How to Implement IFRS 16? Mark Swallow

The ink should just be about dry on the 2022/23 statement of accounts and the 31st March 2025 seems a long way off, but unless you were an early adopter of the implementation of IFRS16 this financial year should see you starting to plan for its mandatory implementation from 1st April 2024.

Not only will the change have an impact on the 2024/25 accounts, it will also impact on the 2024/25 Prudential and Treasury Management indicators as well as revenue and capital budgets that will be the next items on your list in the annual financial calendar.

Implementing IFRS 16, the International Financial Reporting Standard for leases, requires careful planning and co-ordination across various departments within your organisation. The following provides details of a suggested implementation plan that outlines the key steps involved:

  • Establish a Project Team: Form a dedicated project team consisting of representatives from finance, accounting, legal, operations, and IT departments. Assign a project manager to oversee the implementation process.
  • Awareness and Training: Conduct awareness sessions to educate key stakeholders about the requirements and implications of IFRS 16. Provide training to relevant staff members to ensure they understand the new standard and its impact on lease accounting. At Arlingclose we have provided a number of training sessions on this subject and are happy to help you provide training to your key lease stakeholders if required. We will also be covering the topic in our closedown seminars and various technical sessions in our weekly series of Trending Treasury.
  • Data Gathering: Identify all leases within the organisation, including both operating leases and finance leases. Establish a process to gather relevant lease data, such as lease contracts, payment schedules, lease terms, and any additional lease-related information. This may be the biggest hurdle to a successful project implementation and will require a great deal of information requests from all departments within your authority. Getting this done as early as possible would be our advice and use this year’s accounts as a reference point to understanding what leases you have, but remember there will be some leases that you may not know about so now is a good time to get a fully updated lease inventory in place.
  • System Readiness and Implementation: Evaluate your existing lease accounting system or consider implementing a new system capable of handling IFRS 16 requirements. Ensure the system is capable of accurately capturing and reporting lease data, generating necessary journal entries, and producing relevant financial reports. Some of you may have a lease accounting system in place, some of you may just be operating a spreadsheet based approach. At Arlingclose we have partnered with a lease accounting system provider that has proven track record in the implementation of IFRS 16 in the private sector and therefore have a tried and tested system which is able to record and account for leases at both transition and at each year end.
  • Lease Classification and Assessment: Review and classify each lease as either finance or operating lease based on the IFRS 16 criteria. Determine the lease term, lease payments, and any variable lease components that need to be accounted for under the standard. Using a system as outlined above will help in this process and save you time during the implementation process.
  • Lease Modification and Transition Adjustments: Assess any existing lease modifications and determine the required transition adjustments to ensure compliance with IFRS 16. Calculate the right-of-use (ROU) assets and lease liabilities using the appropriate discount rate. This is a fairly complicated process, and we can assist you with this either as a distinct piece of consultancy or through the implementation of the lease accounting system mentioned above.
  • Process and Policy Updates: Review and update lease accounting policies and procedures to align with IFRS 16 guidelines. Establish internal controls and processes to ensure accurate lease data capture, ongoing lease management, and compliance with the standard. This is particularly important if during your implementation process you uncover leases that you were not aware of!
  • Financial Statement Disclosure: Prepare the necessary disclosures as required by IFRS 16, including lease commitments, ROU assets, lease liabilities, and related financial impacts. Ensure the financial statements and disclosures are accurate and compliant with the standard. The impact of the new standard won’t impact the accounts until 31st March 2025 but why wait until then to get all of the necessary disclosures in place and to familiarise you with what will be required?
  • Communication and Stakeholder Engagement: Communicate the impact of IFRS 16 to key stakeholders, such as elected members, local taxpayers, auditors and staff. Provide clear and transparent information regarding the adoption of the new standard and its financial implications. As already mentioned, figures will change in budget setting papers and the accounts will look different when all leases are on the balance sheet, if stakeholders are to understand this, they should be advised on the changes to accounting for leases throughout the implementation process.
  • Ongoing Compliance and Monitoring: Establish a process for ongoing lease management, including monitoring lease terms, assessing lease modifications, and performing periodic impairment tests on ROU assets. Stay updated on any future changes or amendments to IFRS 16 and make necessary adjustments to maintain compliance. This is not just a one-off process and will require a change to the way that leases have been managed, again a reliable lease accounting package may assist you with this.

Remember, implementing IFRS 16 is a complex process, at Arlingclose we are able to support you through this journey so if you feel that you would like to discuss the ways in which we can help please get in contact with us.

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