IFRS 16 leases: A valuer's perspective


By Donna Best, CIPFA Property Advisor

The IFRS 16 leases standard becomes effective for local authorities from 1 April 2022. The principal change is for lessees: whereas at present, only finance leases appear on the balance sheet, from 1st April all property leases will be shown in the balance sheet (with the exception of short term leases) recognising a right-of-use asset and the lease liability. The idea is that lease assets and liabilities will become more transparent on the balance sheet and that it will be easier to compare the finances of different organisations.

Many of you may have been led to understand that this is an accounting matter and that there will be no requirement for valuer input. The reason is that the CIPFA code, although requiring that PPE is measured at current value, allows the use of the IFRS 16 cost model to be used as a proxy for current value. This model can be applied by deriving key information from the lease .

It is not always the case that the cost model will be an appropriate way to measure leased in assets, however, and that the alternative revaluation model will need to be used. This is most likely to be for leases where a market rent isn't being paid and for which there are not regular reviews to market rent. In these instances, a valuation undertaken by a valuer will be necessary. In addition, it is likely that even where the cost model can be used, finance colleagues may well request assistance from property professionals in helping to identify lease interests and key information.

Despite the rapid approach of April 2022, there is at present little information available as to valuation approach and methodology to be used in measuring lease interests under the revaluation model, particularly for specialised assets. The RICS Public Sector Valuation Forum are working on an Insight Paper which is due to be published early 2022. CIPFA is working on agreeing the treatment of mere licences used by schools for assets owned by religious bodies, though this is proving to be a complex issue.

In the meantime, there is much your authority can be doing to prepare for IFRS 16, the main property related task being to identify all lease interests. This includes those hidden amongst service contracts and all nil consideration arrangements (both as lessors and lessees).

Whether in part owing to necessary deferrals and or other priorities stemming from the pandemic, we're at risk of being caught off guard in relation to the implementation of the new standard. If your authority hasn't started preparations, it's time to now.

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