How to Calculate Tenant Improvement Allowances Under ASC 842
A guide on how to account for TIA under ASC 842.
As we pass the financial year-end for many organizations across Australia and New Zealand, finance leaders are reflecting on the lessons learned and key decisions of the past 24 months. Achieving compliance with IFRS 16 was a catalyst for change within many organizations, motivating them to embark on digital finance transformations, using automation to deliver end-to-end process improvements and cost savings. The recent COVID-19 situation has amplified the need for organizations to preserve cash, forcing finance chiefs to look for new ways to improve the stewardship of capital.
Although the AASB 16 and NZ IFRS 16 adoption deadlines are now in the past, most organizations are still looking to uncover the business value of their compliance journey. Our understanding of the standard evolved from it being an accounting problem, to a data and communications problem, and then a lease management problem, and finally a catalyst for business improvement, delivering significant economic benefits. The challenge that nearly every company is facing today is that the decisions they made in 2018 and 2019 were based on the understanding of the requirement at that time. And that is why we are seeing a significant global trend of companies reviewing their system needs in the light of how they can leverage the opportunity.
To achieve compliance, many organizations have automated a part of the lease lifecycle, but they are still facing challenges. Data governance and accuracy have become critical, and with so many competing priorities, many find it difficult to fully automate their leasing process and drive real ROI. During a recent webinar with LeaseAccelerator, PWC, Boral and King & Wood Mallesons, 81% of attendees indicated that the key lesson their organization learned from first time adoption is that access to accurate data is critical.
The following points were also highlighted by webinar panelists as lessons learned from the first reporting cycle;
In 2020, PWC undertook some analysis of financial statements lodged by listed companies in Australia and combined it with findings of their recent global lease accounting survey. As expected, one of the key themes which came through was that the standard has introduced complexity that has been difficult to communicate both internally and to external stakeholders. This has ultimately made it difficult for finance teams to explain the changes in a way that is consistently understood between peer companies and across industries. In LeaseAccelerator’s webinar, audience members identified Procurement, Legal, Treasury and Investor Relations as departments outside of finance that have eyes on IFRS 16. It’s critical that lease accounting projects consider the requirements of these diverse stakeholders to ensure success.
In an IFRS survey conducted by Chartered Accountants ANZ 67% of respondents agree that bringing all leases onto the balance sheet will improve the quality and comparability of financial reporting. Many organisations are seeing that improved visibility is leading to better M&A decision making while debt financing transactions (especially debt covenants) are highlighted in the LeaseAccelerator webinar as a broader implication and business benefit of IFRS 16.
So how are successful organizations optimizing the opportunities associated with IFRS 16 compliance? They are taking a full lease lifecycle perspective. By looking at leasing as a continuous cycle, they can use automation to optimize decisions and drive down cost and risk. They can build strategic insights each time they go through the cycle, driving constant improvement. Partnering with a platform provider that provides global lease lifecycle automation which automates lease management, improves cashflow and simplifies compliance is the first step.
Careylee Suttie, the National Financial Accounting Manager from Boral, the leading international building products and construction materials group, says that “The IFRS 16 standard has been an enabler for us to shine the light on leasing arrangements, which has in-turn equipped us with making better decisions around the nature of our spend. To mention the old adage, ‘When it’s not recorded, it cannot be measured’. The transparency that the standard has brought us has moved us into a whole different space. We have been using the Lease vs. Buy modelling to help us understand which pathway we need to take with assets.”
Furthermore, Ms. Suttie states that “Prior to IFRS 16 this was particularly difficult to do [Lease vs. Buy modelling] especially given our plant and equipment, where there was no central repository of data. Now that we have one central repository, and an automated system to do the calculation, we can run these scenarios quickly and easily. We have absolutely embraced the spotlight on rental, hire and leasing arrangements.”
So if, like many, you’re reconsidering the decisions you made over 12 months ago, consider a platform that can help you realise these benefits. Embrace a long-term vision when making your short-term decisions, especially regarding the ability to automate stakeholder communication and data collection. Now that you’ve most likely completed the most difficult challenge of capturing the data, a move to systemisation and automation will be fast and simple and will have a long-term positive impact on your business moving forward.
Listen to the full webinar here: https://explore.leaseaccelerator.com/webinar-ifrs-16-panel-delivering-business-benefits-after-compliance/, or contact us today if you would like to explore your options and hear how we’re helping many organisations across the APAC region to optimise their IFRS 16 lease accounting compliance process.
A guide on how to account for TIA under ASC 842.
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