Are you ready for your reporting obligations under IFRS16?

If you’re not already in auditor discussions regarding the potential consequences of IFRS16 on your business, you should be. While the new standard may have no impact on your statutory reporting today, it is important to be prepared for the potential impact on your business.

What’s the problem?

Disclosure of a company’s financial obligations has always been key to informing investors decisions to trade in that company’s stock. However, the leasing process to date has created financial reporting issues to meet this obligation. This has meant that whereas there has always been a requirement to disclose the financial obligations of a company where they are the lessee party to a finance lease, there has been no such obligation to date to disclose these obligations where they are the lessee party to an operating lease.

In order to understand the problem it is important to understand the  difference between a finance and an operating lease. The rules are complex, but a good rule of thumb is that in a finance lease, the lease term is greater than or equal to 75% of the economic life of the asset.

So, if a company leased a £5,000 multi-function printer with a 4 year economic life on a 3 year lease, they would need to declare that liability in their statutory accounts. However, if they leased a multi-million pound train with a 25 year economic life on a 7 year lease to align with the train operating company’s franchise term, then that would be considered an operating lease and would result in the company just needing to expense the asset with quarterly lease payment and not having to declare the liability in their statutory accounts.

Similarly, if a company takes on a 10 year lease at £100,000 a year for business premises, where the economic life is 100+ years then this liability also would not need to appear in their statutory accounts.

The effect of this anomaly can result in some potentially significant reporting impacts on a company’s financial obligations.

To address these concerns, the international accounting bodies have released IFRS16 which extends a company’s financial reporting responsibilities and requires them now to account for their financial liabilities as a Lessee for both Finance and Operating leases where the Lease Term is >= 12 months and the Net Present Value (NPV) of the Rent streams you are obligated to pay is >= £3750 ($5000).

The new standard comes into force in January 2019 but has a retrospective requirement to report like-for-like on two prior years.

Solving the IFRS16 problem in Oracle

Oracle has addressed the changes needed under IFRS16 through updates to a number of lease specific modules. The main change has come in the Oracle Property Manager module where new functionality allows companies to capture and properly account for all their Right of Use assets. i.e the right for the lessor to grant the lessee right to use an underlying asset

It provides functionality to meet the IFRS16 accounting obligations in the following areas:

  • Leased Properties
  • Lease Vehicles
  • Leased Capital Goods

Standard configuration in the Property Manager module allows companies to build multiple hierarchies to cater for all their ‘Right of Use’ type assets, for example:


To assist with managing their leases,the Oracle Property Manager module is fully integrated with the other Oracle Financial sub-ledger modules including Accounts Payable, Accounts Receivable and General Ledger allowing it to create its own transactions directly into these subledgers as well as via other sub-ledgers. For example, AP transactions are created for regular lease payments whereas AR is used to generate regular lease invoices.

As an example of what Oracle Property Manager can offer let’s consider an example of a 3 year lease costing £100,000 a year payable in advance. Oracle Property Manager offers the ability to calculate the present value of the lease payments at the start of the lease. If the lease contract does not have its own interest rate, for example for an office lease, then the first thing needed is to decide what rate of interest should be used in the PV calculation. Suppose the company’s general cost of borrowing is used and this is currently 7% then the present value would be £280,229.54. In order to report on these values then the solution is just to input the payment amounts, their payment profile and the yield into the application and calculate the present values.

The Property Manager application now creates the first journal required for the initial liability

1. Initial Lease activation

  • DB ROU Asset             £280,229.54
    • CR Lease Liability        £280,229.54

The application also provides the streams necessary to automatically generate the main accounting transactions over the lease life cycle which are as follows:

2. Annual lease payments via Accounts Payable

  • DB Lease Liability       £100,000.00
    • CR Payables                £100,000.00


3. Monthly Interest Accrual

  • First Month
    • DB Interest Expense    £1,051.34
      • CR Lease Liability        £1,051.34
  • Second Month
    • DB Interest Expense    £1,057.47
      • CR Lease Liability        £1,057.47
  • Etc…


4. Monthly Straight Line Amortisation of the ROU Asset

  • First Month
    • DB Lease Expense       £7,784.15
      • CR ROU Asset     £7,784.15
  • Second Month
    • DB Lease Expense       £7,784.15
      • CR ROU Asset     £7,784.15
  • Etc…

At any point in the lease term the Property Manager solution can provide the current lease liability directly from the balance sheet account, which is calculated as: Initial Liability – Payments + Interest As a side benefit the Property Manager solution can also separate out the actual lease expense from the interest expense, whereas typically this would have been accrued as 12 monthly entries for the full £100,000 payment. Oracle Property Manager also allows companies to automate the regular AP Payments to the Landlord/Lessor and cater for changes in the contract term, contracted lease payment and interest rate and also allows structured rent payments including free periods at the start or end of the lease.

Implementing the IFRS16 solution with Claremont

Whether you are a current user of Oracle Property Manager or not Claremont can help you to implement this cost-effective solution to meet this reporting requirement including migrating all of your existing lease data, whether this is currently managed on spreadsheets or on other applications. Claremont can also provide you with spreadsheet loaders to enable you to load your assets and your current leases. During this process Claremont will also ensure that all leases that were active for the two years retrospective period are included.


There is a legal requirement under IFRS16 to report all lease liabilities for accounting years starting on or after 1st January 2019 with comparative data for the 2017 and 2018 financial years. These requirements can be met in a cost effective manner through Claremont provisioning the Oracle Property Manager module to you to help you manage your lease reporting liabilities.

More Information

Contact us to learn more about kick starting your migration to the new revenue reporting standard.

Ian Monaghan


As Principal Functional Consultant, Ian is primarily responsible for designing and implementing tailored functional client solutions relating to the Service, Contracts and Financials business areas. He has extensive involvement in functional presales.

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