Are You Ready for IFRS 16?

Posted by Phillip Schell Jun 28, 2016 12:47:00 PM

 

Are You Ready for IFRS 16?

 

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released new accounting standards that define how organizations must account for leases.  These accounting standards, addressed in the International Financial Records Standard 16 (IFRS 16), stipulate how most leases must be reported on a company’s balance sheet.  For many lessees -- this change is huge.

While the new leasing standard does not go into effect until January 2019, companies can begin reporting in January 2017 and start communicating expected changes with stakeholders – now. The new standard will affect virtually all commonly-used financial ratios and performance metrics such as gearing, current ratio, asset turnover, interest cover, EBITDA, EBIT, operating profit, net income, EPS, ROCE, ROE, and operating cash flows. These changes may affect loan covenants credit ratings and borrowing costs, and could result in other behavioral changes. And, these changes may compel many organizations to reassess certain ‘lease versus buy’ decisions.

IFRS 16 changes will affect lessees in the following key areas:

  • Balance Sheet: Initially recognizes lease assets and liabilities on the balance sheet at the present value of future lease payments.
  • Income Statement: Recognizes amortization of lease assets and interest on the lease liabilities over the lease term. The overall effect on profit will depend on the portfolio of leases an entity holds. However, in the earlier years of a lease, it is expected that the profit will be lower as a result of higher interest accruing on the lease liability (akin to an amortizing mortgage).
  • Cash Flow Statement: Separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within either operating or financing activities). 

As you can see, the changes are dramatic. This is not just a software change or upgrade. It is a major change in business processes, how applications integrate to accommodate the rule change, and last but certainly not least -- companies will be challenged to effectively communicate IFRS 16 standards to stakeholders who will see major changes in financial results.

To successfully implement IFRS 16 requires a structured initiative that will manage:

Business Process Change

Business processes in many areas, including finance, procurement, tax, treasury, legal, operations, corporate real estate and HR will have to be changed and aligned to support a successful adoption of the accounting changes.

Software Application Integration

For those companies with real estate in one application, assets in another and separate G/L, it will be difficult. The SAP integrated platform will make this a much easier. SAP customers who are already on SAP Real Estate and have their fixed assets in SAP will have an enhancement to download in a few months that will put them into compliance.  

 

SAP Real Estate Management application enables coordination between different departments.

The solution also provides lease accountants the ability to evaluate the financial impact of each lease and ultimately generates all valuation postings required by the new leasing standards.  It even manages the postings for multiple lease accounting standards simultaneously, regardless if the general ledger account or parallel ledger methodology is utilized. This solution is part of SAP Finance and is completely integrated, helping avoid the kind of costly disruptions that can derail critical business processes, operations and costly noncompliance events.

Stakeholder Communications

Corporation stakeholders will need a lot assistance in understanding the changes in nearly all financial ratios and performance metrics such as: gearing, current ratio, asset turnover, interest cover, EBITDA, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows.

Even though the new leasing standards are not effective until December 2018 for US GAAP and January 2019 for IFRS, companies can choose to be early adopters and begin reporting January 2017.  Whether you choose to be an early adopter or comply by the deadlines, there are certain things you can do today to prepare.

Current SAP Real Estate Management users should implement the new leasing enhancements as soon as they are released to begin evaluating the impact on your financial statements.  Even if you do not intend to be an early adopter, the loading of the leases and analyzing the results will pay big dividends in the future.

Companies that implement the SAP IFRS 16 enhancements quickly can run it in simulation mode only and use the results to compare their financial performance before and after implementation. We believe that when key executives are knowledgeable about how IFRS 16 changes will affect performance reporting, they can effectively communicate with their stakeholders.

Recently, B4 Consulting announced its support for IFRS 16 real property leasing with SAP Real Estate Management, which includes implementation services for real estate, procurement, and financial management. Through an IFRS 16 Assessment,  we examine all your business processes and areas affected by IFRS 16. Then, we develop a road map and budget for successful implementation of IFRS 16 standards – including stakeholder communications.

Get ahead of the curve and let’s talk about how you can successfully prepare for IFRS 16. Email me at pschell@b4-consulting.com.

 

Phillip Schell is vice president of Industry Solutions at B4 Consulting, Inc.

 

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Topics: SAP, B4 Consulting, SAP Real Estate, Reporting, IFRS 16, Leasing, Real Property, Leases, Accounting

Is it a Serpent or an Elephant? The Construction Industry Needs Better Business Intelligence Tools.

Posted by Phillip Schell Apr 20, 2015 8:30:00 AM

Six_Blind_Men

 

Is it a serpent or an elephant? The parable of the six blind men and the elephant is one of the world’s most widely-known parables. It illustrates that we should not mistake a part for the whole and importance of keeping an open mind to different points of view. It also conveys the importance of perspective and the value of closely examining complex ideas and issues.

And, while it may seem as though I’m going out on a limb -- this parable also makes for a teaching moment in the construction industry.

More than ever before, the construction industry is learning to use Business Intelligence tools to extract data from construction projects for real-time decision making. The challenge: the construction industry needs to draw accurate conclusions from the huge datasets that are being generated and avoid the conclusions of the blind man feeling the elephant’s trunk and declaring it a serpent.

To help construction companies extract and leverage accurate data from all its data sources, B4 Consulting is building Integrated Frameworks for Construction. We call it -- IF4C – and it allows applications to become interoperable (see http://blog.b4-consulting.com/blog/how-to-achieve-interoperability-in-construction). We believe that this interoperability has a positive effect as well on Business Intelligence. Consider this real-life case: I want a report on the health of one of my self-perform projects, and I want a report on the trend line of the labor productivity of one of the major work packages being performed.

In our experience, this is a typical scenario and here are just a few of the questions and issues that prevent the quick, efficeint and accurate generation of such reports in a lot of construction companies:

  • Do I need my estimating data to make this comparison?
  • If my CBS structures have little or no relationship to my WBS structures what does it mean?
  • How timely are the actual installed data being imputed into a system for trend analytics?
  • How accurate are the data being entered and are they entered into the correct WBS structure?
  • Do I need equipment run time data to interpret the data correctly?
  • Do I need ECM data such as pictures, daily logs, weather reports, etc. to make the correct decisions?

B4 Consulting believes that Business Intelligence is architected correctly when it goes beyond the esthetically pleasing or even intellectually stimulating. Business Intelligence must be actionable and create the opportunity for increasing productivity. See http://blog.b4-consulting.com/blog/outsidein-and-the-ooda-loop-–-transforming-construction

The architecture’s defining characteristics include:

  • Front-end mobility component to initiate real-time possibilities.
  • Ability to draw datasets large enough (remember the elephant!) and across pertinent applications to drive value.
  • Presentation to the correct decision makers in a timely and intuitive manner to advance better field decisions.

The well-architected Business Intelligence framework gives the construction industry the proper information to make the OODA loop work and inform them for competitive advantage.

 

 

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Topics: Mobility, Engineering and Construction, Real-time Data, Reporting, construction, productivity, OutsideIn, Interoperability

Why Mobility Matters for the Construction Industry

Posted by Jay Nichols Sep 11, 2013 2:40:00 PM

Mobility in Construction

When given the opportunity to write for the B4 Consulting blog, I gladly obliged.  I’ve always wanted to blog as I’ve been fortunate to have a lot of amazing experiences and passions that I want to share with the world.  One of my passions is mobility and the entire concept about “Mobilizing the Office and Home.”  I love the opportunity B4 Consulting has offered me to work with my clients and show them true value in mobilization of applications and processes.

B4 Consulting has years of experience in the construction space, and having such has allowed us to build a pretty comprehensive outlook on how the industry works.  As we continue to create blog content, we will focus on the challenges our customers bring to us for resolution with SAP solutions.

SAP Apps for Mobile Devices

Benefits of Mobile Applications

While mobile applications for construction can differ, the ultimate goal with an SAP mobility deployment is to help contractors streamline their communications, applications, and processes across their organizations. Construction companies who take the time and make the investment to explore mobile technologies can benefit from:

Improved Communication - Workers on a jobsite can instantly send one another updates and pictures. In addition, mobile devices open up the flow of data between field and office, giving the entire staff the most up-to date project information.

Accelerated Workflow with Real-time Data - Along with improving (and increasing) communication, mobile devices also offer improved workflow and real-time data. With instant communication, wait time for approval requests disappears. Field data entry allows for real-time data in the accounting and payroll systems with an accurate dashboard picture of the company’s overall performance, as well as the progress of each project.

“Store and Forward” Capability - While not all mobile apps offer this option, our apps are equipped with offline capability, allowing contractors working in remote job locations to enter timecards, save them and sync back to the office once they establish cellular coverage again. This creates a seamless transfer of information and ensures that data is current and up-to-date.

Increased Efficiency - By eliminating unnecessary data entry, your office staff will be able to work more efficiently and save time. Staff members can focus on other areas, increasing efficiency across the board.

Electronic Trail of Data - Using mobile applications also creates an electronic trail of data that contractors can reference at any time. Whether it’s solving an issue while a job is still active, or analyzing past jobs to better plan for future ones, the ability to learn from past data can save money.

Careful consideration of all these factors, in addition to a company’s size and budget, should drive any technology decisions. However, some applications can benefit most contractors regardless of trade or size.

Making the Move to Mobile with SAP

SAP mobile applications are changing the way the construction industry works with better communication, improved workflow and real-time data. With proper research and a plan for implementation, we are helping many contractors take advantage of the wide array of SAP applications, which streamline the flow of data and communication between field and office.

To learn more about SAP mobility solutions for the construction industry, contact me -- Jay the Mobility Guy at: jnichols@b4-consulting.com

Jay 'The Mobility Guy'

 

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Topics: SAP, B4 Consulting, Mobility, Dashboards, Engineering and Construction, Real-time Data, Reporting