Posted by Ben Thorne on May 12, 2017
As an academy, the Academies Financial Handbook prohibits you from having any sort of borrowing, and this includes some types of leases. You are allowed operating leases, but you are not allowed finance leases. The question is though, how do you identify a finance lease, or can you just trust the lease company.
We regularly look at this for our clients, and our conclusion is that the lease company may not always understand the accounting definitions so you do need to look at it yourself, and we would also recommend that we review it as auditors before any lease is signed. We will review any new leases during our audit, so would rather highlight any issues whilst they can still be resolved rather than too late during the audit. The Academies Financial Handbook states that Trusts should seek advice from their auditor if there is any doubt.
Under the new accounting standards, FRS102, there has been a subtle change in the classification of leases. The classification of a lease all comes down to who has the risks and rewards of ownership.
If you hold significantly all the risks and rewards of ownership, then it is will be classified as a finance lease, so a form of borrowing which is not allowed. If it is not a finance lease, it is an operating lease which is allowed.
For example, if you were to lease computers for 5 years, and were responsible for insuring and any repairs/ damage in that period and the ownership transferred at the end of the lease then you likely have significantly all the benefit owning of the computers for their expected useful life, and you have the risk of insuring and repairs, so it is likely a Finance Lease.
On the other end of the scale could be a lease of a mini bus for 2 years, where all repairs are paid for by the lease company. You do not have significantly all the rewards of ownership as the bus should last 10 years, and the risk of ownership (i.e. the repairs) remains with the lease company. It is clearly an operating lease.
We have also seen leases in the past which has some additional benefits for the lessee, such as repayments for a proportion of the lease fee. We would treat these leases with caution and often they can seem too good to be true. It is these leases that can cause regularity complications at the audit if not identified early on.
Obviously not all cases are so clear cut, and to assist our clients, we have prepared a guide which is available on our client only area of the website. When taking out any new leases you also need to consider and ensure that value for money has been achieved.
You can also seek to procure leases from the schools buying strategy. This has be launched by the DFE to help you obtain the best deals. You do not have to obtain 3 quotes when using these deals as they have already completed this exercise for you. There are two lots available at present, one for print equipment and one for multifunctional devices and further details can be found on the DFE website.
If in doubt we are always happy to help review a lease before approval.