Incoming finance regulations mean councils need to ensure finance officers are involved in all decisions to enter leases, according to a sector expert.
International Financial Reporting Standard (IFRS) 16, which will affect the public sector from 1 April 2019, will require councils as lessees to recognise assets and liabilities for all operating leases of more than a year on their balance sheets.
The move, according to Darrell Slevin, director at Link Asset Services, will require finance departments to undertake a resource-intensive audit of all qualifying leases held by their authority.
Slevin told CIPFA’s Scottish Treasury Management Forum last week: “Start thinking about this now and getting stakeholders involved. The earlier you start looking at it, the easier it is going to be.
“All the data should be requested now in time for when transition to the new regime occurs.”
As an aside, he added: “Finance departments should be involved in all leasing decisions and other departments should not go off and sign leases without input from finance. You have to be involved. If you are, then you will ensure that you obtain value for money and the data you need to allow transition under the new rules.”
In August HMRC launched a consultation with public sector finance directors into the application of IFRS16 rules. It is understood that the Chartered Institute of Public Finance and Accountancy (CIPFA) is rumoured to be launching a second consultation early in the new year.
Slevin said that the new rules could be challenging where councils are unable to identify all data relating to historical leases.
He said that opinion from auditors, was that if the data is not available, finance directors will use the incremental rate of borrowing, the basis of which has yet to be established under the current consultations.
“If you use the incremental rate — which is usually lower than rates contained within a lease — it will mean discounting the relevant payments at a lower rate, so the opening liability will be higher.”
In addition, Slevin said that the sector is waking up to potential challenges in the classification of low value leases.
He said: “Under the new standard it stated that low value leases will be classified as leases with a capital value of $5000 or more.
“HMRC is concerned that if they put a hurdle figure then people will start trying to structure leases so that they stay off the balance sheet.”
He suggested that the solution might be to pass classification to the public sector body taking out the lease, based on factors such as de minimis limits.
Slevin said that the public sector had been “caught in the crossfire” by the new rules, which were introduced to give greater transparency for private sector investors.
He said: “What will this achieve for the public sector? Nothing. The balance sheet impact is zero. It is a lot of work to achieve nothing with your balance sheet. The key users of public sector financial statements are people in this room.”
