess processes and procedures to ensure they are efficient and sustainable. Fifty-four percent of respondents relied, to some degree, on spreadsheets for managing the transition. Upgrading related IT solutions and enhancing automation can help optimise current lease administration and reporting while also better integrating processes into the broader organisational IT environment.
Improving your implementation:
Selecting the right IT vendor and solution can make a big difference. Companies should look at the end-to-end costs of lease compliance. A solution that automates many elements of lease administration and reporting can yield significant (cost) benefits. A comprehensive vendor analysis is the first step in bringing best practices to your leasing processes.
Source: PwC's 2019 IFRS 16 Post-Implementation Survey
More guidance needed
Although finance lease accounting has been around for decades, many respondents indicated they were challenged by both interpreting and implementing the guidance in the standard. While some of the principles and guidance included in IFRS 16 are retained from previous guidance, companies found it technically challenging to apply accounting methods for material leases across their organisation at this scale for the first time.
Only 40% of respondents felt that standard setters provided sufficient guidance and transition reliefs to enable an efficient and cost efficient transition process. Respondents indicated that additional guidance would have been particularly helpful in areas such as lease term, tax accounting, lease modifications, discount rate and impairments.
Nearly one quarter (24%) of respondents indicated that they have not yet assessed local statutory accounting requirements in relation to the application of IFRS 16. However, not all jurisdictions have finalised their requirements with respect to permitting or not permitting the application of IFRS 16.
Improving your implementation:
Leading organisations have benefitted from early planning and implementation activities. If your IFRS team needs greater clarity around local reporting requirements, statutory implications or other nuances of the standard, discussing your approach with third party providers well-versed in the guidance can help set you on the path to a more successful and less complicated implementation.
Source: PwC's 2019 IFRS 16 Post-Implementation Survey
Benefits yet to come
Despite having achieved IFRS 16 day 1 transition, many companies have yet to identify or experience real business benefits beyond compliance. Sixty percent of respondents indicated that the application of the new standard did not result in improved financial reporting and transparency or that its impact on reporting was neutral. A majority of respondents (51%) reported that they most want lease accounting implementation to result in lease portfolio visibility and asset optimisation. However, only a small minority (8%) indicated they are already reaping the benefits generated by compliance such as greater lease portfolio visibility and optimisation, improved governance and controls over leases, including more robust lease versus buy decisions, cost savings due to improved procurement of leases across the company and reduced risks from leases.
Improving your implementation:
Technology is a key factor in achieving many of the benefits organisations most want from their lease accounting implementation. Emerging technologies, such as Robotic Processing Automation (RPA) and Artificial Intelligence (AI), are becoming more commonplace across the business and expanding into the leasing process. AI is being integrated into contract analysis and data extraction, while RPA is being used for data input. Data analytics are also being used to predict lease cash flows or benchmark portfolios of leases to analyse spend or identify areas of risks.
Source: PwC's 2019 IFRS 16 Post-Implementation Survey
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Complex investor communications
IFRS 16 has resulted in a significant change to balance sheet structures for entities with large lease portfolios. This change has a direct impact on a number of commonly used performance indicators and financial ratios. The change and the diversity in practice, company to company, makes it difficult for investors to get a clear read on performance post IFRS 16. Investors are challenged to understand a company’s actual performance versus IFRS 16 impacts and have difficulties in comparing two companies who may be taking a different IFRS 16 transition approach or applying different judgments.
Improving your implementation:
Leading organisations are working towards full transparency on the impacts of IFRS on their performance and are actively engaging with investors to explain the changes. By taking a proactive approach, investors will better understand these changes and modify their analysis to reflect them.
Source: PwC's 2019 IFRS 16 Post-Implementation Survey
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