Changes in accounting standards have made lease accounting more difficult. Adopting IFRS 16 leases, for example, makes compliance cumbersome as it involves adjusting to new policies, systems, and processes. Thanks to lease accounting software, a firm’s compliance with new standards can be a breeze.
January 1, 2019, was the deadline set for compliance for all businesses reporting using the new standard. However, research shows that many firms are still behind in their transition. This is probably because some businesses are still practicing IFRS 16 illustrative examples using excel sheets while others are using accounting software that doesn’t deliver its promises. If compliance with the new standard remains a problem, then it’s time to find a reliable software solution. Here’s a basic guide to IFRS 16 standard and how a reliable software solution can help your business.
How is a Lease Calculated in IFRS 16?
Under the IFRS 16, lessees are required to recognize their assets and liabilities coming from a lease. After all, the standard aims to report information that offers a basis for companies to determine the timing, amount, and uncertainty of cash flows arising from rentals as well as the faithful representation of lease transactions.
The IFRS 16 mandates that lessees recognize the assets and liabilities for all short-term rentals or those with a lease term of 12 months or below except in cases where the asset value is low. The lessee must also recognize the right-of-use asset that is a representation of the underlying rented asset as well as the lease liability that represents the obligation to make rental payments.
What is Lease Accounting Software?
Lease accounting software is an application designed specially to automate the report processing for the new standards— GASB 87, ASC 842, SFFAS 54, and IFRS 16. The software gathers information about a rental contract like payment frequencies, rent formulas, and discount rates then proceeds to do the necessary calculations to generate the required journal entries for the financial statements.
What are the Features to Look For When Purchasing an IFRS 16 Software Solution?
There are plenty of software solutions promising quick and easy compliance with the IFRS 16 standards. However, not all software is created equal. As such, businesses should consider these key features.
Configured to Meet All IFRS 16 Disclosure Requirements
The new standard contains plenty of changes when it comes to disclosures. There are now more disclosures needed which include, the total outflow of leases, right-of-use-assets, and interest expenses for lease liabilities. A reliable IFRS 16 software solution should have the proper configurations to generate all the reports the business needs.
The accounting software should be designed to handle all the complexities of IFRS 16 to ensure accuracy and to save the business a lot of time. Some of the data features that the software should have include borrowing rate charts, practical expedient elections, and useful life charts.
Can Fully Support All Internal Controls
Reflecting the bulk of the lease contracts into the balance sheets highlights the company’s lease accounting controls. It is essential then to opt for software that can provide support to internal controls. This means choosing a software solution offering features like data entry validation and role-based access.
A Cloud-Based SaaS System
A centralized location and availability of data are some of the primary benefits of having a SaaS tool for lease accounting. A SaaS system allows the accounting department to access the lease rental documents anywhere as long the person has access to the internet. A centralized location and easily accessible information save company time and space as there won’t be any need for hordes files in hard copies.
Plus, users in the accounting and other departments will have custom access levels to the lease contract data. This feature allows the company to provide access to those who need the data without compromising data security.
Automated Critical Alerts
Missed, late, or overpayment of leases can happen if companies stick to the manual way of doing things. Fortunately, these can be avoided with a stable IFRS 16 software solution. Automated alerts that are sent via email every time an important date is coming up will prevent missed or late lease payments.
Does IFRS 16 Apply to Software Licenses?
There are also software leases in lease accounting, offering the customer a right-to-use of the software once the lease contract starts. The software will be treated as an intangible asset in compliance with the IAS 38. However, the lease of software accounting is outside the scope of the IFRS 16.
Transitioning to new accounting standards including IFRS 16 will always be complicated. Businesses will do well to invest in a reliable lease accounting software instead of having employees in the accounting department do countless of IFRS 16 practice questions and answers to help them with the changes. At Visual Lease, we will ensure an easy transition to new standards with our reliable software.