Delay in new lease approvals approach for academies

Currently under the Academy Trust Handbook, academies do not require approval for taking out operating leases (other than those on land & buildings with a term of 7+ years). By contrast, prior approval from the Education and Skills Funding Agency (ESFA) is required for finance leases, as these are considered a form of borrowing.

However, a recent change in International Financial Reporting Standards (IFRS16) has effectively removed the distinction between operating leases and finance leases, meaning that all leases will be classified as finance leases.

In order to address this and to allow schools to continue to lease equipment without approval, the Department for Education announced in March 2022 that a new lease approval process would be implemented. This effectively involved publishing a list of asset classes that would not need prior approval (including IT and telephony equipment etc).

This new process was originally expected to be implemented from 1 September 2022.

Academies themselves do not adopt IFRS16, but in order to ensure parity across the sector the same lease approval approach was going to be used for both local authority schools and academies.

There has, however, now been a delay announced in applying IFRS16 leases to local authorities, and as a result the new lease approval approach is now expected to come into effect from 1 September 2024 instead.

From an accounting point of view, IFRS16 requires that almost all leases are capitalised on the balance sheet (which is only the case for finance leases at the moment). It is possible that this change in international accounting standards may also filter down into UK accounting standards in due course and affect the treatment of leased assets in academy accounts. However, even if this were to occur, the current timescale for the next update to UK accounting standards means that academies would not be likely to see any changes to their accounts until the year ended 31 August 2026.

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