The introduction of AASB 16 Leases (“AASB 16”), effective for periods beginning on or after 1 January 2019, has had a significant impact on many companies. Whilst initial challenges centred around applying the theory of AASB 16 (such as deciding on transitional options, assessing the impact of renewal options on lease terms and determining the incremental borrowing rate), many companies have subsequently struggled with actually applying that theory by calculating the right of use assets, lease liabilities and associated accounting entries. The question many clients ask is whether an Excel spreadsheet model is adequate for accounting under AASB 16, or whether it is necessary to use a leasing software. The simple answer is that it depends on the particular circumstances of the company and that both options have their pros and cons.
Excel Spreadsheet Models
In the right circumstances, spreadsheet models can be a good option for performing lease calculations. Spreadsheets are generally a cheaper option and allow for flexibility in designing a template to suit the needs of the user. However, spreadsheets tend to carry a greater risk of error due largely to incorrect formulas. In addition, spreadsheets may not have the sophistication to deal with complexities such as transitional entries and lease modifications. As the number and complexity (e.g. existence of extension options, frequent modifications, etc.) of leases increases, the time required to use spreadsheet models and the risk of errors also increases. Whilst calculating the initial entries on transition to AASB 16 may be relatively straightforward, it is important to keep in mind that companies will also need to continue calculating and posting entries to account for the depreciation, interest expense and repayments of leases. Using a spreadsheet model will likely require such ongoing entries to be posted manually.
An alternative option is to purchase a leasing software, or if available, utilise an add-on to the existing general ledger system. Advantages and disadvantages will differ between products, so it is important for companies to perform their own research and due diligence. Some advantages of utilising specialist software is that it may automate much of the process (thus reducing the risk of manual error) and some systems will be able to prepare monthly journals that can be uploaded directly into the general ledger software. Software products should be able to deal with different transition options and also allow for lease modifications. One major disadvantage is of course the cost of purchasing the software. Whether or not the efficiency gains generated through automation justify the outlay will be an area for companies to consider. Generally speaking, as the number and complexity of leases increases, as will the potential efficiency savings which will be generated by using a specialist software.
In summary, it will be up to companies to perform their own cost benefit analysis to decide how best to account for their lease portfolio under AASB 16. As a rough guide, companies whose number of leases are in the single figures will likely be able to manage with using spreadsheet models. As the number of leases increases into double figures, or if there is an increased likelihood of lease modifications, the need to at least consider more automated methods of calculation will increase.
Please get in touch if you need assistance with the adoption of AASB 16.