IFRS 16: A lot of effort, but a great opportunity too

In an article for Room 151, ICAEW Public Sector Director, Alison Ring writes that bringing leases onto the balance sheet from 1 April provides council finance teams with a real “opportunity” to help councillors better understand the scale and scope of local authority finances.

The introduction of International Financial Reporting Standard 16 ‘Leases’ (IFRS 16) on 1 April 2022 will have a significant impact on many local authority balance sheets as well as require a huge effort from council finance teams.

Many finance officers will be glad just to get the work needed to comply with IFRS 16 done, but they should also grasp the opportunity to use the comprehensive review of contracts they are undertaking to educate council leadership teams and councillors on the scale and scope of the local authority finances they are responsible for.

Capturing lease contracts

IFRS 16 abolishes the distinction between off-balance sheet ‘operating leases’ and on-balance sheet ‘finance leases’ and brings almost all leases longer than a year onto the balance sheet. The deadline for public sector entities to become compliant with the standard is April this year, so local authorities need to ensure they are not caught out.

The purpose of IFRS 16 is to provide financial statement users with a better understanding of the resources available to an organisation by requiring assets utilised via contractual arrangements to be recorded on balance sheets alongside legally-owned assets. This will cover many leased office buildings, that will now need to be included in the primary financial statements, rather than being disclosed in the operating lease note towards the end of the accounts.

The standard captures most contracts that give the right to use an asset for a period of time of more than one year, as well as lease arrangements where that right is “embedded” into a larger contract. The latter was already the case for embedded rights that met the old criteria to be treated as finance leases, including many private-finance initiative contracts started a decade or two ago, but IFRS 16 means that other types of lease arrangement will need to be identified and—if they meet the criteria—capitalised as an asset and a related lease liability.

Identifying lease assets

In theory, finance teams should have all the information they need to calculate the amounts to record for both asset and liability sides of the balance sheet, as well as recording depreciation and interest in place of lease payments in the expenditure statement.

However, in practice there needs to be a thorough exercise to review thousands of contracts to see if they are leases or contain embedded lease arrangements that fall within the scope of IFRS 16.

In addition to office buildings, there will be a range of assets to identify, ranging from office equipment to vehicle fleets, to leased facilities and equipment. This is not just about reviewing the legal text of contracts, but also involves working with operating departments to understand whether there is a right to use an asset.

Fortunately, there are two main exemptions that should make this exercise easier, with contracts with a term of 12 months or less or below a de minimus value in the order of £3,500 excluded completely.

Unlike in the private sector, the requirement to revalue local authority assets within the balance sheet adds to the complications that finance teams face. This is in addition to the raft of information required for disclosure purposes, such as sub-leasing arrangements, sale and leaseback transactions and variable lease payments.

There will also be challenges in accounting for lease modifications, where a change to the original terms and conditions requires a reassessment of the carrying value for an asset and its associated lease liability, based on the new pattern of lease payments and discount rate.

Beefing up management controls

The good news is that this exercise, while onerous, has benefits too. Creating an inventory of contracts with key terms identified and understood provides a resource that can be used for other purposes, including controlling costs and monitoring financial exposures.

A more comprehensive understanding of the assets in use across the organisation will help in ensuring that resources are being fully utilised for the benefit of service users and council taxpayers.

Processes to vet new contracts for their accounting implications also provide an opportunity to beef up risk management controls. And there may be opportunities to renegotiate contract terms such as lease lengths and renewal options, or to identify contracts that are no longer needed and that can be dispensed with.

Just as importantly, IFRS 16 implementation provides finance teams with a real opportunity to educate council leadership teams and councillors on the finances of the organisations they are responsible for.

Not only is there a need to explain the accounting change and what this means for the financial statements, but the outputs of the implementation exercise can be used to help those charged with governance to better understand the scale and scope of contracting undertaken, the nature of the assets available to be utilised and, most importantly, the commitments and risks that have been made to suppliers and to service users.

There is a temptation to see IFRS 16 as a problem, and I can understand why yet another major compliance exercise may not be embraced with overwhelming enthusiasm. However, I believe that this particular problem is an opportunity – one that should definitely be grasped.

This article was originally published by Room 151.

Local authorities need to invest in finance teams

Alison Ring, ICAEW director for public sector, tells Room 151 that local audit reform is not enough on its own.

Alison Ring, ICAEW director for public sector, recently contributed an article to Room 151, an online news, opinion and resource service for local authority section 151 and other senior officers.

Reforms mean local government will soon see a new audit regulator, but investing in local government finance teams and better reporting are priorities too.

The government’s decision to set up a dedicated local audit unit within the new Audit, Reporting and Governance Authority (ARGA) addresses one of the key recommendations of the Redmond Review – that there be a ‘system leader’ for local audit, bringing together many of the different aspects of audit regulation currently dispersed across a variety of bodies, including ICAEW.

Nevertheless, ARGA has a big challenge on its hands.


The National Audit Office reported recently that 55% of local authorities in England missed the deadline to obtain an audit opinion on their 2019-20 financial statements, despite an extension of four months to take account of the pandemic. While there were significant practical issues facing both local authority finance teams and audit firms that contributed to these delays, they are symptomatic of wider problems in the local audit market and in the preparation of local authority financial statements.

Local audit in England relies on a small pool of eight firms to audit hundreds of NHS trusts and local authorities within a short time frame each year. Audit firms struggle to find sufficient qualified and experienced individuals to deliver local authority audits, an issue that will only grow as the existing cohort of experienced auditors approaches retirement over the coming decade.

Even with the additional £15m in funding provided this year by the government, audit firms highlight how the risk profile of many councils has increased in recent years as reserves have declined and balance sheets have weakened, with many councils borrowing to invest in commercial activities. The impact of the coronavirus pandemic has damaged the financial position of councils even further.

At the same time, more intensive regulation has – quite rightly – put pressure on audit teams to improve the quality of their work, but that has cost implications too, with firms expressing concern about the viability of their local audit practices. There is a real risk that one, or more, firms could withdraw from the market, reducing competition and putting even more pressure on the remaining firms.

There are also significant barriers to entry, starting with a requirement for audit partners to qualify as a key audit partner in addition to being a registered auditor, a requirement specific to the local audit market and not applicable to other sectors requiring equal or much greater sector-specific knowledge and expertise.

This is an obstacle to new firms considering bidding for local audit contracts, even where they have audit partners with experience that would make them eligible to apply and the ability to train and recruit staff with the necessary capabilities. The limited number of key audit partners in each individual firm also makes it more difficult to manage multiple audits within the short time frames needed to achieve audit deadlines.

Stabilising the local audit market and working with the government to ensure there is a viable pool of expertise available to carry out quality audits will be one of the first items on the ARGA agenda.


However, audit reform is only part of the story. There is also a need to invest in local authority finance teams and in making the local authority finance profession an attractive career choice. Local authorities need to place a higher priority on the importance of producing high-quality financial statements that meet best practice and how doing so can increase financial understanding among both officers and councillors. Success in this area would also benefit local taxpayers’ understanding of and ability to scrutinise spending decisions, improving accountability and transparency.

There also needs to be investment in the quality of the underlying financial records and the supporting working papers provided to external auditors – a cause of delays in some audits. Not as sexy as many of the budget proposals that go to councillors for approval, but we know that poor financial controls and a lack of financial understanding by decision-makers and those to whom they are accountable can cost a lot more in the long run.

Unfortunately, far too many local authorities appear to treat their annual financial statements and the audit as a compliance exercise, something to be ‘got through’ rather than an opportunity to give a full account of how well they have stewarded public resources on behalf of residents.

Poorly formatted and difficult to read, too many council financial reports and accounts are seemingly designed for depositing in the round filing cabinet, rather than taking their place alongside flagship reports. Such reports are often of much less importance and priority than the hundreds of millions of pounds of public money spent on delivering local services or, in some cases, that have been wagered in speculative commercial investments.

I believe that the new regulator will need to look beyond the audit firms and engage with local authorities and their finance teams to demand and encourage improvements. Although audit firms can, and do, insist on changes to financial statements where they fail to comply with accounting standards or are actively misleading, they can’t insist local authorities follow best practice or that they invest in making the financial statements understandable to elected representatives and to the public. There is a role for the new regulator to bring up reporting quality across the sector.

It is important to realise that the proposed new standardised statement of service information and costs won’t be enough on its own. Readers need to be able to understand the wider financial position of each local authority, such as the level of usable reserves and balance sheet risks—and that requires investment in the entire annual report and accounts to make the financial information presented more understandable.

High standard

The overall package of reforms is positive: a new system leader for local audit and a rationalisation of the regulatory environment; a new audited statement of service information and costs to enable budgets and spending to be compared; a review of audit requirements for smaller bodies; auditors to provide an annual report to full council; an independent member with financial expertise on council audit committees; and a willingness to look again at audit deadlines.

But we should not forget that external audit comes at the end of the process and that solving the problems in the local audit market will only go so far.

Ultimately these reforms will only be successful if the financial statements subject to audit are of a high standard in the first place. That means greater investment in finance teams and—most importantly—council leaders and officers placing a higher priority on the quality and understandability of the financial information they produce.

This article was originally published in Room 151, an online news, opinion and resource service for local authority section 151 and other senior officers covering treasury, strategic finance, funding, resources and risk, and subsequently published by ICAEW.

ICAEW chart of the week: Metropolitan France

This week’s chart examines how France inserted a layer of regional administration between the national government in Paris and the 96 departments in mainland France and Corsica.

Map of Metropolitan France divided into 12 mainland regions and Corsica, subdivided into departments.

Île de France 12.3m people
Auverne-Rhône-Alps 8.1m
Hauts-de-France 6.0m
Occitanie 6.0m
Nouvelle-Aquitaine 6.0m
Grand Est 5.5
Provence-Alpes-Côte D'Azur 5.1m
Pays le la Loire 3.8m
Brittany 3.4m
Normandy 3.3m
Burgundy-Franché-Comte 2.8m
Centre-Val de Loire 2.6m
Corsica 0.3m

France’s regional tier of government was created in 1982 with 22 regions in Metropolitan France (ie mainland France and Corsica) and has generally seen to be a success. However, it was concluded that there were too many regions, resulting in a consolidation in 2015 into the current 13 regions, as illustrated by the #icaewchartoftheweek.  

The regions range in size from the 12.3m population eight-department Île de France that includes Paris, to the 2.6m six-department Centre – Val de Loire region in mainland France and the 0.3m two-department Corsica region. This excludes the five overseas one-department regions of Guadeloupe, French Guiana, Réunion, Martinique and Mayotte. 

Regional councils in mainland France and the assembly in Corsica can raise taxes and control substantial budgets, in particular over education and infrastructure investment, as well as having some regulatory powers (but not statutory law-making powers). Elections are on a proportional representation system, with regional presidents chosen by the elected councillors or assembly members.

The establishment of the regions has been part of a process of devolving power from the central government, moving away from the highly centralised control exercised since the French Revolution, which saw the establishment of departments, broadly equivalent to county councils in England. Although each of the 96 departments in Metropolitan France has an elected departmental council and president, many responsibilities for local administration (such as policing) still sit with departmental prefects and subprefects that are appointed by the central government. The lowest tier of local government comprises 36,552 communes, each with an elected council and mayor, with the exception of central Paris, Lyon and Marseille that are further divided into municipal arrondissements.

The comprehensive reforms adopted in France for regional government contrast with the patchwork approach in England, where regional authorities in the form of metropolitan councils were abolished in 1986, only to see a regional tier return in 2000 with the creation of the Greater London Authority. This has been followed over the last decade by the establishment of 10 regional combined authorities, comprising Greater Manchester (2011), Liverpool City Region (2014), Sheffield City Region (2014), North East (2014), West Yorkshire (2014), Tees Valley (2016), West Midlands (2016), West of England (2017), Cambridgeshire & Peterborough (2017) and North of Tyne (2018).

The stop-start approach in England has involved a process of negotiation between central and local government on whether to establish regional combined authorities in particular areas, with a number of proposals across the country under consideration. However, even if they are approved, this will still leave many parts of the country without a regional tier of government. The elections in May in England will therefore see elections for regional authorities only in some areas (including the first-ever elected mayor of West Yorkshire), for between one and three different tiers of local government, and for police & crime commissioners outside of Greater London and Greater Manchester. A rather complex picture!

Back in France, the regional elections scheduled for March have had to be postponed. Instead, a new set of regional administrations across the entirety of Metropolitan France are expected to be elected in June 2021.

This chart was originally published by ICAEW.