In what is already a challenging time for organisations around the globe, many public sector entities are foregoing the complexities of AASB 16 altogether and opting to outsource their lease accounting to third party services.
Outsourcing minimises the chance of error, helps avoid potential headaches, and allows existing resources to focus on the areas that require more judgement, as well as their ongoing BAU responsibilities.
AASB 16 is technically complex and challenging to operationalise and took effect for most public sector entities from 1 July 2019. It introduces new measurement requirements and a need to monitor and recalculate balances on an ongoing basis. This is particularly challenging for public entities managing high volumes of leases, which will now need to bring materially significant assets and liabilities onto the balance sheet, with the associated impacts on fiscal aggregates.
Public sector entities tend to have larger fleet and leased property portfolios, which usually result in frequent changes to lease payments that require re-measurement. Many large public and private organisations are outsourcing the manual AASB 16 activities of their finance function and engaging third parties to handle the data capture, data entry, and ongoing calculations. This allows their core finance teams to focus on the areas that require more detailed judgment and specific expertise – both of, which are arguably more important in the current environment.
Some public sector entities are trying to absorb the new AASB 16 lease accounting activities into their existing finance teams, which can cause a significant disruption to BAU roles. Application of AASB 16 is resource intensive both during the transition and going forward. In the current environment, with constraints on headcount and finance teams being stretched by new and unplanned challenges, many public and private sector organisations are rapidly finding they need help and are turning to digital solutions.
In particular organisations that have large lease portfolios or frequent changes to their leases, there is a greater need for technology involvement. And while technology can offer some assistance, the process of implementation, testing and training can be challenging. Technology solutions can also be costly, hence the popularity of outsourced lease accounting services which provide a more flexible and cost-efficient alternative.
Application of AASB 16 is resource intensive – on transition and going forward. In the current environment, with constraints on headcount and finance teams being stretched by new and unplanned challenges, many public and private sector organisations are rapidly finding they need help.
The AASB 16 accounting process is generally reliant on data that already sits outside of enterprise resource planning systems or general ledgers, making it simple for managed services to access this information. If considering a managed service, public sector entities should understand whether the service has an appropriate understanding of the technical requirements underpinning any technology performing the calculations and whether it is supported by a robust lease calculation engine, adequate quality controls and reviews. It is also important to consider whether the service will connect with non-financial business units and how they might be impacted, while providing finance teams and management with oversight over the reporting process.
Learn more about KPMG’s Lease Hub which assists in reducing the disruption to your business and manages your AASB 16 lease accounting from start to finish.
The original version of this article appeared on The Mandarin website on 30 April 2020.