IFRS 16 Leases – a valuer’s perspective (2023)

Just nine months to go before local authorities need to comply with the new accounting requirements on leases. CIPFA’s property team has been receiving lots of questions from its valuer members in relation to the new standard and we have captured the most frequent questions in this short article.

Will it really happen this time?

Yes! It will apply as of 1 April 2024, CIPFA LASAAC Local Authority Accounting Code Board made it clear when it was deferred in 2022, that there would be no further delays to implementation. Local authorities have been able to voluntarily implement from either 1 April 2022 or 1 April 2023. 

What does this new standard mean for my authority?

The principal change is for lessees, at present only finance leases appear on the balance sheet. From 1 April the majority of leases will be shown in the balance sheet, recognising a right-of-use asset and the lease liability. The idea is that lease assets and liabilities will be more transparently reported on the balance sheet and that it will be easier to compare the finances of different organisations. 

For information regarding the steps local authorities will need to consider, CIPFA Bulletin 14 provides information on an implementation project plan (see appendix 2).

What has the accounting standard got to do with me as a valuer?

Some of you may have been led to understand that this is an accounting matter and that there will be no requirement for valuer input. This might be because as a practical expedient, local authorities are allowed to use the IFRS 16 Cost Model as a proxy for current value, which enables measurements to be derived using key information obtained from a lease.

However, it is not always the case that the cost model will be an appropriate way to measure leased in assets and in such cases the alternative ‘revaluation model’ is required. This is essentially for those leases for which a market rent isn’t paid or for which there are not regular reviews to market rent. In these circumstances the right-of-use asset should be subject to value. 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, modifications and other key information. 

Can I delay thinking about this until next year?

No! We wouldn’t recommend this. Later this year, local authorities will be setting their prudential indicators and preparing capital strategies. To ensure properly prepared indicators, an authority will need to be able to estimate the impact that the leases about to be recognised on the balance sheet will have as of 1 April 2024. Also messages about implementation in both the private and public sector indicate that the time taken to implement will not be insignificant. There will be both technical and practical issues to consider. 

Now is the time to ensure you have, or to gain, the necessary valuation skills to undertake the work with the required expertise and competence.

Where do I find information on how to value a 'right-of-use' asset?

Despite the rapid approach of April 2024, there is at present little information available as to the valuation approach and methodology for measuring lease interests under the revaluation model, particularly for specialised assets. 

However, RICS has published a Practice Information paper which is a great starting point and an essential read for any valuers involved in asset valuation. The paper can be found on the RICS website: IFRS 16 principles for UK real estate professionals

CIPFA Property are also running a training event aimed at valuers. If you would like to know more about the new standard and how your role as a valuer will contribute to the implementation of the new standard, this is the event for you. Here we will explore:

  • the general principles of IFRS 16 Leases as implemented in the Code
  • the decisions around whether a contract falls within the scope of the standard
  • requirements at the transition date and initial measurement of property lease interests (if they meet the accounting definition of a lease)
  • subsequent measurement requirements, including application of the revaluation model - with practical examples of valuation approaches and methodology
  • the standard implications for lessors and property valuation
  • how valuers may contribute their property, valuation skills and expertise for the preparation of the accounts

In addition, the event will give delegates an opportunity to ask questions or seek clarification on the application of the standard to their organisation and its property interests. For further information, please visit PTN IFRS16 Leases - A Valuers Perspective or contact property@cipfa.org.