Big changes for local authority leases

18 Jul 23

The deadline to meet leasing standard IFRS 16 is looming, but the work is worth it.

There’s just under nine months left for local authorities to comply with new accounting requirements on leases.

From April 2024, local authorities will need to start accounting for leases following the Accounting Code’s implementation of IFRS 16 leases. The new mandatory requirements will end different treatments for lessees based on whether they are finance leases (akin to acquisitions) or operating leases (accounted for on a pay-as-you-go basis).

Local authorities that lease assets will need to recognise an asset (described as a right-of-use asset) and a lease liability for most of their leased assets. These changes are not just reflected on the balance sheet, as there are also changes to income and expenditure, although the effects on council tax are likely to be limited by the capital finance regime.

These changes had been due to be introduced sooner but the decision was taken to defer IFRS 16 as a pragmatic response to severe delays in the publication of audited local authority financial statements in England.

The benefits of IFRS 16

  • It improves leasing information for users of accounts and stakeholders.
  • Improved information will affect leases across the authority, allowing a better understanding of the risks incurred. This could also potentially have a positive impact on procurement processes, as more information becomes available on the full cost of leases.

 

What will finance teams need to do?

The good news is that a project plan is available from CIPFA. There will also be transitional arrangements to understand, although the Accounting Code has sought to simplify choices. Finance teams should consider:

  • Preparing a readiness assessment to identify what, and how many, leases they have. These could be for vehicles, plant, IT equipment or property. Going through contract documentation is important, as local authorities will need to identify other contract arrangements that give them the same control of assets as a lease.
  • Exemptions are available. It will be important to identify when exemptions should be used – for example, laptops can be classed as low-value items, so local authorities may choose to exclude them from the new requirements.
  • Understanding training needs, so people across the authority are aware of the impact of the changes to the accounts and the information they will now need to provide.
  • Ensuring all relevant documentation relating to the lease is available. This will mean that the relevant judgements, decisions and estimates can be made in a timely fashion when necessary.

 

Show and tell

This is a major accounting change that will affect the whole organisation, so communicating with both internal and external users of accounting data is important. There will be new liabilities, and it may identify commitments that leaders won’t have been aware of – audit committees will have a lot to consider.

It is vital that finance practitioners and departments understand the impact of the changes, not just in financial statements but also the affect on capital financing.

The big picture

There’s no doubt that for authorities leasing lots of assets, this will be mean a significant amount of work, but there are real benefits.

IFRS 16 will challenge behaviour. More information about leases will be available, and changes in contracts and prices can now directly affect what is on the balance sheet, particularly in terms of what the authority is actually paying for with rents and the commitments it is taking on. It is also likely that decision-makers will have better information over the life of the asset when they decide to buy or lease.

The changes are far reaching, but the gains will justify the hard work.

For more information on IFRS 16, see bit.ly/CIPFABulletin14

Image credit | iStockcod

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