CIPFA/LASAAC agree to delay the implementation of IFRS 16 until 2024/25

Update: Important announcement for local authorities – The CIPFA/LASAAC Local Authority Accounting Code Board announce a further deferral of the implementation of IFRS 16 until the 2024/25 fiscal year.

Following a February/March ‘22 emergency consultation for updating the Code of Practice on Local Authority Accounting in the United Kingdom, CIPFA/LASAAC published their preliminary decisions and feedback statement.

HM Treasury’s Financial Reporting Advisory Board (FRAB) subsequently assessed these preliminary decisions before approving the deferral of IFRS 16 until 1 April 2024. FRAB also recommended that changes to the Code must permit and should encourage local authorities to implement the standard before this date should they choose to.

Following the outcome of the FRAB review, CIPFA LASAAC formally announced the decision to:

• Defer the implementation of IFRS 16 for local authorities until 1 April 2024
• Permit early adoption under the 2022/23 and the 2023/24 Codes.

In a statement on the deferral of IFRS 16, Rob Whiteman, CIPFA CEO said:

“CIPFA is supportive of the decision to delay the implementation of IFRS 16 Leases until 2024. This decision is a necessary one and has been made in the interests of the sector. The deferral should reduce resource pressures in the local audit framework while there are ongoing audit timeliness issues.”

It should be noted that the deferral to IFRS 16 will apply to local authorities only. All other parts of the public sector, including central government and the NHS, will still implement the new standard in 2022/23.

A quick recap:

In December 2021, the Department of Levelling-up Housing and Communities (DLUHC) asked CIPFA LASAAC to deliberate how time-limited changes to the code may help ease delays to the publication of audited financial statements.

Just 9% of local authorities in England met the 30^th of September 2021 audit publication deadline.

In response to the request, CIPFA/LASAAC issued an exceptional consultation, which set out to explore two approaches:

• A revision to the code that would permit local authorities to pause professional valuations for operational property, plant, and equipment for a period of up to two years; whilst also allowing for the application of indexation in the interim period; and
• The deferral of the implementation of IFRS 16 Leases

Preliminary decision and feedback statement

Following the closure March ‘22 of the consultation period, CIPFA/LASAAC outlined the following preliminary decisions.

To pursue the deferral of IFRS 16 for a fixed period of two years – applying to all UK jurisdictions. Subject to review and approval by FRAB.

Regarding the second proposal under consideration, CIPFA/LASAAC decided against both the option to pause professional valuation for operational property and the use of an indexation.

A word of warning

Even though the deferral has been formally confirmed, local authorities should be wary of being drawn into a false sense of security and are encouraged not to suspend their preparations until closer to the ‘new’ effective date. The lessons from private market implementations show us that postponing the implementation for too long presents its own set of issues.

When transitioning to IFRS 16 back in 2019, corporate entities quickly discovered that the resources and effort required to reach compliance were much greater than initially anticipated. Many businesses significantly underestimated the complexity involved both in terms of scope and impact, began their projects too late and miscalculated the level of process and system transformation required to meet the compliance mandate.

Nevertheless, an extended adoption period gives local authorities more time to coordinate their approach and implement project management strategies to help streamline compliance. To make use of any deferral, local authorities should evaluate existing business processes and controls to ensure they are up to the job, as well as assess the suitability of active IT systems.

Another learning from corporate adoptions shows us that spreadsheet solutions such as Excel just cannot be relied upon for a compliance task as complex as IFRS 16, as they lack the necessary control, reporting and audit trail capabilities – making them a risky choice.

Furthermore, it is important that local authorities do not overestimate their ability to fully comply using Excel and instead explore robust, proven, and trusted lease accounting solutions that have been rigorously tested and have successfully navigated multiple audits since 2019.

While it is anticipated that many authorities will make maximum use of the delay, there are others that will be reluctant to lose the momentum they have already built whilst preparing for the previous April '22 deadline and will be keen to start early.