How to prepare for IFRS 16 and ensure public sector lease compliance

The new reporting standard for lease accounting is designed to improve reporting accuracy and transparency. But if you are still using legacy systems, ongoing IFRS 16 management will create yet more manual work for your finance teams. If you have leases that are not yet compliant with IFRS 16, it’s wise to make preparations now.

IFRS 16 is the new reporting standard for lease accounting which came into force in January 2019. Although the public sector compliance deadline was initially deferred to April 2020, it was recently deferred again until April 2021, but there is still urgency on public sector organisations to act.

The new standard eliminates off-balance-sheet lease accounting by removing the distinction between finance leases and operating leases. This means that virtually all your leases will need to be reported in your balance sheet during April 2021.

IFRS 16 impacts operating expenses and asset depreciation in the income statement. The only two exemptions are leases of 12 months or less or those with low value (typically £5,000 or less).

While IFRS 16 will be self-enforcing and largely self-regulating, and there will be no penalties, non-compliance could severely impact access to capital markets — as funders base their assessment on IFRS16-compliant financials. 

IFRS 16 compliance challenges for public sector lessees

For public sector organisations, IFRS 16 means you’ll need to reassess all your operating leases and understand the changes in right of use calculations and their impact on KPIs. And you’ll need to find a more efficient way to collect, structure and document all existing and future leases within your organization.

If you’ve been using legacy software to manage lease accounting up till now, and plan on doing so into the 2021/2022 financial year, this will create extra manual work for your finance teams.

This will burden your people with extra tedious work, reducing their productivity and morale, and negatively impacting your ability to deliver improved citizen services. But the extra work is unnecessary if you have the right solution.

Breaking free from legacy systems

The best way to ensure all your leases comply with the new standards in the short and long term is by investing in a modern solution that quickly migrates you to IFRS 16 in as few steps as possible, then streamlines your ongoing lease financials.

The solution you choose must help you easily and efficiently manage large volumes of leasing data. It should enable you to quickly identify the effects of each leasing contract on balance sheet, income statement and performance indicators.

It needs to provide data collection, calculations, reporting and disclosures which ensure compliance with IFRS 16. And it’s imperative that the solution you choose works seamlessly with your ERP or consolidation systems.

ERP and FP&A for public sector

To support the new standard for your lease reporting and analysis requirements, while reducing the admin burden on your people, your IFRS 16 solution must also be supported by an ERP system and financial planning and analysis (FP&A) software that are both built for public sector organisations.

Your ERP should deliver visibility and control over every aspect of your business, from financial and procurement management to operational reporting and field service management. Ideally, your FP&A will be powered by artificial intelligence, machine learning and best practices.

Both solutions must automate low-value-add tasks while being adaptable and intuitive to use. This means you will be able to quickly adapt to change and make the best of your teams’ precious time so you can maximise stakeholder benefits with available funding — all while meeting the IFRS 16 regulations.

IFRS 16 app

Our IFRS 16 app helps you identify the effects for each leasing contract with intuitive point-and-click simulation and analysis options (including visualizations) so you can see the full picture. It can be implemented in less than 10 days, it forms part of Unit4 FP&A and is supported by our people-centric Unit4 ERP.