Leases  for Schools

International Financial Reporting Standards (IFRS) are a set of accounting rules and standards that must be adhered to.  IFRS16 was introduced on 1^st April 2024 and set out a new lease accounting model.

Previously leases were defined as either a Finance Lease (which are generally over a longer period of time and the sum of the rentals normally includes the full capital cost of the item leased plus interest accrued) or Operating Leases (which are generally over a shorter period of time with no purchasing options at the end of the lease).

Maintained Schools are not allowed to borrow money or go overdrawn except in specific circumstances including where there is written permission of the Secretary of State (via KCC). The exemption is Foundation schools (see footnote)[1].

Under these borrowing rules, operating leases were generally still allowed (as they were not considered borrowing) but finance leases were not. KCC had tightened the rules further due to historic financial risks around leases and the Scheme for Financing Schools previously stated:

Hire Purchase Agreements/Finance Leases constitute a credit arrangement and are classified as borrowing. Schools are not permitted to enter into such agreements.

Schools should seek advice before entering into any lease or asset rental or buy-back scheme to ensure it is legal. All lease agreements are subject to the rules on contracts and the relevant limits apply.

Following the introduction of IFRS 16 which effectively removes the distinction between operating and finance leases, all leases are now considered to be finance leases. To avoid every lease requiring Secretary of State approval, the Department for Education (DfE) has issued a General Consent in respect of schools leasing which means Maintained schools do not need to apply for Secretary of State approval for a lease involving any of the following categories:

• IT equipment (including photocopiers)
• telephony
• catering and cleaning equipment
• furniture
• bathroom / sanitary equipment
• gym equipment
• ground keeping equipment
• LED lighting system - consent is granted where the product has been sourced with support from the Department for Education through Get help buying for schools or from a recommended route on our Find a framework website.
• minibuses and other vehicles for school use
• temporary classrooms and equivalent structures (but not land leases they sit on, which may require separate consent)

The DfE has stated that the list will be kept under review following implementation, and the relevant guidance and documents are being updated accordingly. Any leases for assets not included in the above list will need to be submitted for consent. In the main, the DfE believe these will be leases in relation to land and buildings.

In light of this, the Scheme for Financing Schools and Financial Control 3: Financing Major Purchases has been updated to reflect the changes made by the DfE.

These changes have also resulted in a change for how leases should be accounted for. The DfE’s Consistent Financial Reporting now states: “All leases will now count in principle as capital, unless the total value of the lease is below the local capitalisation threshold.” And that “Where a lease counts as capital, it must not be included in the revenue expenditure lines E12 to E25. Instead, it must be included in E30 as direct revenue financing of capital. The same sum will appear in CI04, and the expenditure will then be recorded in CE01 to CE04 as appropriate.”

We ask that all Kent Maintained Schools begin accounting for leases in this way from 1 April 2025.

For guidance and advice on leases please contact Procurement Services at https://www.procurementservices.co.uk/ or on 0808 2819439.

For guidance and advice on accounting for leases please contact Schools Financial Services on 03301 651 001 or schoolsfinancialservices@theeducationpeople.org

[1] The exemption is Foundation schools whose borrowing does not form part of the Government’s accounts and therefore can borrow, although debts cannot be serviced from the delegated school budget (i.e. the school cannot use the main school budget to pay for financing costs).