Technical / IFRS 16 sets deadline to move leased assets on balance sheet
The standard makes minimal changes to the definition of a lease and for accounting by lessors, but completely changes the way that lessees account for lease arrangements.
All leases, with two exceptions, will be accounted for in the statement of financial position (SOFP) from the date the standard is applied. They will be shown on the SOFP as an asset (reflecting the right to use the underlying leased asset) and a lease liability (representing the obligation to make lease payments). The exceptions are leases of less than 12 months’ duration and leases for underlying assets of low value, such as computers and tablets.
The lease liability will be the present value of the lease payments not paid on the commencement date. This will be calculated using the interest rate implicit in the lease or, if that is not known, the lessee’s incremental borrowing rate – the amount the lessee would have had to pay to borrow over a similar term an asset of similar value in a similar economic environment. This rate will therefore be specific to the lease being considered.
The value of the right to use the asset will be measured at the start date as the amount of the initial measurement of the liability:
- + any lease payments made on or before the commencement date
- – any lease incentives received
- + any direct costs incurred
- + an estimate of any costs that will be incurred by the lessee at the end of the lease for dismantling and removing the asset
The new standard will affect the statement of comprehensive income (SOCI) and the cashflow statement. Under the current arrangements, operating lease rentals are an operating expense, but these will be replaced under IFRS 16 by depreciation and interest charges.
The total cost of the lease over its life will not change, as it will be the total amount paid to the lessor. But rather than the current straight line rental charge, the new interest costs will be higher at the start of the lease period than the end. Depreciation will probably continue to be calculated on a straight line basis but, overall, the impact of lease arrangements will be higher costs at the start of the lease period than at the end.
Metrics such as earnings before interest, tax, depreciation and amortisation (EBITDA) will be affected – operating lease rentals will no longer be included in this calculation. And in the cashflow statement, the cost of leases will be shown as financing rather than operating costs.
In terms of application of the new standard, it is not expected contracts will have to be reviewed to identify whether they include a lease or not, but work will be required to identify the interest rates implicit in each lease and to understand the impact on the financial results and performance metrics.
Debbie Paterson is an HFMA technical editor
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As always, the standard included new disclosure requirements. Some will require judgement because the standard requires disclosures to be made to give users of the accounts enough information to assess the effect of leases on the entity’s financial position. To assist with implementation of the standard, there is a choice of transition arrangements, including entities implementing the standard requirements at the transition date rather than retrospectively restating all prior periods. It is likely HM Treasury will direct public sector bodies on which transition arrangements to follow. |
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In brief An updated frequently asked questions document on the Department of Health 2015/16 Group manual for accounts is now available. This has added FAQs about profit or loss on disposal of non-current assets and changes to the accountability statement. The Department of Health has updated directions on payments made to local authorities and other bodies in connection with property. The directions relate to payments made under sections 256 and 257 of the NHS Act 2006. Guidance on the 2015/16 accounts governance statement has been published by the Department of Health. The annual governance statement is available from its online group manual for accounts. Financial directions to NHS England for 2016/17, which accompany its mandate, are now available. The mandate sets out NHS England’s total revenue resource limit of £106bn and total capital resource limit of £305m for 2016/17. The directions set out additional controls, including expenditure sub-limits to which NHS England must adhere, based on Treasury budgetary controls. |
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Nice update Tuberculosis guideline: more tests England has one of the highest tuberculosis (TB) rates in Western Europe – in 2013 there were about 7,300 new cases. TB is a curable disease spread by inhaling droplets containing the bacterium coughed by someone with infectious TB. Once inhaled, the bacteria reach the lung and grow slowly. In more than 80% of cases, the infection clears, but in a small number, a defensive barrier is built round the infection and the TB bacteria lies dormant. This is called latent TB. Some with latent TB go on to develop active TB. NHS England and Public Health England have been working to reduce the harm of TB. As a notifiable disease, clinicians must notify local authorities or a local Public Health England centre of suspected cases. An expanded NICE guideline (NG33) covers preventing, identifying and managing latent and active TB in children, young people and adults. It aims to improve ways of finding people with TB and recommends everyone under 65 with latent TB should be treated. The guideline recommends changing the age criteria for testing contacts of people with active TB for latent TB and the criteria that signify a positive test result for latent TB. Current practice for diagnosing latent TB is to use a Mantoux test in people aged 18 to 34. Those testing positively for latent TB also receive an interferon-gamma release assay test. Those aged 35 to 65 receive a chestX-ray to test for active TB. The guideline suggests offering Mantoux testing alone to diagnose latent TB in people aged 18 to 65 who are close contacts of a person with pulmonary or laryngeal TB. The changes mean more outpatient appointments and tests, more positive results for latent TB and more tests for active TB. This means more staff needed to care for the test and treatment. The extra annual cost of diagnosing latent TB once the guideline is implemented is put at £1.8m for England. Nicola Bodey, senior business analyst, NICE |
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