To have and to leasehold: accounting for leases

5 Sep 18

Consultations on changes to local authorities’ accounting code include a substantial change to practice around leases, says CIPFA's Sarah Sheen.

To Let signs

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The Local Authority Accounting Code Board (CIPFA/LASAAC) has issued two consultations on the Code of Practice on Local Authority Accounting in the United Kingdom 2019/20. Both are important in maintaining public accountability, stewardship and transparency.

The first consultation, on IFRS 16 Leases, was issued in May; this was earlier than normal to ensure local authority stakeholders had sufficient time to comment and to allow more time to prepare for the proposed changes.

IFRS 16 will lead to a substantial change in accounting practice for lessees where the current distinction between operating and finance leases will be removed. Instead, it requires that a lessee recognises assets and liabilities for all leases with a term of more than 12 months unless the underlying asset is of low value. A lessee will recognise a right-of-use asset representing its right to use the underlying leased property, and a lease liability representing the lessee’s obligation to pay for that right.

There are new requirements for measurement of the lease liability where it will initially be measured at the present value of the lease payments payable over the lease term but may rise to reflect any reassessment or lease modifications, or revised in-substance fixed lease payments.

The right-of-use asset is initially measured at cost and is directly related to the initial measurement of the lease liability (with some) potential adjustments. IFRS 16 allows subsequent measurement to be maintained at cost or at a revalued amount. In line with its views for property, plant and equipment, CIPFA/LASAAC is proposing to adapt the code to require local authorities to measure the right-of-use asset at current value as this measurement best reflects its benefits to local authorities. However, CIPFA/LASAAC is seeking views on this and includes options in the consultation to ensure that this measurement has an appropriate cost-benefit balance for the users of local authority financial statements.

The approach to accounting for lessees is not new to local authorities as many of the principles for initial recognition and measurement follow those of its predecessor standard, IAS 17 Leases. However, there is a general consensus across both public and private sectors that the practical impact may be challenging for a wider range of leases. For example, does the authority have a full list of all its operating and finance leases? What changes will need to be made to its processes systems and is training needed to ensure stakeholders understand the impact of the changes? CIPFA is undertaking an impact assessment that will identify these issues; the consultation also includes a readiness assessment questionnaire to assist local authorities with their preparations.

The second consultation on the 2019-20 code covers a number of areas including narrow scope amendments to IFRS.

Two important changes are proposed to IAS 19 Employee Benefits and IFRS 9 Financial Instruments. Other amendments are proposed for legislative and policy changes, amendments to reflect the concepts introduced by the IASB IFRS Conceptual Framework for Financial Reporting issued in March this year; there is also clarification on the approach in the code to adaptations and interpretations of IFRS and how the code deals with statutory adjustments.

Following its selective post-implementation review on group accounts, employee benefits and service concession arrangements (in PFI/PPP contracts), the consultation is not proposing any changes in these areas but is seeking views on several issues including the prominence of group accounts and the treatment of third party income for service concession arrangements.

The consultation on IFRS 16 will close on 7 September and that on the main code on 8 October.


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