Have you initiated your search for a lease administration software to handle GAAP and IFRS?
Earlier this year, both FASB and IASB released their own versions of leasing standards making Lease Accounting the latest buzzword in the industry today. If you are an organization with a substantial lease portfolio, the odds are that you would have already initiated measures to comply with these guidelines that will become applicable as early as 2019.
As a matter of fact, both FASB and IASB initially started out with the idea of coming up with a single lease accounting rule in early 2010 but agreed to disagree (in early 2014) in certain areas and as a result, dropped the idea of a uniform standard.
This has made the reporting process all the more challenging for organizations that are bound by the reporting requirements of both U.S GAAP and IFRS, in particular. While it’s true that there are quite a few common points in both standards, the areas in which they differ pose certain complications for such entities since there is some uncertainty as to whether they have to maintain two separate books of accounts to fulfill the requirements under each standard. To clear this air of ambiguity, we will explore both the commonalities and differences in the reporting requirements under GAAP and IFRS and discuss how IBM TRIRIGA proves to be your a perfect lease administration software under both of these guidelines.
What is common
- Definition of a lease
- Recognition of lease assets and lease liabilities in the balance sheet, initially measured in the same way
- Carry forward of previous lessor accounting requirements
What is not common
Some of the major differences between the GAAP and IFRS model include the following:
- Accounting Model – While FASB has proposed to continue with the dual accounting model wherein the lease classification test is based on current U.S. GAAP classification criteria, IASB has completely removed such lease clarification tests and now requires all leases reported on the balance sheet to be treated as Finance leases.
- Measurement of lease assets – Under the FASB model, these former off-balance sheet leases will end up with a slower rate of depreciation as against the IASB model, which requires the leases to be depreciated on a straight line basis. Consequently, the carrying amount of lease assets as well as the reported equity under the FASB model will be higher than what will result under the IFRS 16 methodology.
- Presentation of Lease Liabilities – The organization is expected to present lease liabilities relating to former on and off balance sheet leases as separate line items under the FASB model while there is no such compulsion under IFRS 16, as IASB expects the organization to make such distinction only if it considers it to be relevant in regards to gaining a better understanding of its financial position.
How can IBM TRIRIGA help
IBM TRIRIGA, being the leader in the IWMS space in the industry today, has come out with its latest version, IBM TRIRIGA Real Estate Manager 10.5.1, which will enable you to accelerate compliance with both the FASB and IASB new lease accounting standards. Some of the newly added features in the TRIRIGA Real Estate Manager for complying with these lease accounting standards are listed here:
1. Lease classification set as Finance and Operating (instead of Type A and Type B that appeared in the earlier versions) based on the lease treatment calculation. Additionally, for GAAP, the question “No alternative use of specialized asset to lessor at end of lease term” has been added under the FASB Treatment section to determine the lease classification.
TRIRIGA also allows the user to override the lease classification from Finance to Operating if an override comment is provided in the Management Assumptions field. The Override Lease Classification option is shown only if the lease classification is Finance.
2. IBM TRIRIGA supports the Re-measurement logic under IFRS by letting the user choose the asset measurement methodology from three options (At amortized cost, FV under IAS 16 and FV under IAS 40), which are provided in a drop down menu format for the question “Under IFRS, how will company remeasure the asset?”
When “FV under IAS 40” is selected for instance, TRIRIGA lease administration software allows you to update the Fair Value of the lease asset minus the amortization benefits of such enhancements in fair market value. However, the finance schedule for the calculation of this option is not supported by TRIRIGA and it needs to be done by exporting it to Microsoft Excel.
3. IBM TRIRIGA 10.5.1 allows organizations to adopt the new standards either individually on a lease to lease basis or for multiple leases all at once using the Bulk Review Assumptions process. An additional reason type, “Initial adoption to New Standard” has been added on to the Review Assumption function which allows the user to regenerate the Operating or Finance schedules from the Look Back Fiscal Period that is to be defined in the Application Settings. The default settings for the Look Back Fiscal Period has been set as two years of history using the new standard, as per the FASB/IASB guidelines.
4. Initial Direct Costs, Prepayments and Past Lease Incentives are no longer included in the Liability Value of the Operating and Finance schedules keeping up with the changes in the leasing standards.
5. Finance / Operating schedule calculations for Retail Calendars have been enhanced to comply with both the standards for Net Rent and Rent Expense calculations.
6. Lease Modifications – Using the Data Revise and the Amendment options of The IBM TRIRIGA Real Estate Manager, the user can make additional entries, make changes or correct errors in existing leases. Also, he or she can use the Amendment option for increasing the scope (amend lease terms or extend duration, payment etc) of the existing lease.
7. If a new lease needs to be created during the course of modification of an existing lease, the Copy and Link feature in IBM TRIRIGA can be used to copy the appropriate data from the current lease and link the two leases for navigation and reporting purposes.
8. IBM TRIRIGA allows the users to reassess the lease after adoption of the new standards which is helpful if there are changes in borrowing rates or fair market value. This can be done by choosing a Review Type other than Initial adoption to new standard in the Review Assumption function, which will make the fiscal period field editable. The user can then select the correct fiscal period for the reassessment and on submission, the system will recalculate the Finance/operating schedules as per the newly entered fiscal period and also calculate the gain/loss on the lease asset for that period.
9. If an organization has a multinational lease portfolio, IBM TRIRIGA can help report local accounting standards. This can be done by either setting up local reporting during the creation of a new lease or adding local reporting to existing lease records.
10. IBM TRIRIGA can also generate various kinds of Impact reports which can help users to understand the impact of the new standards on the asset values and the balance sheet as well as its effect on income statements and cash flows.
With its comprehensive range of features and capabilities, there is no doubt whatsoever that IBM TRIRIGA 10.5.1 can help you in achieving full compliance with both the FASB (GAAP) and the IASB (IFRS 16) guidelines. If you have any further questions relating to FASB/IASB, reach out to the IBM TRIRIGA experts at ValuD at email@example.com.
This blog post has been updated and republished as “Streamline lease accounting compliance in TRIRIGA 10.5.3“.