Unlocking IFRS 16 Leases Benefits for Schools and Academies

Discover how the IFRS 16 Leases standard can revolutionise asset management and financial planning for schools and academies.

Understanding IFRS 16 and Its Impact on Schools

The IFRS 16 Leases standard, effective from September 2024 for Maintained Schools and Academies, represents a significant shift in how lease transactions are recognised in financial statements. This new regulation mandates that almost all leased assets and their corresponding liabilities be reported on the balance sheet, providing greater transparency and a more accurate financial picture.

This change ensures that schools and academies can now clearly see the value and cost of leased assets, aiding in better financial planning and decision-making. By bringing leases onto the balance sheet, educational institutions can manage their resources more effectively, ensuring they are making the most of their budgets.

Enhancing Budget and Cash Flow through Leasing

One of the primary benefits of the IFRS 16 standard is the ability to lease a diverse range of equipment. This flexibility can significantly enhance a school’s budget and cash flow management. Instead of making large capital expenditures to purchase equipment outright, schools can spread the cost over time, aligning payments with their financial capabilities.

Leasing allows schools to access the latest technology and equipment without the need for substantial upfront investment. This approach not only conserves cash but also enables schools to use their funds more strategically, investing in areas that directly impact student learning and development.

The following is a selection of typically leased assets:

Types of Leasing Available to Schools

There are 2 types of leasing agreements available to schools:

Operating Lease for schools

An Operating Lease for schools is a type of rental contract that allows the customer to utilise an asset for a specified period in exchange for regular rental payments to the lessor (the finance company). These agreements usually have a shorter term than the equipment’s expected lifespan or “useful economic life,” requiring the school to pay only a portion of the equipment’s capital value during the lease period. Consequently, the equipment must remain in a “sellable” condition and retain some residual value at the lease’s conclusion. In an Operating Lease, the leasing company (the “Lessor”) maintains the risks and benefits of ownership and continues to hold an investment in the leased equipment. It is crucial to note that you will not own the equipment once the Operating Lease agreement ends.

Finance Lease for schools

A Finance Lease for schools is an agreement between a “Lessor” (a funding or finance company) and a “Lessee” (such as your school, academy, or university), where the Lessee needs to use business equipment, vehicles, or machinery. The Lessor provides this equipment in return for predetermined regular payments. Finance Lease agreements typically cover the entire or a significant portion of the equipment’s expected useful life. In a Finance Lease, the Leasing company (“Lessor”) passes all the risks and benefits of owning the equipment to the customer (“Lessee”). At the end of the agreement, you will not own the equipment. Leases that do not qualify as Operating Leases will be considered Finance Leases.

Strategic Advantages of IFRS 16 for Educational Institutions

The adoption of IFRS 16 offers several strategic advantages for educational institutions. By providing a clearer financial picture, the standard enhances accountability and transparency, which are crucial for maintaining stakeholder trust and securing additional funding or grants.

Moreover, the ability to lease a wide range of assets supports strategic planning and operational efficiency. Schools can ensure that they have the necessary resources to deliver high-quality education without overextending their budgets. This approach not only improves financial stability but also promotes a more sustainable and adaptable educational environment.

Contact our team if you’d like to know more.