Board Cover Template 2017 - Future Focused Finance



516567725625th June 2019IFRS 16 OverviewBy Louise LowryIFRS16 LeasesImplementation for public sector on 1st April 2020. The standard removes the previous distinction between finance leases and operating leases. The new question becomes ‘does this contract contain a lease (where there is a right to control the use of an asset for a period of time)’. This impacts lessees. All leases will be moved onto our Statement of Financial Position (SOFP, or balance sheet) and be accounted for as a right of use asset unless under 12 months and minimal financial value (eg. Less than ?5k). Whilst it is usual to have new standards coming on stream, standard changes do not usually involve such a large scale impact on both accounting treatment and systems and processes. IFRS16 is different in that it involves substantial change in processes and systems across multiple teams, including Finance, Procurement, Estates, IT and any department with a ‘lease’ in place, to facilitate the change. Additionally, there is a need for upskilling in technical knowledge within the wider finance team to support implementation. The impacts are as follows:The 2019/20 Accounts will look consistent with 2018/19. However, transition will involve the restatement of Accounts balances at 1st April 2020, with new assets identified at that date, and the remaining period of the lease utilised for the lease calculation. Therefore, the impact is on the 20/21 year and will impact our planning process for that year.All existing and new Building lease agreements, equipment lease agreements, including photocopiers and managed service contracts, and lease car lease agreements will be impacted by the standard. Any items treated as an operating lease historically will now be considered to be a lease that requires on-SOFP accounting.A move from historical accounting to future accounting – i.e. the accounting looks forward, not backwards in that the accounting model is mapped out at the start of the lease for the duration of the lease.Previously evenly spread lease payments are replaced with frontloaded interest costs and evenly spread deprecation costs for the asset over its life.Inflationary increases in future years of the lease are dealt with as contingent rents and expensed in the period. The original model doesn’t change.There will be an increase in our total PPE assets. Impact will be assessed fully by end November 2019 on completion of full data collection exercise. It is currently estimated based on ?X.Xm of Operating leases in the 18/19 Accounts, and assuming a 7-year life on average, gives c. ?XXm increase to our Property, Plant and Equipment (PPE) Asset base. This is likely to be understated due to the increase in leased equipment in the 2019/20 plan. PDC impact should be minimal due to corresponding liability also on SOFP.There will be a corresponding initial increase of c. ?XXm in ‘Borrowings’ on the SoFP as increased IFRS16 Lease liabilities will be included within that line in the Accounts (as existing finance leases are). Again, this impact will be fully assessed by the end of November 2019, and is likely to be currently understated due to the increase in leased equipment in the 2019/20 plan.Transfers of rent, equipment and travel budgets is required, to a central code, to deal with the replacement interest and depreciation costs centrally. Currently ?x.xm of costs, but budget requirement expected to be higher in early years due to frontloaded interest costs. Upskilling in technical skills of more finance staff is required to understand ‘finance’ lease accounting not traditionally encountered outside the technical Financial Accounts team.A comprehensive system is required to track lease renewal dates and update IFRS16 lease accounting models appropriately for changes. Substantive changes may require de-recognition of lease and recognition of a new lease, which may cause a loss or gain on disposal due to the uneven accounting entries over time. A comprehensive system is required to record all lease information, including the supporting financial models, and to track any changes to those models. Current finance lease models (4 in place at the 31 March 2019) are recorded in Excel Spreadsheets. This will not be a robust enough going forward, and Unit 4 have developed an add-on module to link to our existing financial ledger which is being explored as an option. NB. Oracle are also developing a module for SBS clients. The IFRS16 Leases implementation plan is attached at Appendix 1 for your reference.Challenges: The work involved to action this standard change is largely sat within the Financial Accounts team in Financial Services and by 2 or 3 people. This is because the accounting treatment that is being implemented will not have been used by other members of the finance team since qualification. It also has a direct material impact on the Accounts disclosures. The challenge will be to ensure these individuals have free resource to implement this work in addition to the day-job.Risks: ineffective implementation may impact External and Internal Audit opinions over 19/20 and 20/21. The 20/21 Accounts may not be signed off if material errors are included due to poor implementation.Appendix 1 – IFRS16 Implementation PlanRefActions requiredResponsible OfficerDeadlineJune 19July 19Aug 19Sept 19Oct 19Nov 19Dec 19Jan 20Feb 20Mar 20April 201.Review the contracts for all Operating leases in 18/19 Accounts to confirm remaining term and substance of contract. Assess each per IFRS16. Review IFIC4 where applicable. 30/9/191.1For lease cars, confirm with HFMA/Treasury if different lease car arrangements should be treated differently – i.e. is a salary sacrifice car meant for person use by an employee still a lease contract per this standard in so far as the right of use asset is concerned?31/7/191.2Confirm whether lease term to be applied is the full term, or up to break clause date? (for all types)30/6/191.3Confirm what interest rate (borrowing rate) is to be used where the interest rate is not possible to determine otherwise. (HMT dependant) 31/1/191.4For lease cars, collate relevant information on each car lease – copy orders/invoices/contracts to review each individually.30/9/19 Check for new-31/3/192.Review the contract database to identify all contracts lasting over 1 year and over ?5k per annum. Where new contracts are identified (not already reviewed in ref 1.) complete the assessment of remaining term and substance of contract. Assess each per IFRS16. Review IFIC4 where applicable.30/9/19 Check for new-31/3/192.1Confirm any changes to property leases in year with EstatesAll by 31/3/202.2Confirm expected treatment of managed service contracts, and how to disentangle inflated consumable prices to calculate the value of the asset provided, where assets are provided as part of the contract.30/9/192.3Continue to track new leases coming on stream up to 31/3/20 so all captured ready for 1/4/20 IFRS16 implementation.3.For all leases identified in 1. And 2. Above. Complete a NPV calculation, identifying the lease value per the standard and using the implicit discount rate in the lease.All by 31/3/203.1Summarise impact on financial statements by consolidating all lease calcs completed so far, comparing each year’s I&E hit against original lease I&E hit to establish 20/21 planning pressures. Also establish total increase to Asset base and effect on PDC in 20/21 and onwards.30/11/193.2Review Budgets transfers needed from rent/equipment/car codes to finance cost and depreciation. Summarise impact for 20/21 plan.30/11/194.Consider solutions for recording all leases to be accounted for on-SOFP. Eg. Excel spreadsheets, Unit 4 Business world’s recommended solution, or an alternative?30/6/194.1If a non-excel solution is to be utilised, progress procurement process (including business case if over ?5k)31/8/195.Consider what process can be implemented to ensure all Equipment contract renewals and separately, buildings and car lease renewals, are captured and the accounting updated appropriately depending on the nature of any change – i.e. some with be contingent rent changes only, others will require disposal of, and new lease set up. 31/12/196.Set up system to ensure all new leases (equipment and buildings and cars) are informed to finance early enough in the process for accounting to be set up for the lease.31/12/197.Set up system to ensure where leases are ceased finance are informed (and the asset/ lease disposed of in the Accounts.)31/12/198.If a new solution is procured, progress implementation plan for new software go live. This includes ensuring any integrations with Unit 4 Business World are set up ready for use. (Up to the point of adding data.)31/12/199.Upload leases information collated in 1 and 2 above into the new leases solution (if applicable), with implementation date of 1/4/20 onwards. 31/3/2010.Cross check the NPV calculation that the NEW system does to own spreadsheet calculation to ensure initial upload is working correctly.31/3/2010.1Specifically, cross check the journals produced for interest and liability reduction each month by the system both on initial upload and ongoing. 31/3/2011.Set up process for transferring journals from the new solution into the ledger monthly, or actioning journals manually monthly, depending on if new solution is purchased. Be cautious about journaling in future periods. Better to do monthly to keep a check on the process and ensure it’s working correctly.Ready for April month-end12.Action ASSET journals in existing system as follows:Upload all new lease assets into Fixed Asset Register. These will currently hit cc 4355. Either, set up the Finance lease assets in FAR to code the credit entry to appropriate SOFP liability codes, or manually Journal the Credit on 4355 to the correct SOFP liability account code each time. 31/3/2013.Set up Control account processes, to cross check FAR records against GL, and to cross check Leases records if in a new system/or Excel, against GL.Ready for April month-end ................
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