A finance or operating lease is not expected to be treated as a service concession under IFRIC12 since:
• There would generally not be an integrated provision of construction and services. The public sector would also normally be responsible for internal repairs and insurance; and
• The public sector would not generally control the residual interest in the asset.
Therefore the assessment of the lease would currently be under IAS17 as to whether it was considered to be a finance lease (on balance sheet) or an operating lease (off balance sheet). The rules associated with IAS17 suggest the following with regard to the structure of any lease if it were to be treated as an operating lease:
• There could no control over the asset at the end of the lease from the public sector (e.g. no right to buy at pricing below the market level);
• The lease term could not be for the major part of the economic life of the building and hence the present value of the minimum lease payments could not make up substantially all of the fair value of the building; and
• No substantial termination amounts due to hubco on cancellation of the remaining life of the lease, if this is a long term lease.
Therefore this may only be suitable for generic buildings that have alternative uses (e.g. offices), for which hubco is prepared to take ongoing void risk and residual value risk. For example if the NHS Board were taking occupancy of a minority part of a building and the hubco were prepared to market the building to other tenants.
In any event a joint exposure draft has been released by the IASB and FASB proposing a change to accounting rules that would also see operating leases being recorded on balance sheet. Although the effective date of a final standard may be some time away, it is sensible to plan projects on this basis of this emerging treatment of leases. In brief for all leases, lessees would record an intangible asset for the right to use the leased asset and a liability for the obligation to make lease payments (including the present value of future obligations).
Therefore this would suggest that a lease (whether a finance lease or operating lease under current accounting rules) is not a viable option for an NHS Board or Local Authority getting funding from the Scottish Government, as this would create a double hit to capital and revenue budgets.
SFT Contacts:
Andrew Bruce: 0131 510 0807
Neil Grice: 07540 123335