IFRS accounting – scenarios
If you want to make sure that your lease contracts are valued in compliance with IFRS 16, you have several alternatives. Here are three most common IFRS 16 accounting scenarios:
- You can build the model yourself in a spreadsheet.
- You can entrust the preparation and settlement of calculations to an external consulting firm.
- You can implement software that will automate valuation and accounting according to IFRS 16.
Below you will find an overview of the benefits and limitations of each approach.
1) IFRS 16 calculation based on an Excel model
The “do-it-yourself” approach based on an Excel spreadsheet is potentially the simplest, easiest to implement and least expensive solution for IFRS 16 reporting. In order to use it, your company needs Microsoft Excel and at least a good knowledge of the tool among the staff of your financial departments. In addition, the staff responsible for the model must be fully familiar with the IFRS 16 standard and be able to apply it in practice
This model will work well if the people in your company have sufficient knowledge of IAS/IFRS and are capable of building a fully functional calculation model from scratch.
Excel accounting – limitations and risks
Managing multiple contracts:
Changing parameters or adding new contracts might make the model increasingly complex and difficult to maintain, especially if there are numerous contracts. That is why maintaining an IFRS 16 model in Excel for 100 or more contracts may pose a challenge in the long term.Risk of error:
Despite its flexibility, Excel is susceptible to errors in formulas and refreshed connections, which can potentially turn to incorrect values in financial statements. Sooner or later errors will occur in your Excel-based IFRS 16 model leading to mistakes in your company’s financial statements!Lack of transparency:
If your model contains data for 500 contracts with an average term of 5 years, after just 36 months the number of rows in the worksheet will grow to over 1 million. The degree of complexity of your model will quickly increase, making it increasingly more difficult to audit and control.Problem of work continuity:
If the employee responsible for the model parts ways with the company, their successor may struggle to understand and properly use the tool thus heightening the risk of errors in your financial statements.
Consequently, despite its initial simplicity and low cost, the Excel model can prove risky and difficult to maintain in the long term.
2) IFRS 16 valuation by external consulting firm
Outsourcing the IFRS 16 process to an external consulting firm comes with certain advantages, e.g. no need for internal competencies, and time efficiency.
By choosing this solution, you gain access to professional expertise and can rely on experts for accurate calculations and accounting according to IFRS 16.
You do not need to worry about building tools or training your team – you pay for the services and wait for the results to be delivered to you.
External company – limitations and risks
Service costs:
The cost can be significant depending on a number of factors, e.g. the number of contracts, the reputation of the service provider and the frequency of reporting. The Big 4 accounting firms use proprietary tools and generally charge more than their smaller counterparts, who rely on Excel models.Loss of control:
Outsourcing can lead your organisation to lose in-house IFRS 16 expertise and skills. The finance and accounting staff may find it difficult to account for the values shown in financial statements, a situation that is problematic in the context of audits.Potential conflict of interest:
If the consulting firm hired to manage the IFRS 16 process is appointed to conduct an audit, the entire process might have to be reorganized, generating additional costs and complications.
Consequently, even though outsourcing guarantees convenience and expertise, it entails certain risks and expenses that you need to consider when making the decision.
3) Implementation of IFRS 16 valuation tool
Implementing a professional IT tool for managing the IFRS 16 process can offer many benefits for your company. Here are some of them:
- A comprehensive solution:
You gain access to an IT tool and know-how related to lease reporting under IFRS 16. Its calculation mechanisms are proven and auditable. - Process standardization:
The solution creates repeatability and makes the process of lease accounting independent of individual employees. - Scalability:
The system is generally prepared to process a large number of contracts. For example, FlexiReporting can process 1,000 contracts in less than 60 seconds. Impressive, isn’t it? - Advanced analytics:
Access to calculation history, easy tracking of contract changes and extensive analytics are added advantages.
Disadvantages or limitations?
Essentially, there is only one aspect worth mentioning, and that is the cost of purchasing and implementing the software. Lack of funds for a new IT solution can be a major setback to optimization of your company’s IFRS 16 processes.
Luckily, the cost and time needed to implement IFRS 16 software is much less significant than in the case of most other IT systems. The whole operation is far less complex compared to the process of implementation of an ERP system or financial and accounting software.
The Software-as-a-Service (SaaS) model can be attractive, because it eliminates substantial one-off expenses and allows for cost scaling as needed.
In summary, implementing IT tools to manage the IFRS 16 process can be an effective and scalable solution for companies.
However, you should consider the expenses involved in implementing and maintaining the system to ascertain whether it is the right choice for your organization.
Software for IFRS 16 lease accounting
The key advantages of introducing FlexiReporting for managing financial reporting under IFRS 16 include:
- Process Optimization:
With integrated calculation mechanisms and automated account assignment rules, processes become more efficient and less susceptible to human error. - Excel Integration:
If your accounting team is used to working in Excel, with FlexiReporting you can keep that platform as your primary tool, while adding features that make reporting easier. - Transparency and Control:
FlexiReporting’s transparent reports and user-friendly interfaces make it easy to monitor and audit financial data. - Flexibility and Scalability:
Whatever the number of your lease contracts, the system is able to process them efficiently, offering repeatability and consistency of accounting and reporting. - IFRS 16 Compliance:
The system is designed to be compliant with international standards; an aspect that is crucial for many companies operating in multiple jurisdictions.
FlexiReporting is a worthwhile investment if you are looking to optimize and streamline the IFRS 16 reporting processes within your organization.
Related posts:
IFRS 16 Accounting: Leases and rentals
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The impact of IFRS 16 on financial statements
The adaptation of IFRS as an accounting standard affects the presentation of values in financial statements, especially in the context of leasing and rental under IFRS16.
The article examines these changes, showing how this standard modifies the balance sheet, profit, and loss statement and cash flow statement, highlighting key differences and new challenges in financial reporting.
IFRS 16 lease of service and retail space – Case Study
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