This is an extract of the article that was written by our CEO Terje Glesaaen in cooperation with KPMG Partner Serge Fjærvoll in the professional publication “Revisjon og Regnskap” in December 2019
The first part is based on an interview companies with an extensive IFRS 16 implementation process during 2018 and the beginning of 2019 with different software solutions.
Several companies did not have an overview of the use of resources in the IFRS 16 implementation process and of those who would make an estimate, the lowest estimate was a quarter of full-time equivalents (internal plus external). Some stated that there were many people and functions involved, both at the corporate level and in the reporting the units. The companies have used external accounting advisors to a limited extent but raised questions with their auditor and participated in external courses.
Companies that we interviewed purchased and used externally developed software for registration and calculations. Companies had experienced changes in the systems during the implementation process, and no suppliers had a fully developed solution. Companies that chose the integrated system, which was further developed specifically for the company in question, used resources on quality assurance and that they had partly to pay for the development.
Most companies indicated that the overall use of resources was higher than expected.
All of the companies we spoke to had established a project group or provided instructions and guidance to the group. Business areas or units were given responsibility for mapping and assessment to a greater or lesser extent. Some monitored contracts and made calculations at the group level.
Several of the interviewed companies have a decentralized reporting structure where they are based on reporting from subsidiaries. We perceive that training and understanding of what is to be reported has been time-consuming. IFRS 16 has effects on many reporting entities and can be difficult to include “on top” in consolidation without being distributed among the entities. On the other hand, in many cases IFRS 16 cannot be used in local accounts. Separating these effects places demands on their own elimination units, journals and their own accounts.
After implementation there is a need to register new contracts and account for changes in contracts. This provides a continuous need for focus on IFRS 16 in the organization.
Everyone we have talked to has used modified retrospective method. Practical exceptions and implementation options amount the companies varies. Many companies have chosen not to include short term contracts and low value assets in the lease liability. Service elements (typically common costs) have been included in the lease payment recognized in the balance sheet, portfolio assessments have been used and some lease contracts have been included based on the modified retrospective approach to reduce future depreciation of the Right of use asset.
Companies with decentralized performance responsibility and structure have in many cases not had central records of contracts and have previously relied on reporting from companies for note information on contractual obligations in accordance with IAS 17. When introducing IFRS 16, a common method has been to review the general ledger to identify the leases. Systems were required to record contracts and information for the IFRS 16 calculations. Earlier information was found to be deficient, and several of the companies thus obtained a better overview after the contract review.
Companies that have many leases from the same supplier (s) have to some extent agreed that the supplier (s) should provide periodic overviews of leases with key information, which the company uses to update its calculations. This may be the case for leasing of cars and for machinery and equipment that are rented in large quantities for projects.
The companies we interviewed have, to a limited extent, established and documented policies and procedures to identify and manage changes, determine whether there are changes that affect earnings or balance sheets, and make new calculations. This is something the companies will continue to work on in the future and is part of the company’s IFRS 16 implementation. It can be complicated and requires a good understanding of the standard and it will be an advantage that complicated changes in the calculations are made by only a few people with sufficient insight into IFRS 16.
Data and specifications for note information and additional information for the 2019 financial statements have been little focus for the companies in the implementation process. Some will customize the internal report package for the annual report for additional data.
Read more about IFRS 16