Are you ready for your reporting obligations under IFRS16?

If you’re not already in auditor discussions regarding the potential consequences of IFRS16 on your business, now is the time to start thinking about your response. While the new standard may have no impact on your statutory reporting today, it is important your company now prepares for the forthcoming impact on your business.

The Problem

Disclosure of a company’s financial obligations has always been key to informing investors decisions to trade in that company’s stock. However, the asset leasing process to date has created financial reporting issues when companies try to meet this obligation. This has meant companies have historically failed to disclose these obligations where they are the lessee party to an operating lease,  whereas there has always been a requirement to disclose the financial obligations of a company where they are the lessee party to a Finance Lease.

In order to understand this discrepancy against company’s reporting their obligations, it is important to understand the difference between a Finance and an Operating Lease. The rules are complex, but a good rule of thumb is that in a Finance Lease, the lease term is greater than or equal to 75% of the economic life of the asset.

So, if a company leased a £5,000 multi-function printer with a 4 year economic life on a 3 year lease, they would need to declare that liability in their statutory accounts. However, if they leased a multi-million-pound train with a 25 year economic life on a 7 year lease, that would be considered an Operating Lease and would result in the company not having to declare the liability in their statutory accounts and just create a need to expense the asset in their Profit and Loss.

Clearly, the effect of this anomaly can result in some potentially significant reporting impacts on a company’s financial obligations.

The Financial Reporting Change

To address these concerns, the international accounting bodies have released a new Financial Reporting Standard, IFRS16, which extends a company’s financial reporting responsibilities. This requires them to account for their financial liabilities as a Lessee both for Finance and Operating leases. Specifically, where the Lease Term is >= 12 months and the Net Present Value (NPV) of the Rent streams you are obligated to pay is >= £3750 ($5000).

The new standard comes into force in January 2019 and has a retrospective requirement to report like-for-like on two prior years.

The Oracle Solution

Oracle has addressed the changes needed under IFRS16 through new functionality introduced via a series of patches to the Oracle Property Manager module (R12.1.3+).

The first of these patches released in December 2017 introduced a new ‘Calculation Program’ alongside a series of IFRS16 focused reports. This allowed clients to re-calculate their ‘Right-of Use’ asset leases affected by IFRS16 and report on them on both a current and retrospective basis.

The second patch released in June 2017 applies changes to the standard accounting processes in Oracle Property Manager allowing companies to properly account for the various events on a ‘Right-of Use’ asset from a company’s perspective. It introduces new balance sheet balances, such as right-of-use and lease liability, and new generated expenses from amortization of right-of-use and liability interest expense.

To assist with the management of assets other than property, Oracle Property Manager has been designed to provide standard asset hierarchies to cater for all ‘Right-of-Use’ asset types, so can be used to manage all IFRS16 accounting obligations including:

• Leased Properties
• Leased Vehicles
• Leased Capital Goods

The Oracle Property Manager module is also fully integrated with the other Oracle Financial sub-ledger modules including Accounts Payable, Accounts Receivable and General Ledger allowing companies to generate payment and billing entries directly into their subledgers.

Finally, the new functionality introduced into Oracle Property Manager allows companies to create their own assets and associated depreciation rules directly through the Oracle Property Manager module rather than relying on implementing the Oracle Fixed Assets solution. It should also be noted that, unlike Fixed Assets, Oracle Property Manager is a multi-currency sub-ledger.

As an example of what the Oracle Property Manager can now offer, let’s consider an example of 3 year lease costing £100,000 a year payable in advance. Oracle Property Manager offers the ability to create both the Asset Lease, the associated ‘Right-of Use’ Asset and to define all the present value lease payments from the start of the lease based on an interest rate defined by the client. Suppose the company’s general cost of borrowing, currently 7%, is used then the present value of the lease would be £280,229.54.

The Property Manager application manages all the accounting generated by this lease through a series of accounting entries:

1. Initial Lease activation

The initial accounting entry reports the Lease Liability associated with the ‘Right-of-Use’ asset:

• DB ROU Asset             £280,229.54
• CR Lease Liability        £280,229.54
  
  

2. Annual lease payments via Accounts Payable

The application then further provides the streams necessary to automatically generate the main accounting transactions over the lease life cycle:

• DB Lease Liability       £100,000.00
• CR Payables                £100,000.00
  
  

3. Monthly Interest Accrual

The application also recognises the monthly interest associated with the lease:

First Month

• DB Interest Expense    £1,051.34
• CR Lease Liability        £1,051.34

Second Month

• DB Interest Expense    £1,057.47
• CR Lease Liability        £1,057.47
• Etc…
  
  

4. Monthly Straight Line Amortisation of the ROU Asset

Finally, the value of the Asset is amortized over the course of the lease as a Lease Expense:

First Month

• DB Lease Expense       £7,784.15
• CR ROU Asset     £7,784.15

Second Month

• DB Lease Expense       £7,784.15
• CR ROU Asset     £7,784.15
• Etc…

The effect of managing these lease ‘streams’ is that at any point during the lease term the Property Manager Solution can provide the current lease liability directly from the balance sheet account. The solution can also separate out the actual lease expense from the interest expense and allow companies to automate the regular AP Payments to the supplier to cater for changes in the contract term, contracted lease payment and interest rate. It is also able to structure rent payments including free periods at the start or end of the lease.

No additional Licence Costs

A key benefit to existing Oracle clients already covered by an existing Oracle Financials licence is that the new functionality offered by Oracle Property Manager introducing the new IFRS16 functionality will be provided free of charge. The Oracle Property Manager module will be released in a slimmed down version with only the functionality specific to the management of asset leases under IFRS16 being available. This will still provide clients with the ability to create assets, asset leases, generate IFRS16 reporting, account for asset leases, generate lease transactions as well as depreciate assets through Oracle Property Manager but should vastly reduce any associated ongoing licence costs.

Use Claremont for your IFRS16 implementation

Whether or not you currently use Oracle Property Manager, Claremont can implement your new IFRS16 Oracle Property Manager solution.  Claremont is a specialist in managing Oracle lease, property and asset solutions and our consultants have worked extensively with the Oracle Property Manager module over a number of years. As well as configuring the module specific to your requirements, we can migrate all of your existing asset and lease data to the new solution.

Alternatively, should you wish to perform migration activities yourselves, we can provide spreadsheet loaders to enable you to load your assets and current leases to the solution.

Finally, Claremont can fully test your IFRS16 solution ensuring it does not impact your system and aligns with your existing business processes. We can provide a full knowledge transfer to ensure your staff fully understand all the new IFRS16 functionality being introduced.

Summary

The legal requirement for IFRS16 to report all lease liabilities for accounting years starting on, or after 1st January 2019 with comparative data for 2017 and 2018 financial years will place additional responsibilities on your company to account and report your asset lease liabilities correctly under these new standards.

Claremont will provide you with unrivalled expertise to help you meet your IFRS16 obligations, in a cost-effective manner through the use of the Oracle Property Manager IFRS16 solution and provided at no extra licence cost to existing Oracle Financials licence users.

More Information

Contact us to learn more about kick starting your Oracle Property Manager IFRS16 implementation to meet the new reporting standard.