Lessees who apply New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) must apply accounting standard NZ IFRS 16.

This can cause increased complexity for leases of property, office space, vehicles, and other heavy machinery and equipment.

To deal with this, affected entities must essentially decide between two approaches:

Manage the accounting manually on spreadsheets for each individual lease, or
Look to an automated software solution to handle the accounting with the click of a button.

For entities considering the latter, BDO’s flagship lease software solution,  BDO LEAD, can help.

BDO LEAD is BDO’s flagship lease software which helps lessees manage the complexity of lease accounting.

NZ IFRS 16 adds complexity to the way that lessees of for-profit entities account for their leases.

Operating leases come on-balance sheet like finance leases do (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 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 impacts all for-profit entities, including:

Those already applying NZ IFRS, and
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 need to assess whether they 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 can be onerous, impracticable, and risky (in terms of error and/or overwrite).

BDO LEAD can assist entities to mitigate the complexity and risk associated with a manual spreadsheet-based approach to NZ IFRS 16.

Business challenges

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.

Accounting challenges

Entities need to have a full understanding of:

The three adoption methods, including pros and cons.
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.

Implementation challenges

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.

Operational challenges

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.

Created by 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 the 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

Software functionality

Archival

BDO LEAD lets users save leases under review in a central database and analyse all leases based on criteria. Information can be tailored to fit with an entity’s specific requirements.

Measurement

With BDO LEAD, entities can 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 options to track changes and reassess leases. The application also calculates the interest expense and amortisation expense for the period.

Analysis

Information stored in the database can be used to analyse leases. The basic version of BDO LEAD comprises analysis tools that can be tailored to the user and sector.

This includes:

General analysis/queries
Disclosures in the notes required by NZ IFRS 16.

woman at desk doing financial analysis

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 on the details of the leasing standards.
Ensures the efficient and timely implementation of NZ IFRS 16 which meets the highest quality standards.

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.

Ongoing lease management

Opportunity to entirely restructure your lease accounting and lease management.

Easy, efficient and verifiable

Lease recognition is automated, transparent and easier to handle – significantly increasing the efficiency of lease accounting.
The "Audit log" function gives entities (and their auditors) oversight over all changes and updates that have been made at the click of a button.

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 requirements e.g. select (modules) functions you need.

Risk free and secure

Safe storage and contract maintenance.
Direct and clear processes to identify and address issues.
Increase in transparency.

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 financial statements at the date of 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 16. 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 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 can 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.

Contact our team

If you'd like to learn more about BDO Lead, contact our team below.

Chris Neves

Audit & Assurance Consultant

View Bio

James Lindsay

Partner, Head of Financial Reporting Advisory