If you’re reading this in 2025, the most important step is not to panic. Even if you have left the transition to the new leasing standard late in the day – perhaps hoping CIPFA would postpone yet again – the process is actually deceptively simple, and there is plenty of professional help available.
IFRS 16 represents a significant shift in lease accounting standards. Rather than the old operating lease / finance split for lessees, now all but the smallest leases or shortest will be brought onto the balance sheet. This will impact prudential indicators, financial systems, and the statement of accounts, so getting it right is essential. Arlingclose are here to help you with each stage:
Understand the requirements. Firstly, familiarise yourself with the core principles of IFRS 16. The standard eliminates the distinction between operating and finance leases for lessees, requiring all leases to be recognised as assets and liabilities, except for short-term and low-value leases.
Identify all your leases. This is actually the most painful part of the transition for most clients. Conduct a detailed review of contracts to identify agreements that qualify as leases under IFRS 16. Pay close attention to embedded leases, where lease terms may be hidden within service agreements or other contracts.
Assess systems and processes. Evaluate whether existing accounting systems can handle the requirements of IFRS 16. You may want to consider a special leasing system if you have a very large number of leases, though most authorities will manage with good old Excel spreadsheets.
Gather the necessary data. This is where the real work begins. For each lease you will need to understand the lease terms and payment schedules, the interest rate implicit in the lease and any extension or termination options. The last of these is particularly important as the rules around how extensions and terminations are accounted for are a big change compared to IAS 17.
Calculate the lease values. Now to the fun part! Once you have all the information you need, you can calculate the value of the liabilities and assets you need to put on the balance sheet. This can be fiddly even for simple leases so if you need help Arlingclose is available to assist .
For more complicated leases, or concessionary arrangements such as PFI you’ll need to consider the impact of any indexation and cancellation or extension options. Unlike the private sector you may have peppercorn rents, or very long (100+ year) leases - all of this will need to be considered.
Evaluate the Financial Impact. Once you have the figures it’s time to look at the impact on the council. It isn’t just the balance sheet; remember your prudential indicators and the Capital Financing Requirement will also need to take it into account.
Train Staff. Ensure finance teams and other relevant departments understand the changes and their implications. Provide training on new systems, processes, and reporting requirements.
Engage Stakeholders. Otherwise known as “talking to your colleagues”! Transparency will help manage expectations and mitigate concerns about changes in financial performance, for example the total debt reported to councillors is about to rise, they should be forewarned.
Plan for Disclosure. IFRS 16 requires expanded disclosure in financial statements. Prepare to report on lease assets, liabilities, and related expenses in greater detail.
By taking these steps, organisations can confidently navigate the complexities of IFRS 16. If you need assistance with any of these stages or just a sympathetic ear whilst trying to identify all your leases, please contact us at treasury@arlingclose.com. We can help with all stages of the transition, but especially calculating lease values and their impact on the balance sheet and prudential indicators.
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