Technical / IFRS 16: timeline sets milestones for new leasing standard introduction

Following the two-year deferral to allow NHS bodies to deal with the small matter of a pandemic, there will be no more excuses.

The leasing standard has been part of business-as-usual in the private sector since 2019, including bodies such as NHS Property Services. And a handful of government departments have already adopted the standard, so the rest of the public sector has to catch up.

NHS England and NHS Improvement, along with the Department of Health and Social Care and the Treasury, have updated their guidance. Importantly, there is a new implementation timeline and there are several deadlines coming up.

The first thing that NHS bodies will have to do is complete a return to allow the Department to inform the Treasury of the expected impact of the new accounting standard on the capital and revenue departmental expenditure limits (CDEL and RDEL) in 2022/23.

This return will be made available to NHS bodies in early December for submission in January.

At the same time, the 2022/23 planning will be on an IFRS 16 basis. This means finance teams will need to have a good understanding of their operational plans for 2022/23, and whether those plans will involve new lease arrangements or renegotiating existing leases.

During the final quarter of the year, there will be another agreement of leases exercise. This was last run in 2019 and allows NHS bodies to agree, or not, whether there is a lease arrangement between them.

The exercise will focus on the arrangements and will not include any agreement of values or lease terms.

The Treasury has mandated the transition arrangements that public sector bodies will adopt when implementing IFRS 16.

It will allow for lease arrangements to be grandfathered from international accounting standard IAS 17 to IFRS 16 – leases under the old arrangements will remain leases under the new and vice versa.

However, this comes with a big caveat – that an assessment of whether a contract included a lease had already been undertaken in accordance with IAS 17 and its related interpretations, IFRIC 4 and SIC 27. If this assessment has not been undertaken, then it will need to be done as part of the transition.

Ideally it would be done ahead of completing the 2021/22 accounts, so that the transition can be made on the grandfathering basis.

If there are contracts that contain leases identified during 2021/22, then the classification error will have to be adjusted before the transitional transactions are accounted for.

There will be more disclosures required if the correction of errors takes place on 1 April 2022 rather than the day before.

IFRS 16 requires finance teams to make a lot of judgments and estimates – about whether it is a lease, what options will be taken up and the likely length of the lease.

All of these need to be made prior to transition and documented with reasons, as well as the evidence supporting the decisions that have been made.

This will be needed by auditors, but also by future finance teams over the life of the lease.

Finally, finance departments often keep changes to their professional accounting standards to themselves.

The rest of the organisation carries on in blissful ignorance of the work being done by the financial reporting team to meet a new standard’s requirements.

This is not always the best approach to take. The audit of the 2020/21 accounts was difficult for many reasons, but one was that the adoption of IFRS 15 – the standard covering revenue from contracts with customers – had largely been treated as a year-end exercise rather than being embedded into systems.

This meant that evidence relating to payments from clinical commissioning groups that were not backed by contracts or formal arrangements were not considered from an IFRS 15 perspective, so income was difficult to evidence.

For the leases standard, it will be even more important that everyone negotiating or signing a contract understands that whether that contract contains a lease is a vital consideration.

Work should be ongoing educating the rest of the finance team, legal teams, procurement and estates.

And systems need to be embedded for managing and collecting lease information throughout the organisation.

Debbie Paterson is the HFMA’s policy and technical manager