Lessees who apply New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) now have a new accounting standard to apply (NZ IFRS 16).
This will see complexity increases for leases of property, office space, vehicles, and other heavy plan and equipment.
To deal with this, affected entities basically have to decide between two approaches:
1. Manage the accounting manually on spreadsheets…for each individual lease, or
2. Look to an automated software solution to handle the accounting with the click of a button.
For entities considering the later, this is where BDO’s flagship lease software solution, BDO LEAD can help!
BDO LEAD is the smart choice for lessees in managing the complexity of lease accounting.
Update: In May 2020, NZ IFRS 16 was amended to provide an alternative (simplified) approach to addressing changes to lease payments as a result of COVID-19.
This approach departed from the "normal" way these changes would have otherwise been accounted for, including in lease-software solutions like BDO LEAD.
In response, BDO has made the necessary changes to BDO LEAD to incorporate additional functionality to ensure that COVID-19 related lease payment changes are treated in accordance with NZ IFRS 16.
Existing and potential users can rest assured that BDO LEAD remains a fully NZ IFRS 16 compliant lease software solution.
While accounting standards are not an entity’s enemy, Sun Tzu’s famous quote from the Art of War at the top of this page is very apt when thinking about how to approach the adoption NZ IFRS 16.
This is because the effort and expertise required will vary entity-to-entity, depending on:
- The size and age of an entity’s lease population
- The nature of the items leased
- The nature of an entity’s Group Structure
- Which general accounting options an entity plans to elect
- Which adoption options an entity plans to use.
Refer to our specific BDO Cheat Sheet for more details.
As a result, a successful (and more importantly, compliant) adoption of NZ IFRS 16 is less likely when an entity:
- Key lease-related information is unknown, and
- An entity is unaware of the relevant application areas and “fishhooks” within NZ IFRS 16.
To refer to another apt quote from The Art of War:
“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win”
The take away message here is simple: “Plan, plan… and then plan some more”.
Setting the scene for a Lease Software Solution
New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) are changing.
From 1 January 2019, (NZ) IFRS 16, will add additional complexity to the way that lessees of for-profit entities will have to account for their leases.
- Operating leases now come on-balance sheet like Finance leases do currently (certain practical expedients to this).
- Entities will therefore appear more “asset rich”, but also more “indebted.
- Financial metrics and ratios based off of reported results will change across the board (i.e. EBIT(DA), gearing debt-to-equity ratios, net current assets, times interest expense, Net profit, operating and financing cash flows).
This change will impact all for-profit entities, including:
- Those already applying NZ IFRS, and
- Also those entities that are currently “non-large” and therefore applying Special Purpose Financial Reporting (SPFR).
Because NZ IFRS 16 brings more assets on top the balance sheet, entities will need to assess whether they would still fall below the “large” entity asset thresholds ($60m assets – New Zealand companies; $20m assets – Overseas companies).
For certain entities, a manual, spreadsheet-based approach to manage and account for their leases will be onerous, impracticable, and risky (in terms of error and/or overwrite).
This is where BDO LEAD can help!
BDO LEAD is BDO’s flagship streamlined and efficient technology solution designed to assist entities mitigate the otherwise complexity and risk associated with a manual spreadsheet-based approach to NZ IFRS 16.
Where does NZ IFRS 16 pose a challenge for lessees?
Entities need to:
- Assess the impact on shareholder value.
- Assess how to maintain public support.
- Assess the impact on their ability to declare dividends.
- Consider the potential impact on their bank covenants.
- Estimate the effects on financial metrics, financial ratios, and financial statements overall.
- Reassess and manage their existing and future lease portfolio.
- Assess whether to exercise renewal and / or termination options.
Entities need to have a full understanding of:
- The three adoption methods, including pro’s and con’s.
- The classification of lease contracts.
- What the journals on the date of adoption will be.
- What the ongoing, business-as-usual journal entries will be.
- The effects on reported results.
- The effects on budgets and forecasts.
Entities need to consider:
- If existing processes are sufficient for new requirements.
- If processes are clear and transparent.
- Levels of automation vs manual input.
- If the IT landscape is too complex for manual calculation.
- Levels of personnel resources to ensure successful implementation.
Entities need to:
- Review levels of personnel to avoid a ‘bottleneck’ in the process of implementing NZ IFRS 16.
- Review tools and processes to ensure they are robust and able to withstand human error (data easily backed up, calculations automated, inputs date and time stamped).
- Review budgeting and forecast processes.
BDO Lead - the "Why" and the "What"
Created by both (NZ) IFRS experts and software developers, BDO LEAD is a web-based application, with local installation that has the capability of operating on a virtual server or local hardware (server).
BDO LEAD utilises a simple and user friendly data input interface for day-to-day use, running all necessarily calculations in real-time in background, including:
- Interest expense for the period
- Amortisation expense for the period
- Opening and closing balances of the Lease liability, and Right-of-use asset, and
- Other financial statement disclosures.
BDO LEAD has a proven track record, having been successfully implemented by well known organisations such as Aldi Supermarkets, Deutsche Telekom and STEAG Energy Services.
BDO LEAD gives users the opportunity to save leases under review in a central database and the ability to analyse all leases based on criteria.
Information is able to be tailored to fit with an entity’s specific requirements.
BDO LEAD allows entities to manage leases on a quantitative basis.
Once key lease information has been entered, BDO LEAD calculates the Lease liability, and Right-of-use asset.
There are also options to track changes and reassess leases.
BDO LEAD also calculates the interest expense and amortisation expense for the period.
Information stored in the database can be used to analyse leases.
The basic version of BDO LEAD comprises analysis tools that be tailored to the user and sector.
- General analysis / queries
- Disclosures in the notes required by NZ IFRS 16.
Benefits of BDO LEAD
|Time and cost
- Business resources are free for alternative use e.g. to meet key business objectives.
- Saves time consuming training into the details of the new leasing standards.
- Ensures the efficient and timely implementation of NZ IFRS 16 which meets the highest quality standards.
|Ongoing lease management
- Opportunity to entirely restructure your lease accounting and lease management.
- BDO LEAD is an intuitive and end user friendly tool.
|Tailored to an entity's unique needs
- Your accounting engine does not need to be adapted.
- BDO can advise on project design and contract evaluation and guide you through the process.
- Tailored to suit your needs e.g. select (modules) functions you need.
|Created by NZ IFRS experts
- Created by experts in the technical and financial reporting.
- Trust and comfort that you have expert NZ IFRS advisers dealing with lease accounting accurately.
|Risk free - safe
- Safe storage and contract maintenance.
- Direct and clear processes to identify and address issues.
- Increase in transparency.
|Easy and efficient
- Lease recognition is automated, transparent and easier to handle – significantly increasing the efficiency of lease accounting.
- The "Audit log" function allows entities (and their auditors) oversight over all changes and updates that have been made at the click of a button.
Where BDO IFRS Advisory can help along the way
Giving you advice on the appropriate transitional method
We assist entities to compare and contrast the impact of the three transitional methods on your financial statements at the date of initial application of NZ IFRS 16 and in future years.
Evaluate which contracts are likely to qualify for the short term and low value lease recognition exemptions
In this context, BDO helps you understand the complex interplay of the requirements to recognise ROU assets as a lease under NZ IFRS
Analysing the entirety of your contracts, allows us to give you advice on the recognition of lease portfolios.
In this way, we help you downsize your lease contract numbers to a manageable number
of leases (portfolios), concurrently reducing the complexity of the recognition of your leases.
Giving entities a greater understanding of your lease contract obligations.
The classification of your lease contracts carried out by us (lease vs. non-lease) makes the identification of future contracts as non-lease easier. In leasing-intensive industries this is particularly valuable as resources are set free for alternative use. Furthermore, we assist in the identification of leases embedded in continuing obligations and the demarcation of non-lease components in a contract.
Professional and organisational advice as both the initial and subsequent measurement generally underlie increasing complexity
BDO IFRS Advisory is happy to advise you in the project design and the contract evaluation process, particularly with regard to the best practice choice.
We would like to support you in the manual capture of your leases or the data fields missing in your databases if digital capture is not or only partially feasible.
How do I go about getting BDO Lead?
First of all, feel free to watch our pre-recorded demonstration of the software to see if BDO LEAD is the software solution you have been looking for.
If BDO LEAD is for your entity, there are two options to explore:
- Licence the software
Whereby you obtain the right to use and operate you own version of the software solution.
This is typically a more cost effective solution for those entities with an extensive lease population, and available internal resource to run and operate the software.
- BDO’s Managed Lease Service (MLS)
BDO’s MLS is a more cost effective option whereby entities sit back and let BDO’s dedicated team manage all your leases on BDO LEAD for you.
You still own all your lease data, and get all the information you need to account for your leases, without the need to licence and independently operate BDO LEAD.
This is typically a more attractive option for entities with a small to medium lease population, and/or where an entity has limited resources to run and operate the software independently.
BDO MLS is also an popular option for entities that have external audit requirements. BDO LEAD’s “Audit log” reporting functionality means that Auditors are able to focus their efforts on new and updated lease information, rather than (re)looking at each manual spreadsheet each year, saving you time and (audit fee) cost.
Download our BDO Management Lease Services flyer.
Enquire now for a BDO representative to contact you back to discuss further.