The impact of IFRS 16 Leases on financial statements and the challenges of complying with compliance requirements has been the focus of much of the discussion that followed the announcement of FASB ASC 842. Audit Firms in Dubai, a leading audit services in UAE has found that many companies in Dubai are having difficulty preparing for the new IFRS/FASB requirements. The benefits and opportunities that the new standard brings, however, are what most discussions have not addressed.
New standards will be in effect for most companies starting January 2019 and December 2018 respectively. They require lessees recognize an asset and liability arising out of an operating lease on the balance sheet. This fundamental shift in accounting will have an impact on a UAE company's reported profits, financial ratios, and other financial metrics.
Current standards - IAS 17 (formerly FAS 13) and FASB ASC 842 (formerly FAS 13) define operating leases as 'off-balance-sheet' treatments. These are listed in the footnotes to an entity's financial statements. The IASB research shows that this doesn't take into account 85% global lease commitments and does not accurately reflect an entity's long term financial obligations.
Leasing was unlikely to have been on the boardroom agenda prior to the announcement of the new standards. It also is unlikely that it would have featured in the majority of financial directors' to-do lists. This is especially true considering the over a decade-long deliberations about the global leasing project. It is no surprise that companies are still trying to determine the true impact of the new standard on their organization.
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Many have had to increase their contingency plans and create a cohesive strategy for preparation since the new standards were finalized. Many financial audit teams will soon realize that having a better focus on their lease portfolio will lead to both operational and economic benefits. Beyond compliance, there are many benefits and opportunities for company audit teams
Here are benefits audit firms in Dubai should leverage:
With the introduction of new accounting principles, there has been a renewed focus on a company's current leases practices, controls, and overall leasing strategy. This will likely bring leasing back to the forefront of boardroom discussions and give lessees the opportunity to be more efficient:
These changes will undoubtedly reduce risks associated with non-compliance and financial reporting. Dubai, UAE organizations will also be able to identify efficiency issues and implement reforms that will improve operational performance, drive cost savings, and speed up time.
Companies in UAE will need to consolidate and centralize all lease data necessary for compliance with the new standard as part of the transition. Organizations have the opportunity to conduct a health-check of their lease portfolio in order to evaluate the performance of the entire portfolio. An organization could conduct such a review to gain a better understanding of what it is leasing at what price and on what terms.
This information allows companies to quickly identify and resolve any issues in their lease portfolio. A comprehensive view of the entire portfolio will help identify any savings or opportunities for further optimization, regardless of whether it is a lease that has been unknowingly extended beyond its original term.
Many UAE companies are considering leasing lease management software. This allows them to centralize their leases, and perform more precise portfolio analysis.
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The new standards have made it clear that many businesses still don't know the best way to track and account for leases. A number of inefficiencies have been discovered by top audit services in Dubai in many technology systems.
According to a recent report by Deloitte, only 31.3% of respondents believed that their current software systems were adequate to handle the transition requirements.
Ask lessees if they can rely upon their existing infrastructure and system to meet lease accounting application requirements or if they have to create a new system. Experts agree that technology will be an increasing part of achieving compliance with lease accounting.
Relying on spreadsheet accounting alone to manage, track and account for your leases is dangerous. Information silos can occur between accountants and those managing the portfolio. Over time, data becomes inconsistent, disjointed, and disparate. Data can be corrupted or inaccuracies may occur, making it more difficult to validate and verify the critical lease data.
Dubai, UAE companies will need to find a better way to reduce inaccuracies in their data and ensure consistency across their entire lease portfolio to make the transition smoother. This software will allow audit services to achieve compliance and provide full visibility of their portfolio, as well as the ability to assess the impact on their company.
If you need more help in understanding the benefits of IFRS 16 or need help with auditing, get in touch with Audit Firms in Dubai.
Kasun Liyanage is an Audit Manager with over 7 years of experience dealing with diversified corporate clients. He not only manages the team’s work schedule but also is an expert in handling audit areas such as external audits and fraud investigation, Internal control benchmarking and best practices and well as preparation of financial statements and IFRS compliance.