How does IFRS 16 increase manual work in accounting?

Introduction to IFRS 16 and its objectives

IFRS 16, introduced by the International Accounting Standards Board (IASB), took effect on January 1, 2019. Its primary goal is to enhance transparency and comparability in lease accounting. Lessees must now recognize most leases on their balance sheets, offering a clearer view of a company’s financial position.

Previously, leases were classified as finance or operating leases, with operating leases often off-balance-sheet, leading to opacity. IFRS 16 removes this distinction, treating all leases similarly to improve financial reporting quality.

By requiring the recognition of lease liabilities and right-of-use assets, IFRS 16 provides stakeholders with a clearer picture of a company’s financial obligations and asset utilization, albeit with added complexity in lease accounting.

Key changes brought by IFRS 16

IFRS 16 mandates lessees to recognize all leases on the balance sheet, except for short-term and low-value asset leases. Companies must now account for a right-of-use asset and a lease liability for each lease.

Lease expenses shift from operating expenses to depreciation of the right-of-use asset and interest on the lease liability, impacting the income statement and key metrics like EBITDA.

New disclosure requirements include detailed information about leasing activities, future cash outflows, and the impact on financial statements, necessitating a comprehensive approach to lease management and accounting.

The impact of IFRS 16 on manual accounting tasks

IFRS 16 has increased manual accounting tasks, primarily due to the need to identify and evaluate all existing lease agreements. This involves reviewing contracts, extracting data, and determining the appropriate accounting treatment.

Ongoing lease management requires continuous monitoring and updating of lease data, including reassessing lease terms and discount rates, which is time-consuming and labor-intensive.

Preparing financial statements and disclosures under IFRS 16 demands detailed and accurate reporting, often involving manual data collection and analysis, straining accounting resources and increasing error risk.

Challenges faced by accountants under IFRS 16

Accountants face challenges in processing and managing the large volume of lease data, especially for companies with extensive lease portfolios, requiring significant manual effort and attention to detail.

Ongoing lease management and reassessment are time-consuming and error-prone, necessitating a thorough understanding of the standard and its application.

How to mitigate the increased manual workload?

To reduce the manual workload, companies can leverage technology and automation. Specialized lease accounting software can streamline identifying, evaluating, and managing lease agreements, automating data extraction, calculation, and reporting.

Investing in training and education for accounting staff ensures they understand IFRS 16 requirements, helping them navigate the standard’s complexities efficiently. Regular training sessions keep staff updated on best practices and new developments.

Outsourcing lease accounting to specialized service providers can alleviate the burden on internal teams, ensuring expert handling and access to advanced tools and technologies.

Conclusion and future outlook

IFRS 16 has increased manual accounting work, particularly in lease identification, evaluation, and management, and added complexity to financial reporting. However, leveraging technology and investing in training can mitigate the workload and ensure compliance.

Staying informed about new developments and best practices is crucial as the accounting landscape evolves. Embracing technology and automation will be key in managing lease accounting complexities under IFRS 16 and beyond. Proactive steps can lead to greater efficiency, accuracy, and transparency in financial reporting.

While IFRS 16 introduces challenges, it also offers opportunities to enhance lease management processes and improve financial reporting quality. By adopting a strategic approach and leveraging the right tools and resources, companies can navigate IFRS 16 complexities and achieve long-term compliance and efficiency.

One such tool is Fatman Frame, a comprehensive contract management software designed for lease and rental contracts. Its IFRS 16 extension ensures full compliance with precise calculations for Lease Liability and Right-of-Use (ROU) Asset, including amortization and depreciation plans. User-friendly and seamlessly integrated with bookkeeping and consolidation systems, Fatman Frame offers extensive reporting capabilities, streamlining lease management, reducing manual workload, and enhancing financial reporting accuracy and transparency.

For more information on how to achieve IFRS 16 compliance with help of Fatman Frame IFRS 16, see the introduction and book your demo with us