Changes in accounting standards have made lease accounting more difficult. Adopting IFRS 16 lease accounting, for example, has made compliance cumbersome as it involves adjusting to new policies, systems, and processes. But with IFRS lease accounting software, a firm’s compliance with new standards can be a breeze.
While the January 1, 2019, deadline for IFRS 16 compliance has passed, research shows that many firms are still lagging in their transition to the new standard. This is probably because some are still practicing IFRS 16 illustrative examples using excel sheets, while others are using accounting software that doesn’t deliver on 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 the new standard and how a reliable IFRS 16 software solution can help your business.
How are IFRS 16 leases calculated?
Under IFRS 16, lessees must recognize their assets and liabilities coming from a lease. After all, the standard’s goal is 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 a faithful representation of lease transactions.
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. Lessees must also recognize the right-of-use asset that represents the underlying rented asset, as well as the lease liability that represents the obligation to make rental payments.
What is IFRS Compliant 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, such as payment frequencies, rent formulas and discount rates, then does the necessary calculations to generate the required journal entries for financial statements.
IFRS 16 Software Key Features & Benefits
There are plenty of software solutions promising quick and easy compliance with the IFRS 16 standard. However, since not all software is created equal, businesses should look for the following 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, including 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 disclosure reports the business needs.
The accounting software should be designed to handle all the complexities of IFRS 16 to ensure accuracy and 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.
Full support for 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 IFRS 16 software that can provide support to internal controls.
This means choosing a software solution offering features like data entry validation and role-based access.
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 staff to access lease documents anywhere as long the person has access to the internet. A centralized location and easily accessible information save companies time and space, eliminating the need for hordes of files in hard copies.
In addition, users in accounting and other departments can have custom access levels for lease contract data. This feature allows the company to provide access to those who need it without compromising data security.
Automated critical alerts
Missed, late or over payment of leases can happen if companies stick to the manual way of doing things. Fortunately, these can all be avoided with a stable IFRS 16 software solution. Automated alerts that are sent via email every time an important date is coming up prevents missed or late lease payments.
Does IFRS 16 apply to software licenses?
There are also software leases in lease accounting, entertaining the right-to-use for the software once the lease contract starts. The software should be treated as an intangible asset in compliance with IAS 38. However, accounting for software leases is outside the scope of IFRS 16.
IFRS 16 software can ease the transition
Transitioning to new accounting standards, including IFRS 16, will always be complicated. Businesses would do well to invest in a reliable lease accounting software to manage the changes and help the accounting department adopt IFRS 16.
At Visual Lease, we ensure a smooth transition to the new standards with our reliable software.