Background to IFRS 16, how the standard was developed, who it applies to and when it should be implemented.
Who does IFRS 16 apply to?
Background to IFRS 16 – why a new standard?
The main concern of the standard setters was that, where leases were classified as operating leases, they were off balance sheet – ie there was a perceived lack of transparency about the assets being used under leases classified as operating leases and of the future liabilities payable under those contracts.
The new standard was developed to be more transparent about leased assets and related liabilities on balance sheet. It was accepted that the lessor accounting model wasn’t fundamentally flawed so no major changes were made to that model. Generally, the accounting requirements for lessors are not significantly changed so the focus of IFRS 16 was mainly on lessee accounting, especially for leases currently off-balance sheet.
IFRS 16 was issued in January 2016 after a long period of development and has since been the subject of detailed consultation for application in the public sector. See below for the various consultations for the local government approach to implementation.
When should local government implement IFRS 16?
IFRS 16 is being implemented across most of the public sector from 1 April 2022. Due to the serious issues in local audit, the CIPFA/LASAAC Local Authority Accounting Code Board (CIPFA/LASAAC) has decided to defer mandatory implementation of IFRS 16 until 1 April 2024. However, CIPFA/LASAAC is of the view that IFRS 16 offers the best mechanism for reporting lease transactions and supports high quality financial reporting. It would therefore strongly encourage local authorities to voluntarily adopt IFRS 16 either as of 1 April 2022 or 1 April 2023. CIPFA/LASAAC issued an an updated statement on the deferral of IFRS 16 Leases for local authorities on 8 April 2022.
The 2022/23 Code included provisions to allow local authorities to voluntarily adopt IFRS 16 in its Appendix F to allow for voluntary implementation as of 1 April 2022.
Consultations
The story of how IFRS 16 was interpreted for local government application under the auspices of CIPFA/LASAAC:
- Emergency Code Consultation for 2021/22 and 2022/23 Codes, consultation closed March 2022
- Code of Practice on Local Authority Accounting 2022/23, consultation closed October 2021
- Code of Practice Consultation on the Impact IFRS16 on Housing Tenancies and on COVID-19 Rent Concessions, consultation closed March 2021
- Code of Practice consultation | CIPFA, consultation closed October 2019
- Code of Practice on Local Authority Accounting 2020/21 | CIPFA, consultation closed September 2019
- Consultation on IFRS 16 Leases | CIPFA, consultation closed September 2019