The implementation of IFRS 16 removes the distinction between Finance Leases and Operating Leases. This means that all leases will now show as borrowing on the school Balance Sheet, but also list the leased items as assets.
Because all borrowing by a school requires prior approval by the Secretary of State, the DfE has provided a list of assets that have been pre-approved which includes IT equipment.
The implementation of IFRS 16 isn’t an altruistic move by DfE to make life easier for schools; it is an international accounting standard that all organisations have to implement and so DfE have been required to follow suit.
IFRS 16 is the International Financial Standard for lease accounting which replaces the existing standard on lease accounting (IAS 17) and the interpretations IFRIC 4, SIC-15, and SIC-27. The standard came into effect in January 2019.
IFRS 16 is not automatically being implemented by Local Authority Schools with immediate effect. Following a CIPFA consultation, it has been agreed that, because of the time lost to COVID, the implementation of IFRS 16 for Local Authority Schools has been deferred until 1st April 2024. However, if a Local Authority is in a position to implement IFRS 16 at an earlier date, then it is able to do so.
IFRS 16 is not being implemented by Academies with immediate effect. In the financial year through to 31st August 2022, Academy Trusts are required to adhere to the rules laid out in The Academy Trust Handbook. This regulatory guide stipulates that Academies are only allowed to enter into Operating Leases without prior approval from the ESFA, on behalf of the Secretary of State. When completing their 2022 accounts, Academy Trusts are required to separate out Operating Leases and Finance Leases according to FRS102 Accounting standards, as per the Academies Accounts Direction.
The reference in DfE guidelines to Local Authority Leases prior to 1st April 2022 and Academy Trust leases prior to 1st September 2022 not requiring Secretary of State approval is not a retrospective approval of Finance Leases prior to the implementation of IFRS 16. It is simply the approval of the re-categorisation of these lease agreements as Finance Leases once IFRS 16 has been implemented.
The adoption of IFRS 16 does not enable Local Authority Schools and Academy Trusts to take out Finance Lease agreements without doing the correct due dilligence. The School Financial Value Standard requires the school to ensure that the lease agreement is providing them with the best value for money.
There is still some ambiguity over how IFRS 16 will be implemented for Academy Trusts because they will still be required to follow the rules set out in The Academy Trust Handbook. The 2022 edition of this will determine the rules that Academy Trusts must follow in the school year from 1st September 2022 until 31st August 2023, but this is not due to be published for another couple of months.