Managing your lease portfolio’s accounting

Managing your lease portfolio’s accounting

Since the adoption of IFRS 16 Leases back in 2019, Tier 1 and Tier 2 for-profit entities that report under NZ IFRS or NZ IFRS (RDR) have been required to apply “on-balance sheet” accounting to the vast majority of leases as lessee.

Managing the accounting requirements of IFRS 16 has created practicable challenges for entities with:
  • Large lease populations, and /or
  • Leases that are not subject to fixed lease payments over a fixed term (e.g., property leases that include renewal and termination options, and lease payments subject to periodic rent reviews, CPI uplifts, etc.).
On the adoption of IFRS 16 (and in subsequent years) entities made a choice between whether the lease accounting would be managed:
  1. Internally on spreadsheets.
  2. Internally on specialised lease software (direct licence).
  3. Externally via lease management outsource arrangements (utilising either (1) or (2) above).
Initially, the decision as to which of these approaches an entity selected was based on a balance between cost and internal resource for the nature and size of the entity’s lease population, as well as whether the entity was audited (as the degree of audit work required differs, particularly in the case of (1) above)

For example, managing lease populations on spreadsheets ((1) above) was the lowest cost option (as it only incurred already fixed internal resource costs.

By contrast, entities with moderate to large sized lease populations and/or with a large number of property leases typically found that having leases managed on specialised lease accounting software (via either (2) or (3)) was necessary (particularly where the entity was audited).

However, approaches (2) and (3) obviously had real cash outflows by way of (licence) fees to be paid, when compared to (1)).

The other consideration that entities considered was the toll that managing lease accounting had on their already stretched finance teams. Where an entity elected to go with approaches (1) or (2), this required the entity to have dedicated staff (including back up staff) proficient and trained in:
  • The requirements of lease accounting under IFRS 16, and
  • How to use the specialised lease software, or make the necessary manual updates to spreadsheets when changes in the lease population occurred.

Our observations to date

(a) Staff resourcing and expertise

It would be fair to say that many entities underestimated the internal time and cost commitment that approaches (1) and (2) would end up having on the (more crucial) day-to-day, business as usual activities of their finance teams and other departments.

It has also become apparent that option (1) practicably is only really manageable for moderately sized lease populations that had a small to medium number of leases.

While lease accounting is not particularly complex, it is however at times quite involved and requires a grounded working knowledge in both the fundamentals of lease accounting under IFRS 16, as well as the mechanics of whatever method an entity uses to manage the lease accounting.

In recent years, many entities have found themselves in a position where the current finance teams have limited expertise and/or availability to manage the entity’s lease accounting due to staff attrition which was exacerbated by COVID which saw a lot of movement of staff within the accounting profession.

Accordingly, we have seen an increasing number of entities in the unfortunate position of not having staff with knowledge or knowhow to make updates to the entity’s lease spreadsheet or specialised lease accounting software (including where the person responsible had not changed year on year). This has led to significant issues for these entities for their annual reporting purposes.

We have also observed entities (particularly those with large lease populations) decide that the often significant effort to manage the entity’s lease accounting was not an effective use of their staff’s time, and not adding any value to the critical day-to-day finance functions of the entity.

Accordingly, we saw many entities elect to move to externally outsourced lease managed arrangements ((3) above), such as BDO’s MLS offering.

(b) Increases in licence fees

In recent years, as the hosting costs for cloud software providers have increased, so too have the prices for specialised lease software products.

As a consequence, we have seen a number of entities determine that the current price points of direct licences for specialised lease software has tipped the balance in terms of cost versus benefit – particularly in the current economic climate where entities are focusing on managing costs.

Accordingly, we have seen many entities elect to move to externally outsourced lease managed arrangements ((iii) above), such as BDO’s MLS offering.

In the vast majority of these cases (and particularly for those entities with large lease populations)  the fee for BDO’s MLS offering is now notably more cost effective than competing direct licence models – with the added benefit of reducing internal time and cost as staff are largely released from the process of managing the lease accounting on a regular basis.

Final food for thought

For entities currently concerned about the value-for-money of their existing specialised lease software, the time commitment that managing the entity’s lease accounting has on their staff, or simply thinking “Surely, there must be a better way?”, we would recommend that Management serious consider whether an externally outsourced lease managed arrangements such as BDO’s MLS offering is something to consider.

In the last six months, we have seen an exponential increase in the number of entities enquiring about (and then moving onto) BDO’s MLS offering - particularly from other (direct licence) specialised lease software.

For entities with upcoming 31 March 2024 and 30 June 2024 reporting dates, it is not too late to get in touch for an obligation free consultation to discuss whether the BDO’s MLS offering is something that would be fit for purpose for you entity.

Further details of BDO’s MLS offering can be found on BDO’s website or contact our Head of IFRS® Advisory,  James Lindsay directly (

For more on the above please contact your local BDO representative.