Processes are a major challenge within an IFRS 16 implementation, especially as the requirements for Finance related processes are more stringent in terms of checks and balances. Flaws in the process setup can impact the postings to the general ledger, diminishing the trustworthiness of financial disclosures.
As addressed in our first blog on IFRS 16, a new end-to-end leasing process needs to be implemented, reflecting newly required on-balance accounting of most lease contracts. This new process needs to be integrated within the existing process landscape. The main implementation goal is to create a harmonized and efficient end-to-end process, causing various challenges that need to be addressed.
What are the typical challenges during the process definition and implementation phase?
- Local differences in process, data and application landscape – multinational companies face local differences in the current process setup due to opposing regulatory requirements. These include different contract repository systems, processes and information flows that complicate the setup of a harmonized lease process.
- IFRS 16 related contract data availability – currently a company might have several contract management tools in use. Selection of a leading tool with additional data collection requirements based on IFRS 16 can lead to opposing opinions between the front and back offices regarding data format and quality. This may lead to decreased information quality and efficiency if several databases are maintained.
- New reconciliation needs for the Finance department – the accounts payable process is already defined and needs to be integrated with the new lease accounting process. It is necessary to identify the invoices that are related to IFRS 16 relevant contracts that ultimately lead to additional reconciliation process steps. This increases the workload of the accounting departments.
- Process standardisation and third-party dependency – car fleet contracts usually comprise a large percentage of lease contracts. Data is coming from vendors that will provide the information in their specific formats. This undermines the goal of one harmonized process. For other contracts the source lies within the company and does not dependent on a third party.
How to deal with challenges to support the process implementation?
Centrally led collaborative approach provides local guidance
- Build a project team that encompasses the knowledge of local specifics and can identify the biggest common denominator as a basis for a harmonized E2E-process.
- Implement the harmonized approach in the various countries and let them deal with local adjustments individually.
Flying squad for data gathering and remediation
- Establish a process to ensure a proper information flow to the accounting department.
- Source data out of one global system or define a leading tool and data enriching steps for lease accounting purposes.
Standardisation of process per lease asset type
- Anticipate a separate process that makes use of a data transformation engine to harmonize the processing of car fleet data due to the very specific circumstances surrounding car fleets.
- Design two lease accounting processes, one for car fleets and one for non-car fleet contracts that are harmonized within each other.
Smart Automation for efficiency in Finance operation
- Recognise the new standard as an opportunity to implement new process optimizing technology to integrate the accounts payable process and both lease processes.
- Use Robotic Process Automation (RPA) or OCR software for contract analysis for more efficient IFRS 16 processes as specific steps can be automated resulting in a more targeted allocation of human resources.
Addressing the mentioned challenges with the suggested approaches will help focusing on what is crucial and relevant for a successful process transformation while implementing IFRS 16.