Report
Annual report and Accounts 2019 to 2020
Making gambling fairer and safer
e) Finance leases
IFRS 16 “Leases” has been implemented from 1 April 2019; this introduces a single lessee accounting model that requires a lessee to recognise assets and liabilities for all leases (apart from the exemptions included below).
For government bodies reporting under the FReM, IFRS 16 is due to be brought into effect on 1 April 2020 and replaces IAS 17 (Leases). The Commission has elected, with DCMS authority, to early adopt IFRS 16 (as adapted by the 2020-21 FReM).
In respect of lessees, IFRS 16 removes the distinction between operating and finance leases and introduces a single accounting model that requires a lessee to recognise (‘right-of-use’) assets and lease liabilities.
The definition of a lease has been updated under IFRS 16, there is more emphasis on being able to control of the use of asset identified in a contract. There are new requirements for variable lease payments such as RPI/CPI uplifts; and there is an accounting policy choice allowable to separate non-lease components.
Implementation and Assumptions
The Commission has applied IFRS 16 using the modified retrospective approach and therefore the comparative information have not been restated and continues to be reported under IAS 17 and IFRIC 4. The cumulative effect of adopting IFRS 16 is included as an adjustment to equity at the beginning of the current period.
IAS 17 operating leases are included within our statement of financial position as a lease liability and right of use asset for the first time with changes made through the general fund as a cumulative catch up adjustment. The calculation of the lease liability and right of use assets are included below.
The option to reassess whether a contract is, or contains, a lease at the date of initial application has not been used, the Commission has used the practical expedient detailed in IFRS 16(C3).1.
The definition of a contract is expanded to include intra- UK government agreements where non-performance may not be enforceable by law. This includes Memorandum of Terms of Occupation (MOTO) agreements.
The Commission has expanded the definition of a lease to include arrangements with nil consideration. Peppercorn leases are examples of these, these are defined by HMT as lease payments significantly below market value. These assets are fair valued on initial recognition.
On transition any differences between the discounted lease liability and the right of use asset are included through cumulative catch up. Any differences between the lease liability and right of use asset for new leases after implementation of IFRS 16 are recorded in income on the SoCNE.
The Commission has elected not to recognise right of use assets and lease liabilities for the following leases:
- intangible assets;
- non-lease components of contracts where applicable;
- low value assets (less than £5,000) ; and
- leases with a lease term of 12 months or less.
Previous treatment
In the comparative period, as a lessee the Commission classified leases that transfer substantially all the risks and rewards of ownership as finance leases. The leased assets were measured at an amount equal to lower of the fair value and the present value of minimum lease payments.
This fair value cap has been removed under IFRS 16 and has resulted in re-measurement of finance leased assets within 2019-20 if they meet the re- measurement criteria mentioned below.
Assets previously held as operating leases were not recognised in the Commissions statement of financial position. Payments were recognised in SoCNE on a straight line basis over the term of the lease. Lease incentives were recognised as an integral part of the total lease expense, over the term of the lease.
Policy applicable from 1 April 2019
At inception of a contract, the Commission assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time.
This includes assets for which there is no consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Commission assesses whether:
- The contract involves the use of an identified asset;
- The Commission has the right to obtain substantially all of the economic benefit from the use of the asset throughout the period of use; and
- The Commission has the right to direct the use of the asset.
The policy is applied to contracts entered into, or changed, on or after 1 April 2019.
At inception or on reassessment of a contract that contains a lease component, the Commission allocates the consideration in the contract to each lease component on the basis of the relative standalone prices.
The Commission assesses whether it is reasonably certain to exercise break options or extension options at the lease commencement date. The Commission reassesses this if there are significant events or changes in circumstances that were anticipated.
As a lessee
Right of use assets
The Commission recognises a right of use asset and lease liability at the commencement date. The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for initial direct costs, prepayments or incentives, and costs related to restoration at the end of a lease.
The right of use assets are subsequently measured at either fair value or current value in existing use in line with property, plant and equipment assets. The cost measurement model in IFRS 16 is used as an appropriate proxy for current value in existing use or fair value for the majority of leases (consistent with the principles for subsequent measurement of property, plant and equipment) except for those which meet one of the following:
- A longer-term lease that has no provisions to update lease payments for market conditions or if there is a significant period of time between those updates; and;
- The fair value or current value in existing use of the underlying asset is likely to fluctuate significantly due to changes in market prices.
The right of use assets is depreciated using the straight line method from the commencement date to the earlier of the end of the useful life of the right of use asset or the end of the lease term. The estimated useful lives of the right of use assets are determined on the same basis of those of property plant and equipment assets.
The Commission applies IAS 36 Impairment of Assets to determine whether the right of-use asset is impaired and to account for any impairment loss identified.
Lease liabilities
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease, or if that cannot be readily determined, the rate provided by HMT.
The lease payment is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in the index or rate, if there is a change in the Commission’s estimates of the amount expected to be payable under a residual value guarantee, or if the Commission changes its assessment of whether it will exercise a purchase, extension or termination option.
Lease payments included in the measurement of the lease liability comprise the following:
- Fixed payments, including in-substance fixed payments;
- Variable lease payments that depend on an index or a rate, initially measured using the index rate as at the commencement date;
- Amounts expected to be payable under a residual value guarantee;
- The exercise price under a purchase option that the Commission is reasonably certain to exercise, lease payments in an optional renewal period if the Commission is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Commission is reasonably certain not to terminate early.
When the lease liability is remeasured a corresponding adjustment is made to the right of use asset or recorded in the SoCNE if the carrying amount of the right of use asset is zero.
The Commission presents right of use assets that don’t meet the definition of investment properties per IAS40 as right of use assets on the Statement of Financial Position. The lease liabilities are included within Lease liabilities within current and non-current liabilities on the Statement of Financial Position.
Impact on financial statements
On transition to IFRS 16, the Commission recognised an additional £1,729k of right of use assets and £2,087k of lease liabilities, recognising the difference in the movement in accruals due to the brought forward rent free provision, which is released over the life of the lease (see note 16*). When measuring lease liabilities, the group discounted lease payments using a rate of 1.99%.
| £'000s | |
|---|---|
| Operating lease commitment at 31 March 2019* | (1,654) |
| Discounted using discount rates | 1.99% |
| Finance Lease liabilities at 31 March 2019 | - |
| Exemptions for | |
| Short terms leases | - |
| Leases of low value assets | - |
| Extension and termination options reasonably certain to be exercised | - |
| Variable lease payments based on an index or a rate | - |
| Residual value guarantees | - |
| Lease liabilities recognised at 1 April 2019† | (2,087) |
determined using data from the Commission's electronic leave records.
Permanent and short term employee costs are presented in accordance with IFRS. Permanent and short term employees are identified as follows:
- Permanent employees are those with a permanent (UK) employment contract with the Commission.
- Short term employees are other employees engaged on the objectives of the entity (for example, short term contract employees, agency/temporary employees, locally engaged employees overseas and inward secondments where the entity is paying the whole or the majority of their costs).
References
* Finance Lease liabilities at 1 April 2019 includes £616k which wasn’t recognised as an Operating lease commitment as at 31 March 2019.
- £610k relates to the lease on Bloomsbury Street (see note 16), which wasn't recognised as an Operating lease commitment as at 31 March 2019 as there was no signed intra-UK government agreement. Under IFRS 16, the definition of a contract is expanded to include intra-UK government agreements where non-performance may not be enforceable by law. This includes Memorandum of Terms of Occupation (MOTO) agreements.
- £6k relating to a ‘Franking Machine’ lease (see ‘Plant & Equipment’ note 16), which wasn’t recognised as an Operating lease commitment as at 31 March 2019.
† The effect of ‘discounted using discount rates’ is £183k, being the difference between restated operating lease commitments £2,270k (£1,654k + £616k) and the total lease liability of £2,087k.
Last updated: 2 November 2023
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