The problem with IFRS 16 … and why AI might be the answer
September 14, 2017
Forgive the snappy title, but throughout the retail industry there are accountants who are wrestling with how to deal with IFRS 16.
Not your typical topic for a forensics article, but bear with me, as all will become clear. Every now and again a new accounting standard comes along that gives certain businesses an unintended headache. Sometimes that headache relates to the complexity of the calculations that are needed, and sometimes it’s just the sheer challenge of finding the “beans” to count.
For a number of the retailers I’ve been talking to, IFRS 16 falls into that last camp. For 2019 accounting periods onwards, the accounting standard basically requires lessees to recognise nearly all leases on the balance sheet, reflecting their right to use an asset for a period of time, and the related liability for payments.
So why is that a problem for retailers? Well, most retailers have quite a few leased properties in their estates. This can give rise to significant issues and areas of judgement when implementing the new lease standard, including:
- Incentives received as part of renewal options;
- Discount rates;
- Variable payments linked to an index or rate where regular re-measurement is needed; and
- Separating lease and non-lease elements of payments e.g. stripping out service charges.
In theory this sounds fairly manageable, but there's a catch. Where are the beans? They are not in the accounting system, and that means going back to the contracts.
But that's just the start of the bean hunt - how many leases are there, and where in the business are they kept? After that (and lease agreements are not known for their brevity), there’s a challenge to track down the relevant clauses that our bean counter needs to work their magic.
This is where the recent press we’ve seen on Artificial Intelligence really comes into its own. It stems from the fact that the manual analysis of contracts has proved so difficult, and isn’t a repeatable solution.
An alternative has been to deploy “Contract Digitisation”. Together, we have been using Forensic technology to take some of the pain out of the situation: digitising contracts, storing them on a digital repository, and using AI and smart searching to capture relevant clauses, extract the relevant information, and make the necessary calculations.
The benefits of this approach don’t stop at lease contracts though. Through a legal or procurement lens, how good would it be to have all of your signed contracts in one place? So when you need to find that Brexit clause, or make sure you’re claiming the right rebate, or finding which of your Goods Not For Resale (GNFR) contracts have a right of Audit, the information is at your fingertips. Increasingly we are seeing that where big analysis is the challenge, increasingly AI is the answer!