By Michael Mncube, Product Owner - Financial Reporting at CaseWare Africa
IFRS16 is the third significant reporting standards change in under two years and it is set to have a huge impact on businesses in 2019.
Preparing for the change demands extensive groundwork now. This comes hot on the heels of the implementation of IFRS 9 and IFRS 15 by the International Accounting Standards Board (IASB). IFRS 16 comes into effect on 1 January 2019 and will completely change the accounting treatment of leases. So going forward from the ‘lessee’s’ perspective operating leases will be included on the balance sheet, with potentially huge impacts on financial metrics such as EBITDA, asset turnover, interest cover and gearing ratios.
Lease vs. Buy Decisions
These changes may affect loan covenants, credit ratings and borrowing costs, and could result in other behavioural changes which may compel many organisations to reassess certain ‘lease versus buy’ decisions.
With IFRS 16 eliminating nearly all off balance sheet accounting for lessees, entities must reassess their lease agreements across big ticket items such as office space, industrial equipment and employee cars and laptops, through to smaller items such as office furniture and printers. This will require the gathering of information relating to all leases including: terms and conditions; cancellation periods and the implications of early cancellation. Entities may have to go to great lengths to source the original lease contracts on long-standing agreements, and they may have to renegotiate the terms.
Departments including: IT; procurement; facilities management; legal; corporate real estate; HR and payroll, and finance and accounting, will collectively have to work together to ensure that all the necessary lease data is gathered, that all leases are negotiated optimally, and – crucially – that ERP systems are updated and able to support the new reporting standards.
The process is likely to prove challenging and time consuming for large entities, and potentially confusing for SMEs. However, for stakeholders, IFRS 16 will offer a more accurate overview of an entity’s financial standing, with greater transparency in the long term. And considering the effective date of annual periods beginning on or after 1 January 2019, entities have no time to lose in preparing for the new standard if they have not done so already. IFRS 16 is a hot topic in the market at the moment, with auditors and advisors being called in to help them implement the necessary changes, and a swathe of seminars being held to help entities understand what will be required.
The latest change comes after a challenging year in which entities also had to adopt the new IFRS 9 and IFRS 15 reporting standards - which became mandatory for annual periods beginning on or after 1 January 2018. IFRS 9, which addresses accounting for financial instruments, and IFRS 15, which covers accounting for revenue from contracts with customers, both demanded a restructuring of reporting, impacting every entity and requiring revamped ERP systems to cope with the change.
If you Snooze you WILL lose
Those entities that delayed in laying the groundwork for IFRS 9 and IFRS 15 found to their dismay that new reporting standards require comprehensive preparation, and IFRS 16 is likely to require even more extensive preparation.
The Solution – minimum effort – maximum benefit
To support entities in meeting the new requirements, CaseWare has integrated the IFRS 9 and IFRS 15 standards into its automated processes, enabling clients to comply with both standards with minimum effort. Work is now underway to integrate IFRS 16 standards into CaseWare, with this update expected in mid-2019.
Michael is a qualified CA(SA) and holds a Master’s Degree in Taxation. He served his articles at Grant Thornton where he was exposed to both the private and public sector. He gained experience in both listed and unlisted entities, with various industries including Healthcare, Retail, NPO's and Mining & Support services. Prior to joining Adapt IT – Caseware Africa he was with Vodacom as an IFRS Specialist assisting with the implementation of IFRS 9 and transition from IAS 17 to IFRS 16, and drafting Annual Financial Statements for the groups’ divisions. His journey in finance started in 2007 where he worked for an SME Electrical and Mechanical contracting company as a Bookkeeper for just over 8 years. He gained valuable experience in Financial and Management Reporting, Tax, Project tracking, Governance and Internal Controls. His Masters' degree focused on Tax Strategy and Tax Administration with a Dissertation titled "A comparison of SME tax incentives among BRICS countries: Lessons for South Africa". He currently works as a Product Owner-Financial Reporting focusing on IFRS and IFRS for SME.