IFRS 16 effective from 1 January 2019 affected all companies with long-term contractual lease obligations recording their accounts in accordance with IFRS.
Accounting under IFRS can create additional challenges for companies in their business processes. In particular, as accounting regulation grows, companies are forced to ensure that business management systems comply with reporting standards, including IFRS 16. Secondly, the time taken to adapt business management systems to IFRS 16 is limited. Thirdly, operational efficiency is a key issue – how to implement new requirements with the same number of staff and in the same business management system (without using additional sources – calculations in Excel, etc.).
Under IFRS 16, lessees are required to account for contractual lease liabilities as non-current liabilities when the lease term is longer than twelve months and the lease price exceeds a specified period. Long-term liabilities under a lease are calculated and recorded as the net present value of future cash flows, discounted at the contractual discount rate.
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Companies are also required to account for the right of use asset or simply assets, which are also calculated as the net present value of future payments and is depreciated over the term of the contract.
An effective way for companies to cope with the business process challenges listed above is to supplement their existing business management system with a solution designed specifically for IFRS 16. It is particularly useful to have a solution that covers the accounting management of IFRS 16 contracts, from the signing of the contract, the calculation of long-term liabilities, the right of use asset, to the end of the lease or early termination of the contract.
Benefits for the Business
The implementation of IFRS 16 ensures a more transparent presentation of the company’s financial information to shareholders and potential investors. The implementation of a specialized solution also provides the technical means to implement this standard.