In January 2016, the International Accounting Standards Board (IASB) issued the final version of IFRS 16 (Leases). This standard will replace IAS 17 for financial years beginning on or after January 2019. However, until recently, HM Treasury had not issued any guidance meaning public sector bodies such as the NHS had not been able to adequately plan.
The main change is how you’ll be required to report leases in your accounts. IAS 17 defined a Finance Lease; any lease not meeting this definition was to be considered an Operating Lease which is neither capitalised nor the liability reported on the balance sheet. For lessees IFRS 16 removes the distinction between the two types of lease so, with a few exceptions, leases must be reported on the balance sheet. Although final guidance is yet to be issued by HM Treasury, exceptions are likely to include:
- Leases with less than 12 months to run following transition
- Any lease with a term of 12 months or less
- Low value leases
Are only leases affected?
No. Any arrangement that creates a ‘Right of Use Asset’ must also be properly reported. This will include Managed Service Agreements or other asset supported ‘service’ contracts. Again, there are some exceptions. For example, an underlying asset that cannot be ‘identified’ – perhaps because the owner has the right to control or substitute the asset.
Will Operating Leases still be available?
They won’t be called ‘Operating’ Leases, but residual-based leases will still be available and commercially attractive – they will still deliver lower periodic costs than other forms of funding.
We’ll continue to provide advice and support to ensure our clients obtain the most attractive funding in every instance. And, where that involves a lease, we’ll continue to protect your interests by ensuring you achieve the best commercial terms.
How can Lifecycle help?
We’re working with our customers to evaluate their entire lease portfolio and to support all the balance sheet entries they’ll need at transition. We’ll also help with any issues of interpretation of the standard as they arise. If you’d like more information on how we can help, just call Neil Marriott on 01865 340800.