Where we were!
Schools have been accounted for under UK GAAP, the standard accounting practice in the UK. In 2008 the then chancellor Gordon Brown announced that ‘Schools are not allowed to borrow without permission of the Secretary of State for Education’. This meant that Schools could only enter into Operating Leases. There are several requirements for a lease to be deemed as an operating lease these include but are not limited to
1. Risk we resale of the asset sits with the funder there therefore has to be a residual investment. The easiest example of an operating lease is Contract Hire for a vehicle
2. You can’t lease for more than its useful life
3. It shouldn’t be of a specialised nature
Certain items that may have very long life or are high in intangible costs such as software or installation were either excluded or became economically unviable.
Costs for extension, indefinite use or third party buy out were unknown and varied massively often leading to unforeseen costs
Where we are!
The Public Sector has moved to International Financial Accounting Standard. Under these standard there is no differential between a lease with or without a residual investment so they are both accounted for in the same way.
The statement, Schools can’t borrow remains, however, specific consent has now been given by the DfE and certain items, including IT, can be leased without pre-approval. This therefore means that any lease whether it grants title at the end which can be documented or what we know as operating leases are now available to LA Schools from 1st April, with Trusts set to follow in September. As most items fall under the IRFS 16 low value assets exemption, these leases can still be classed as off balance sheet.
Trusts are not subject to IRFS as they are set up with Charitable status, but they were still not allowed to ‘borrow’, which they will be able to in September. They will still benefit from accounting for a lease as on balance sheet for finance leases or off balance sheet (a revenue expense) for operating leases.
The future
All Schools will now be able to make more appropriate informed decisions when considering the best way to purchase all IT assets. Where devices have been historically returned and replaced after 3 years to benefit from the most up to date kit, warranties etc, this will still be the best option. Items such as boards have been leased for many years, now we can match the term with the warranties and lease for a longer period of time, matching the term with the actually useful life. It may be simple that budget dictates a longer term is the most suitable option to enable the school to benefit from essential equipment now ensuring the best outcomes for the child and using their own IT resource more effectively.
For Trusts, they will have the benefits of the above, however they will still be able to place residual based leases off balance sheet, we can therefore help with capital and revenue budgets when deciding which is the best option.
With all options, we can request the banks future expectations there should therefore be no unforeseen costs. End of term options can be documented if required and appropriate.
With regards to 1:1 or BYOD devices that are backed by parental contribution we can again choose the most appropriate lease which will be easier to administer.