If you aren’t already compliant with the new AASB 16 leases standard, it is now crucial to address these important new requirements.
How do organisations implement the large-scale accounting change this standard requires? Some entities are turning to technology, others to outside consultants – and some are trying to make do with existing resources.
AASB 16: A new accounting standard for leases
AASB 16 came into effect for most entities from 1 July 2019. Impacting almost all entities across the public and private sector, the new standard requires lessees to bring most leases on-balance sheet from 2019 – fundamentally changing the accounting treatment of leases by lessees. Not only is the new standard onerous in its requirements, it is also technically complex to operationalise. For organisations starting on this journey, here are a few tips to ensure success, and common pitfalls to avoid.
Look after your people
These complex requirements have put increased pressure on finance teams who have to juggle the new requirements in addition to their BAU roles. Through working with clients across the public and private sector, KPMG has observed that organisations often face workforce challenges when implementing AASB 16 processes – no matter how well-prepared or sophisticated the finance and reporting teams are.
“Many organisations are not prepared for the amount of time and resources required, not only in implementation but also moving forward. Increased effort is needed beyond the initial steps of identifying the complete population of leases, including embedded leases, and capturing data for them – to then performing ongoing reassessments and recalculations for existing and new leases as part of BAU,” says Marina Shu, Associate Director, CFO Advisory, KPMG.
It’s not just finance teams being affected, and Shu recommends getting buy-in from other key business units to ensure successful change management.
“Buy-in from non-Finance teams is incredibly important and cannot be underestimated.”
“Depending on how decentralised an organisation’s leasing process is, the impact of AASB 16 will likely be wider than just the finance team. Due to the nature of the new standard, timely and accurate communication – between Finance and other functions such as property, procurement, IT, Legal, Ops and even HR – is critical to ensure that new or changes to existing leases are reported correctly and in the right period,” says Shu.
AASB 16 presents a complex problem for finance teams and beyond and needs to be monitored for developments as interpretations continue to evolve. Adequate resourcing, identifying skills gaps, and deploying learning activities are all likely to be important considerations in any implementation project.
Andrew King, Partner, CFO Advisory, KPMG notes that “many organisations are either re-deploying resources from elsewhere in the organisation to take on the new activities required, or asking existing resources to absorb them. This, coupled with the concentration of effort around month-end, requires organisations to consider the agility of their workforce and workflow management,”.
Choosing the right solution
Many entities are choosing to outsource compliance activities or turning to technology to ensure existing teams aren’t stretched too thin.
“Some are using simple spreadsheets for smaller lease portfolios, whilst others are opting for full system implementations or looking to outsource their AASB 16 lease accounting activities to third parties,” says King.
Employing specialised lease accounting models rather than simple “DIY spreadsheets” has the advantage of simplifying manual processes and reducing human error when performing complex calculations. However, where larger volumes of leases or reassessments are at play, entities are also assessing specialised lease accounting software – with cloud-based solutions offering remote accessibility, which is vital for dispersed teams.
But stand-alone lease accounting software can also have its challenges.
“The process of system selection and implementation can be disruptive, with many entities investing a lot of time in configuration, testing and training staff,” says Shu.
“Many are still refining their functionality as they encounter complex real-life lease scenarios. In the meantime, organisations are resorting to manual workarounds to compensate for functionality that doesn’t exist in the system.”
To avoid these challenges, many public sector entities are engaging third parties to handle the manual work: outsourcing the data capture, data entry, and ongoing calculations – thereby allowing their core finance function to focus on the judgemental aspects of the new standard. Each option presents its own advantages and challenges – the right choice depends on the requirements of your organisation.
To find out more about AASB 16, including better practice advice and tips to remain compliant, head to the KPMG website. There you can find out more about KPMG’s full suite of AASB 16 solutions, including Lease Hub, a managed service providing AASB 16 compliant lease accounting.