Seven lessons from implementing IFRS 16

The new IFRS 16 accounting standard requires organisations to record rights of use and liabilities relating to leases on the balance sheet.  On the face of it, this is a straightforward requirement, and one that will enable better comparison of performance across similar business where one business owns key business assets and the other leases them.  In practice, the work required to collect the necessary data, prepare the accounting assessment and implement an IT solution is easily underestimated.

I have recently helped a London headquartered FTSE250 multinational implement the new standard.  They operate in over thirty countries around the world and have around 700 leases – predominantly buildings, and some vehicles and machinery.  They adopted the fully retrospective method, which of course added to both the data collection and accounting assessment complexity.  Our role was predominantly to implement the IT solution, but we became heavily involved in the overall project management, the data collection, and some of the accounting assessment.  It was an interesting project and a challenging one, and I’ve listed out some of the key learnings below. I hope this is useful to other organisations who are yet to prepare for the new standards (according to one KPMG report there are quite a few of you)!

Lesson One | The Team

Implementing IFRS 16 is not just an accounting project – unless you have few enough leases to perform the accounting assessment in a spreadsheet, then implementing the IFRS 16 standard is both an IT and an accounting project.  You need to structure your team accordingly.  The structure that worked well for us was to have three streams:

1. Data Stream – this stream works with the local accounting teams around the world to facilitate collecting the data.  
2. Accounting Stream – this stream is accountable for the accuracy of the accounting assessment.  They work with the local teams to ensure they’re trained well enough in the standard to provide accurate data.  They work with the auditors to agree on how the standard will be implemented, what discount rates to use etc.  They work with the IT team to define the requirements of the solution and test that it is fit for purpose.  They work with group finance to ensure the correct disclosures are made internally and externally.  
3. IT Stream – this stream is accountable for delivering an IT system to capture the lease information, calculate IFRS 16 adjustments, and provide output reporting.

But it’s important that the team works closely together and have overlapping skills.  For example, choose IT professionals with a good accounting understanding who have taken the time to learn the standard.  Choose accountants who are tech savvy and have experience of working on accounting IT projects.  Choose people for the data team who will be able to understand the accounting standard in quite some depth.

The team needs a strong project manager to ensure everyone is pulling together and has everything they need, and that stakeholders are well briefed.

Lesson Two | Get the Data Collection Template Right

Typically the lease information exists in the form of lease contracts, and these contracts are in the possession of local teams.  One important task is to have the local teams inspect those contracts and pull out the key information needed to perform the accounting assessment – this data needs to end up in the IFRS 16 IT solution.  There are two approaches here:

1. By far the best approach is to have the local teams enter the data directly into the IT system.  This may not always be possible as your project deadline may require you to build the IT solution in parallel to collecting the data.  
2. The most common approach is to capture the data using spreadsheets.

If you are using option (2) then it is really important to:

1. Ensure that the data you are asking for is sufficient.  Your accounting stream should design the template with the accounting assessment in mind.  
2. Ensure that the data is in a format that will easily upload into the IT system.  
3. Be really specific in the template what each field is asking for and its relevance for IFRS16.  There should be absolutely no room whatsoever for ambiguity if you want to avoid

Lesson Three | Training

The following people need to be trained in order for them to deliver the project efficiently and effectively

1. Local accounting teams  
2. Project data stream  
3. IT data stream  
4. Group finance

They need to be trained on two things:

1. The IFRS 16 standard  
2. Exactly how it is to be adopted in your organisation and what key decisions you’re taking to things like intrinsic interest rates

The best suited person to do this is someone from the project’s Accounting Stream.  Take training seriously, ensure training is thorough and has 100% attendance.  If you don’t do this, it will affect the quality of the data you collect, and the accuracy of the calculations performed in the IT solution.

Lesson Four | Don’t try to develop your own software

Just don’t.  We didn’t try on my project but having spent 20 years in Accounting IT I can assure you that trying to do it yourself will be a lot harder than you think.

Lesson Five | Choose the right software

We were engaged by our customer after they had tried and failed to implement a different software package that couldn’t meet their requirements.  Your accounting stream should invest significant time in defining your exact requirements of the IT solution to form the basis of your due diligence.  Ensure your chosen solution meets all those requirements, and don’t just take the vendor’s word for it.  Ask them to demonstrate their solution to prove out all your requirements.  Take references and ensure that there are other organisations who have requirements similar to yours that have been met by the software.

Lesson Six | Choose the right implementation partner

A few thoughts here:

• It makes a lot of sense to resource your Accounting Stream with someone from an Accounting firm, they’re likely to have previous experience implementing IFRS 16.  However, don’t assume that engaging an Accounting firm to manage all three streams will reduce risk by having a single vendor (neck to choke).  Often IT delivery teams within Accounting firms are very separate from accounting teams and it may likely end up feeling like you’re dealing with two vendors.  
• Pick an implementation partner that has experience delivering the tool, and where the team they are putting forward have a good accounting understanding, and specific understanding of the IFRS 16 standard.  Ensure they have a sound and tested approach to delivering the project and won’t turn up expecting to be lead by you.

Lesson Seven | Identify down-stream implications early on

Think through the entire impact of IFRS 16 and bake this into your project.  For example:

• Do you need to amend your ERP/ ledger to store the IFRS 16 adjustments and put in a process to feed that from your IFRS 16 solution?  
• Do you need to update your consolidation/ reporting solution?  
• What new/ different external disclosures do you need to make as a result of IFRS 16?  
• Are there impacts on other internal measures like management reporting and reward?  
• Do you need to restate historical actuals or budget/forecast data to reflect IFRS 16?

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