Consolidation
Implementation of the system across the Group
WSE
Consolidated financial statements audited by a statutory auditor
Contract amendments
Numerous changes to payment schedules (rent indexation, temporary rent reductions, changes of leased property)
PLN, EUR, GPB, USD
Contracts in different currencies
Outcomes
- Comprehensive valuation of assets and liabilities under IFRS 16 for stock market reporting of the Group
- Central register of over 400 lease contracts with consistent reporting for all contracts governed by IFRS 16
- A structured process that eliminates the risk of errors involved in processing IFRS 16 data on Excel worksheets
Challenge
Compliance of contracts with IFRS 16
In 2021, as part of its growth strategy, the company offered its shares in the open market and got listed on the Warsaw Stock Exchange (WSE). With that came the obligation to ensure the conformity of its financial statements to the International Accounting Standards (IAS).
One of the biggest challenges was the application of IFRS 16 to lease agreements for the premises that the company uses in its business.
According to IFRS 16, all leases should be reported as a right to use the leased asset and a liability under the lease. Therefore, in IAS/IFRS-compliant financial statements lease expenses (previously recognized as third-party services) are replaced by assets and liabilities arising from the application of IFRS 16, with associated interest and depreciation of fixed assets.
Initially, IFRS 16 calculations were outsourced to an external auditing firm. However, it soon became clear that the chosen cooperation model was not entirely effective.
Its biggest limitation was the lack of transparency of calculations and over-reliance on the external service provider. Limited availability of external professionals and the use of a complex Excel model that was outside the company’s control posed a major risk to the stability and repeatability of the stock market reporting process.
Solution
FlexiEPM - full automation of reporting to the Central Statistical Office
It was relatively easy to implement FlexiEPM as the tool for managing IFRS 16 compliance. With an off-the-shelf solution featuring a predefined set of reports, the system was up and running in just 4 weeks.
A crucial step in the process was the import of data from Excel sheets to a central system repository. FlexiSolutions consultants prepared dedicated migration mechanisms to automatically import the parameters and schedules of all contracts. The most time-consuming process was the verification of accuracy of imported data and reconciliation of historical results.
Benefits
Automation and consistency in lease reporting in accordance with IFRS 16
Thanks to implementation of FlexiEPM the customer gained the following benefits:
- The company gained a coherent system for automated valuation of leases. The solution enables central management across the entire Group, including its foreign companies.
- FlexiEPM has made it a lot easier to update financial statements, especially when it comes to dynamic changes in lease contracts. The system ensures flexibility in a variety of situations, e.g. in the case of rent price indexation or rent reductions, adjusting the values and payment schedules accordingly. Most notably in 2020-2021, the company entered into negotiations with many landlords. The reason was the decrease in foot traffic caused by COVID-19 restrictions. As a result, the price of rent changed several times, either permanently or on a temporary basis.
- With FlexiEPM for IFRS 16, the process of valuation and reporting for indefinite term leases has become much simpler. The standard requires that the company make an assumption about the anticipated duration of each contract. In the context of over 400 contracts, it is only natural that various scenarios will crop up. For example, closures of selected locations or updates to estimates when a lease contract is extended.
- The software makes all the adjustments necessitated by the change of lease terms in accordance with the rules and guidelines of the IFRS 16 standard.
- The software is used for processing all leases signed by the companies. The IFRS 16 tool is specifically designed to process contracts with payments in foreign currencies. In these situations, in addition to basic calculations, including the current value of liability or interest, the system automatically calculates exchange rate differences. These differences are then applied to the value of the liability and reflect on the company’s financial result.
- With FlexiEPM , the company can record IFRS 16-compliant values on a monthly basis without the assistance of an outside firm. The responsibility for these tasks was taken over by the staff in charge of reporting.
By increasing the frequency of valuation and recognizing its results directly in the books of accounts the company gained better control over the IFRS 16 reporting process and consistency across all reporting operations that rely on the company’s financial and accounting data, including both management reporting and stock market reporting.
