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CIPFA/LASAAC has confirmed that the implementation of IFRS 16 will be mandatory from 1 April 2024.
From then, local authorities will need to account for leases following the Accounting Code’s implementation of IFRS 16 leases. The new mandatory requirements will end different lease 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 must recognise leased assets (described as right-of-use assets) and a lease liability for most of their leased-in assets. These changes are not just reflected on the balance sheet: there are also changes to income and expenditure, although the effects on council tax are likely to be limited by the capital finance regulatory framework.
Once revisions to the balance sheet are calculated, changes to income and expenditure should be straightforward. But there will be a small number of leases where changes may be more complex to implement. This is because IFRS16 affects the profiling of costs on Public Private Partnerships (PPP) and Private Finance Initiatives (PFI).
Where are we now?
The good news is a project plan is available from CIPFA which provides suggested timelines and a checklist to assist with the implementation.
In early 2024:
· Producing draft accounting policies, including changes to financial statements and disclosures. This will allow teams to test information systems and their ability to produce information for 2024-25 financial statements, which will further benefit 2023-24 disclosures.
· Engaging with local auditors to review the progress, particularly to review the draft accounting policies and their impact on the financial statements.
· Setting Prudential Indicators and capital strategy. It is important to understand the impact of right-of-use assets on the capital financing requirement and to include the impact of lease liabilities on borrowing limits.
Lessons learnt
The private sector and central government have implemented IFRS 16 early. This gives us the opportunity to consider the lessons learnt for best practice.
Project teams should consider:
· Ensuring a logical approach to data collection. Establish the time and resources required, which will depend upon the number and type of leases involved. It is also important to allocate time to identify any gaps in data.
· Prioritising an early review for existing contracts with missing assurance or supporting evidence. This will aid the process of demonstrating the assurance for embedded leases.
· Reviewing estate records for property and operating leases. Obtaining completeness assurance is vital because the transition data will need to include all leases currently recognised under IAS 17.
· Establishing a collaborative approach across organisations. Finance teams cannot do this work alone, and preparations should involve legal, procurement, fleet, IT, property management, and business support teams. These departments may all hold data or have requirements that need assessing.
CIPFA Solutions
For authorities leasing lots of assets, teams will need to consider how they manage their portfolio.
This includes evidencing historical information, such as revised calculations. But with multiple teams on board, spreadsheets can only do so much before human errors start creeping in.
CIPFA suggests considering solutions that integrate finance and asset management packages for both capital and asset management.
For instance, CIPFA’s AssetManager.NET is one such software solution that provides a fully integrated finance and asset management package. Developed by CIPFA experts in finance, IT and property, it is the only asset management software that has been specifically designed for the Public Sector.
For the CIPFA project plan, see CIPFA Bulletin 14: Closure of the 2022/23 Financial Statements.
For more information on IFRS 16, see Appendix F of the Code of Practice 2023/24 online edition
and the updated IFRS 16 guidance IFRS 16 Leases guidance | CIPFA.
