Trying to achieve IFRS 16 and ASC 842 compliance manually is fraught with pitfalls. Find out how reliable lease accounting software can change this.

The implementation of IFRS 16 in the UK and ASC 842 in the US in 2019 sent shockwaves through organisations and public bodies in both countries, and further afield.

IFRS 16 alone impacted one in every two companies, not to mention public bodies, and changed the way they report lease agreements.

The introduction of these lease accounting standards wasn’t rash, as they’re designed to ensure greater transparency between lessees and investors. 

Even so, the challenges businesses face in complying with these regulations remain a source of frustration for many.

FMIS’ lease accounting solutions offer a practical solution that automates many of the processes involved, reduces risk, and ensures transparency.

The Challenge of Compliance

Arguably, the most notable result of IFRS 16 and ASC 842 is how they’ve improved global financial reporting.

They’ve achieved this by requiring most leases to be recognised on the balance sheet, including operating lease obligations that were regarded as off-balance-sheet in the past. That said, there are differences between the two standards:

IFRS 16: All leases are treated in a similar way for accounting purposes.

ASC 842: Finance and operating leases are distinctly different, resulting in a difference between comparability and expense recognition across international standards.

Main Compliance Challenges

Understandably, the changes ushered in by IFRS 16 and ASC 842 present a variety of challenges for businesses and public bodies in the UK. The main challenges include:

Number of assets per schedule: While real estate leases usually include a single large asset, such as land or a building, equipment leases may contain hundreds or thousands of assets per schedule.

The biggest challenge here is that each asset must be managed as a separate lease.

Diverse ownership structures: In larger organisations, real estate is usually managed by a centralised real estate group under the supervision of the CFO, but equipment leases are not managed by a centralised group.

Each lease’s ownership depends on the asset type, making data abstraction more difficult.

Lease complexity and monetary value: Even though equipment and software lease portfolios do not have the same monetary value as real estate leases, there are more assets and leases for them than for real estate.

This can lead to organisations focusing most of their lease accounting processes on larger-value real estate leases while paying less attention to equipment leases with more complex compliance requirements.

Complex calculations: Equipment and real estate leases both include base and variable rents, although each lease type structures these differently.

 Equipment lease base rent calculations are usually based on a percentage of the equipment’s original cost. 

How Lease Accounting Software Can Help

While organisations can take a manual approach to IFRS 16 and ASC 842 accounting, this comes with serious risks, such as a heavy workload that leads to missed deadlines, no audit trails, and calculation errors. FMIS’ lease accounting software is the solution to escaping these pitfalls:

Automated Complex Calculations

Managing hundreds or thousands of leases with different payment structures requires complex calculations. Performing these manually could lead to human error that has a significant ripple effect.

By offering automated calculations, FMIS’ lease accounting software ensures accuracy, compliance with IFRS 16 and ASC 842 standards, and consistency across large asset portfolios. 

With this software, organisations can automatically calculate adjustments to the right-of-use asset and lease liability to produce general ledger postings and schedules.

They can also track mid-term adjustments and early settlements, automate actuarial interest charge calculations, and close periods to prevent reconciliation problems.

Audit Trails and Data Transparency

Audit trails and data transparency help prevent illicit activities such as money laundering and fraud while supporting compliance with regulatory requirements

. Such transparency also helps organisations, auditors, and regulators identify discrepancies and errors. 

FMIS’ lease accounting software provides a clear audit trail of every approval, calculation, and change, supporting internal controls and reducing the risk of non-compliance. 

Streamlined Reporting and Disclosures

Manual lease management and accounting make it difficult for organisations to access the data they require for reporting and disclosures. The process can be incredibly time-consuming, keeping financial teams from analysing data. 

All the financial reporting required for compliance with the latest IFRS 16 and ASC 842. Organisations can automate reporting to produce PDF and Excel reports with the ability to export data from the software.

IFRS 16 and ASC 842 Compliance the Easy Way

Complying with IFRS 16 and ASC 842 accounting standards does not need to be an ongoing headache for organisations.

With lease accounting software from FMIS, manual calculations, lifecycle tracking, and reporting are a thing of the past. Now, it’s easy to step into the future with automation that offers accuracy and ease.