IFRS 16 Lease Agreement Overview

8/4/2016 CONFIDENTIAL © Copyright 2016. Seal Software Limited. All Rights Reserved 1

Seal Software: The Flexible Regulatory Contract Platform

IFRS 16 – Lease Agreement Changes

What is IFRS 16?

8/4/2016 © Copyright 2016. Seal Software Limited. All Rights Reserved 2

The International Accounting Standards Board (IASB) issued IFRS 16 Leases in Jan 2016.

IFRS 16 describes the recognition, measurement, presentation and disclosure of leases for both parties to a contract

It is effective from 1 Jan 2019 and completes the IASB’s project to improve the financial reporting of leases

IFRS 16 replaces the previous leases standard, IAS 17

The problem it solves…

Under IAS 17

When a lease was economically similar to purchasing the underlying asset, the lease was classified as a finance lease and reported on a company’s balance sheet

All other leases were classified as operating leases and not reported on a company’s balance sheet

There was a lack of clarity or transparency with lease reporting

IFRS 16 brings most leases on-balance sheet for reporting

Any company with leased assets is affected

It redefines many financial metrics such as the gearing ratio and EBITDA, and may affect covenants, credit ratings, borrowing costs and stakeholders’ perception

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What will be the impact?

Significant value will be coming back to balance sheets – estimated at $2.86Tn (1)

Increases focus on who controls an asset and may change which contracts are considered leases

Lessees and lessors will likely consider renegotiating or restructuring existing and future leases

IFRS 16 essentially kills sale-and-leaseback as an off-balance sheet financing structure, common with large assets in certain industries

Assess options with two possible exemptions in IFRS 16:

Low value leases: ≤ $5K

Short term leases: ≤ 12 mos.

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(1): FT Jan 2016

Complying with IFRS 16

Do I know which of my contracts contain lease clauses?

If not, how can I find this information?

Are systems and processes in place to manage my legacy and go forward agreements?

Which transition options are best?

How can I manage the costs to implement the change, and continue to comply with IFRS 16?

Can I have all my lease agreements identified, lease details extracted, and the contracts reclassified or revised by the deadline?

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Seal: The right approach

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Locates and categorizes contracts from across the organization

Extracts >50 data elements out-of-the-box, including lease terms. Indexes and enhances the data

Data can be searched, sorted, and compared with approved language

Seal is an analytics platform so business users can easily search for terms and provisions specific to lease agreements

Adaptable and flexible. Seal can be trained to find and index all the relevant data about a lease

Traditional approach: Manual contract reviews

Often a process of reading every contract and tracking the results in spreadsheets

Can take many months at high cost

It is a subjective review – different results by reviewer Will each know exactly how leases can be structured?

Would need to capture the details of each lease

Non repeatable – when any aspect of IFRS 16 is modified, you must start over

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Steps to IFRS 16 compliance with Seal

1. Seal finds all contracts and centralizes them in repository

2. System identifies which contracts have lease provisions or language that would be impacted (triage to the right contracts)

a. Some may require analysis if they meet the definition of a lease, especially those with significant services

3. It will extract, gather and validate key terms from contracts

4. Help decipher lease and non-lease components from the entire portfolio

5. Seal’s reporting will help business users understand the current environment and develop the optimal remediation plan

6. Re-negotiate now or at renewal

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Sample of contract terms extracted by Seal

Active agreements

Contracting parties

Lease clauses

Lease term

Lease values

Separation of Lease and Service components

Pricing / payment basis

Asset control

Termination term

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Challenging IFRS 16 Scenario


Separation and re-papering non-lease components

Many contracts combine lease and non-lease (e.g. service) components

Under current rules, this is acceptable as, financially, they are treated alike

However, under IFRS 16, these will need to be separate contracts

Both lessees and lessors are required to have new, individual contracts for lease and non-lease components

Seal can extract the Services components from lease agreements.

Seal and our Consulting partners make a compelling solution


Consulting partners wrap Seal with the following:

Program design

Pre-developed IFRS16 specific contract policy playbooks

Contract review and triage

Remediation advice and consultancy

Wider IFRS16 understanding and integration work

Ensure key reporting requirements are met

Support customer organization with added advice and resources in wider areas of IFRS 16 compliance

Summary


Seal Software is a critical contract regulatory platform that will flex as the business and regulations evolve

Seal Software helps consolidate all critical documents and extracts key terms to comply with regulatory requirements (saving years of manual effort in the process)

Seal Software works with Tier 1 Consulting firms to provide an end to end solution for IFRS 16 and other regulatory requirements

IFRS 16 Lease Agreement Overview

Documents

Transcript of IFRS 16 Lease Agreement Overview