IFRS 16 and PFI Schemes David Green dgreen@arlingclose.com

The “new” IFRS 16 Leases accounting standard is finally upon us, with CIPFA/LASAAC confirming that there will be no further delay to implementation beyond 1st April 2024. When I say “new”, we should recognise that the standard was actually issued by the IASB back in January 2016, and adopted by central government in April 2022, so local authorities have had some time to prepare for it.

It has also been confirmed that debt liabilities arising from Private Finance Initiative (PFI) schemes, known as service concessions in accounting jargon, will be covered by IFRS 16. This is important because PFI unitary charge payments increase each year with inflation and IFRS 16 has changed the accounting for index-linked leases such as these.

The idea is that where payments will be higher in the future due to a past increase in an inflation index, the measurement of the liability should reflect those higher payments, consistent with the very concept of a liability. The old IAS 17 standard took a different approach, where the liability only reflected minimum lease payments, with increases due to inflation expensed each year as contingent rent.

Local authorities will therefore need to remeasure their PFI liabilities upon transition to IFRS 16 and annually thereafter. For many, this will mean a large increase in liabilities in 2024/25, especially if inflation has risen substantially since commencement and if there are many more years of unitary charge payments to come. And since PFI liabilities count as debt, this has implications for the prudential indicators, the affordable borrowing limit and for minimum revenue provision. In the extreme, it may lead to a few authorities breaking the law by borrowing above their authorised limit for external debt.

The double entry to the remeasured liability is normally to increase the associated leased asset. However, PFI assets are generally held at current value, i.e. a professional valuer’s judgement, which will not change just because you are using a new accounting standard. A downwards revaluation will therefore be processed in most cases, affecting the Revaluation Reserve and possibly the Capital Adjustment Account. This will be further complicated if the asset is no longer on the local authority’s balance sheet, perhaps because the school has transferred to become an academy.

Arlingclose has assisted many local authorities to recalculate their PFI scheme liabilities in accordance with IFRS 16 and understand the implications for their borrowing and minimum revenue provision. Please get in touch if we can help you too.

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