This article was originally published on the Satriun Group blog.Many corporations are busy or preparing to get busy with implementing IFRS 16 in preparation to its January 2019 effective date. We at Satriun Group are involved in a fair number of such implementations. I am fortunate to act as project manager in the roll-out of IFRS 16 at several groups, dealing with volumes up to 15,000 lease contracts across 40 territories worldwide. Implementing IFRS 16 is more complex than you may think it is. It touches on many elements of the accounting and reporting landscape and requires an understanding of the impact on the IFRS Consolidated Financial Statements all the way down to the individual journal entries in the accounting ledgers. This also makes it a fun exercise! When you are about to embark on your IFRS 16 implementation journey, do keep the following eight aspects in mind:
- 1. Project governance Solid project governance is key to ensuring a smooth delivery of IFRS 16. Don't underestimate the exercise and make sure you establish a strong project organization, including a steering committee with key stakeholders, a project management office, a sounding board with delegates from different parts of your corporation, and including a lifeline to your auditor. Think about the change management that lies ahead of you, and how to keep your colleagues informed: set up a portal on the intranet, circulate newsletters, or deliver a roadshow, to name a few instruments.
- 2. Lease data assessment Inevitably, sooner or later you start collecting and assessing lease contract data. Make sure you ask the right questions to your colleagues. Key elements of your questionnaire include the asset class, start date and end date, the payment schedule, interest rate, service components, rent free periods, lease incentives, renewal and early termination options, purchase options, and restoration obligations, to name a few. Make sufficient time available to assess the accuracy and reliability of the lease contract data provided to you.
- 3. Account and dimensional modeling IFRS 16 impacts many elements of an accounting or reporting application. You need to come up with a data model design that touches upon income statement by nature of costs and by function of costs, balance sheet, balance sheet movement schedules, cash flow statement, and IFRS notes to the Consolidated Financial Statements. You need to assess the impact on both management and financial accounting policies, including KPIs such as (Recurring) EBITDA and Free Cash Flow, accounting policies for intercompany (sub)leases and service components, and how to ensure that you cover the tax accounting requirements because IFRS 16 will generate additional temporary differences.
- 4. Consolidation application update Your consolidation solution has to reflect your IFRS 16 data model design. But you also need to decide how you will deal with 2018 comparative data. Do you select the Full Retrospective or the Modified Retrospective approach? And when you select the Modified Retrospective, how do you ensure like-for-like comparisons for 2019 versus 2018 in your management reporting? You also need to think about forward-looking statements and how budgets and forecasts will be impacted by IFRS 16.
- 5. IFRS 16 solution adaptation There are many plug-and-play IFRS 16 solutions available in the market. Despite the solutions already containing a lot of content on lease accounting calculations, there are, of course, a number of things still to be implemented, including your own entities and accounts. Then there are the required workflows and segregation of duties, as well as the data validation controls to be applied. In addition, you need to think about how you would feed the lease contracts into the solution: through an automated data integration, through flat file uploads, or simply through manual data entry?
- 6. Accounting ledger update Many corporations apply the policy that IFRS compliancy is already covered in the accounting ledgers. When this is the case, the accounting ledgers have to adapt to IFRS 16 as well. There are two specific topics to keep in mind. First there are the profit center and cost center dimensions in the accounting ledgers. Make sure your IFRS 16 solution provides the postings at the right level of granularity. Then, there is the reconciliation between the actual payments as executed by accounts payable, and the conceptual payments as calculated by the IFRS 16 solution. Define a method to reconcile the two; be it through an expense account or a suspense account.
- 7. IFRS 16 knowledge transfer Once everything is processed from a technical perspective, you need to go out and train your colleagues on both the IFRS 16 accounting policies as well as on the IFRS 16 software solution. Also, don't forget to update your Group IFRS Accounting Manual. Documentation and training comes in many forms. Documentation can be offline (e.g., PDF) or online (e.g., video). Training can be done through physical classroom trainings, WebEx sessions, or e-Learnings. Whatever you choose, just make sure that the materials are timely and easily available.
- 8. Acceptance and Go Live The final step in your IFRS 16 implementation is user acceptance tests (UAT) and Go Live. UAT is done, preferably, right after delivery of the training program and involves a full back-to-back simulation of the process. Going through a UAT is key to determining that everything works according to expectations. Upon completing a successful UAT, you are ready for Go Live. Don't forget to provide your colleagues with the required support through a hotline or another single point of contact (SPoC) method. And don't forget to celebrate success!