Two months to go until the adoption of IFRS 16, are you ready?
Insights - What We Think

IFRS 16 is a new lease accounting standard which requires lessees to adopt a single lease accounting model. This means lessees must recognise nearly all leases ‘on balance sheet’, with a term of over 12 months, and recognising a right of use asset and a lease liability.

With the adoption of IFRS 16 now less than 2 months away, local authorities are very aware of the significant amount of work to be done and the increased complexity of lessee accounting. Whilst the data, numbers and accounting requirements have been highlighted, what about the new procurement requirements and policies that are required from the 1st of April 2024?

Whilst procurement is tasked with achieving best value on behalf of their organisation, previously they have never had to take into consideration arrangements from an IFRS 16 perspective.

Explicit lease arrangements are straightforward to identify (be it a lease, contract hire, rental or hire agreement) whereas some procurement exercises that have always been deemed services may now contain a lease element within the contract. It is vital that these are identified at the tender / mini competition stage.

It is imperative that the correct information is requested through a Find a Tender Service full tender, or through a mini competition under a relevant Framework agreement. If the latter, is the information available as it may not have been specified when the Framework agreement was established? This means more scrutiny of the Framework to ensure that the required accounting information will be available and, if not, an alternative Framework may have to be considered.

Procurement will need to consult with finance to establish if there are assets within the proposed contract, who controls them, and who obtains the economic benefit in order to determine if there is a lease agreement under IFRS 16.  If there is, additional information requests will be required as part of the procurement process.

Once bids are received, the proposals will need to be analysed to assess:

• Has the information required to account for the lease been provided?
• Is the lease value for money?

To assess if the proposed lease is value for money, an options appraisal should be undertaken. If the result of the exercise is that it offers the most prudent form of funding, and all the information required to account for it is available, then sign away. If not, an alternative form of funding the assets may need to be introduced as part of the procurement process and will ensure best value is achieved.

To accommodate these changes to the procurement process, a number of key areas need to be addressed:

• Training for finance / procurement staff
• Establishing new policies and procedures
• Establishing a finance / procurement designated team for new procurement exercises

As well as the transition and figures for IFRS 16, new working practices with only a short timescale in which to address them will also need to be considered.

Our experts at Link Group have assisted clients in all these areas by producing options appraisals on agreed client parameters and, also, have a draft leasing policy template for new requirements from the 1st of April 2024.

If you would like further information on the support available from Link Group, please message me at darrell.slevin@linkgroup.co.uk