Post on 24-Jan-2017
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?
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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
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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
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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
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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