Item 7 f 2024_25_InternalAudit_PreparednessforIFRS16_FinalAuditReport
Argyll and Bute Council · 12 June 2025
Back to Audit and Scrutiny Committee — 12 June 2025 and its agenda
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Argyll and Bute Council Internal Audit Report May 2025 FINAL High Medium Low VFM Number of Findings 0 0 1 0 Preparedness for IFRS16 Audit Opinion: Substantial
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2 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 Contents 1. Executive Summary ........................................................................................................................ 3 Introduction ............................................................................................................................................ 3 Background ............................................................................................................................................. 3 Scope ....................................................................................................................................................... 4 Key Dates ................................................................................................................................................ 4 Risks ........................................................................................................................................................ 4 Audit Opinion ......................................................................................................................................... 4 Recommendations ................................................................................................................................. 4 2. Objectives and Summary Assessment ........................................................................................... 5 3. Detailed Findings ............................................................................................................................ 7 Appendix 1 – Action Plan ..................................................................................................................... 10 Appendix 2 – Audit Opinion ................................................................................................................. 12 Contact Details Internal Auditor: Moira Weatherstone Telephone: 01546 604146 e-mail: moira.weatherstone@argyll-bute.gov.uk www.argyll-bute.gov.uk
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3 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 1. Executive Summary Introduction 1. As part of the 2024/25 internal audit plan, approved by the Audit & Scrutiny Committee in March 2024, we have undertaken an audit of Argyll and Bute Council’s (the Council) system of internal control and governance in relation to Preparedness for IFRS16. 2. The audit was conducted in accordance with the Global Internal Audit Standards (GIAS) with our conclusions based on discussions with council officers and the information available at the time the fieldwork was performed. The findings outlined in this report are only those which have come to our attention during the course of our normal audit work and are not necessarily all the issues which may exist. Appendix 1 to this report includes agreed actions to strengthen internal control however it is the responsibility of management to determine the extent of the internal control system appropriate to the Council. 3. The contents of this report have been agreed with the appropriate council officers to confirm factual accuracy and appreciation is due for the cooperation and assistance received from all officers over the course of the audit. Background 4. Leasing is an important method of financing the acquisition of assets for many organisations, this can include assets as diverse as buildings, vehicles, machinery, and computers. In a lease the lessor owns the asset and leases it to the user, the lessee. This is an agreement which is legally binding and generally non-cancellable without early termination penalties. 5. Leases can be classified into finance leases and operating leases. A finance lease usually involves repayment to the lessor by a lessee of the full cost of the asset together with a return on the finance provided by the lessor. The lessee enjoys substantially all the risks and rewards of ownership of an asset. An operating lease is an agreement whereby the lessor retains the risks and rewards of ownership and normally assumes responsibility for repairs, maintenance and insurance. The lessee pays a rental for the hire of an asset for a period of time which is normally substantially less than its useful economic life. 6. Under IFRS 16 (International Financial Reporting Standard) a lease is defined as a ‘contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration’. IFRS 16 defines a lease term as the non-cancellable period for which the lessee has the right to use an underlying asset, meeting the definition of capital expenditure. 7. The introduction of IFRS 16 requires all leases or lease type arrangements, including ‘embedded leases’ to be recognised on the balance sheet through a ‘right to use’ asset, meeting the requirements of capital expenditure and together with the associated lease liability and impacts to income and expenditure. Local Authorities are required to implement IFRS 16 from 1st April 2024, first reporting in the financial accounts for the year ended March 2025.
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4 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 Scope 8. The scope of the audit was to review and assess the arrangements for the compliance with IFRS16 as outlined in the Terms of Reference agreed with the Interim Head of Financial Services on 13 March 2025. Key Dates 9. The Terms of Reference provided provisional timescales for the review to take place, the actual dates are noted below. Exhibit 1 – Key Dates Stage Actual Date Terms of Reference agreed 13 March 2025 Fieldwork Commencement 14 March 2025 Draft Report issued 8 May 2025 Management Comments received 8 May 2025 Final Report issued 14 May 2025 Audit and Scrutiny Committee 12 June 2025 Risks 10. The risks considered throughout the audit were: Audit Risk 1 - failure to have procedures in place to ensure compliance with IFRS 16 Audit risk 2 - Failure to account for all leases to be included within the scope of IFRS 16 Audit Risk 3 - failure to implement the requirements of IFRS 16 Audit Opinion 11. We provide an overall audit opinion for all the audits we conduct. This is based on our judgement on the level of assurance which we can take over the established internal controls, governance and management of risk as evidenced by our audit work. Full details of the five possible categories of audit opinion is provided in Appendix 2 to this report. 12. Our overall audit opinion for this audit is that we can take a substantial level of assurance. This means that internal control, governance and the management of risk is sound. However, there are minor areas of weakness which put some system objectives at risk and specific elements of residual risk that are slightly above an acceptable level and need to be addressed within a reasonable timescale. Recommendations 13. We have highlighted one low priority recommendations where we believe there is scope to strengthen the control and governance environment. These are summarised below: Robust procedures should be established and circulated to departments to ensure the lease database is maintained and kept up to date
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5 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 14. Full details of the audit findings, recommendations and management responses can be found in Section 3 of this report and in the action plan at Appendix 1. 2. Objectives and Summary Assessment 15. Exhibit 1 sets out the control objectives identified during the planning phase of the audit and our assessment against each objective. Exhibit 1 – Summary Assessment of Control Objectives Control Objective Link to Risk Assessment Summary Conclusion 1 Procedures and systems have been put in place to ensure compliance with IFRS 16 Audit Risk 1 Substantial Procedures and systems have been put in place to ensure compliance with IFRS 16. Initial work began in 2020 to start the process of collating information of leases within the Council. In June 2023 the Council’s consultant agency commenced preparation of a Decisions and Policies draft paper and also an Action List to assist with meeting our obligations under IFRS 16. In February 2024 a new Accounting Policies document was finalised, this, applying to lease arrangements where Argyll and Bute Council is the lessee. In addition, in April 2024, the Finance Manager prepared an ‘Implementation of IFRS 16 Accounting for Leases’ document, clearly outlining the requirements of IFRS 16 are and what should be included. It also outlined what needs to be done to meet our obligations under IFRS 16. Although it was not clear whether the ‘Implementation of IFRS 16 Accounting for Leases’ document had been widely circulated it formed part of the preparation for the relevant Finance team. A significant amount of work has been undertaken from the end of 2024, accelerating at the beginning of 2025 to ensure that we the Council has captured all lease agreements which fall within the scope of IFRS 16 and the Code to provide assurance that everything is accounted for in the Councils Financial Statements or the year end March 2025. 2 Communication processes have been put in place Audit Risk 2 Substantial Systems and processes within the Council over the years have resulted in leases being arranged by departments,
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6 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 between the services and Financial Services to ensure all leases within the scope of IFRS 16 have been accounted for historical leases renewed and/or carried forward, this has led to there being no single complete register for leases throughout the Council. This has resulted in the requirement to gather and collate a significant amount of information, setting up processes to record the information gathered and the necessity to analyse information gathered to assess whether leases fall within the scope of IFRS 16. Extensive communication and engagement with Financial Service and the Departments has been ongoing, with meetings undertaken. Communication process were put in place, commencing in 2020 and continuing throughout the period to 2025 in order to ensure all lease information was gathered from Departments, all third tier managers being contacted in February 2025. In addition meetings were held throughout 2025 with key officers, contacts and in particular procurement and estates. 3 Training has been provided to relevant staff members or specialist services procured in order to ensure compliance with IFRS 16, with systems and processes updated accordingly Audit Risk 3 Substantial Training has been provided to relevant staff members to ensure there is a clear understanding of IFS 16 and our obligations on how to account for lease agreements. Training has been delivered by external providers and has been provided internally to key staff. Training commenced in 2020 with several sessions being delivered by external providers and attended by, predominantly, the Senior Business Support Officer. These early training events focussing mainly on introducing and understanding IFRS 16. In 2021 an IFRS 16 Forum Webinar was attended with further training and workshops being delivered in 2023 and attended by delegates for various department within the Council. Further training was provided throughout 2024 and 2025. 16. Further details of our conclusions against each control objective can be found in Section 3 of this report.
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7 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 3. Detailed Findings Procedures and systems have been put in place to ensure compliance with IFRS 16 17. All local authorities require to account for leases in accordance with IFRS 16 Leases rom 1 April 2024, first reporting in the financial statements for the year ended 31 March 2025. This, with the exception where adaptations to fit the public sector have been made in the Code of Practice on Local Authority Accounting in the United Kingdom (the “Code”). 18. Systems and processes within the Council over the years have allowed lease agreements to be arranged by departments, historical leases renewed and/or carried forward. This has resulted in there being no single complete register or central overview of leases held throughout the Council. In order to comply with IFRS 16 Finance Staff have undertaken a significant amount of work gathering and setting up a processes to record lease information, in addition to analysing information gathered to assess whether leases fall within the scope of IFRS 16. 19. Policies, processes and systems have been implemented and the Council is on track to fulfil their obligations to comply with IFRS 16 for the financial year end 2025, with extensive work being undertaken to gather, collate, analyse and record lease information. 20. Work on the implementation of IFRS 16 began in 2020, with an initial email being sent from the Senior Business Support Officer, to key staff, requesting the identification of all items currently rented or leased by the Council. An attached spreadsheet, based on a spreadsheet provided by the Council’s leasing advisors, showed the information required to be kept for each item rented or leased by the Council. Following the initial email being circulated in 2020, a lease template was sent out at every subsequent year end. 21. June 2023 the Council’s consultant agency commenced preparation of a Decisions and Policies draft paper and also an Action List to assist with meeting our obligations under IFRS 16. 22. In November 2023, an email was sent to all Finance contacts, Principal Accountants, administration Finance contacts (schools AFAs), finance departmental contacts and procurement, highlighting that the deadline was fast approaching to have a new database up and running to comply with IFRS 16. It outlined that the Senior Accounting assistant had been tasked with gathering as much information and copies of all hired, rental and leased agreements for the whole of the Council whether these agreements were under or over 12 months, that this information was required to enable finance to start populating the new database which was to come in to effect from 1 April 2024. It also highlighted that it was extremely important to have accurate and up to date information and the importance of finance being kept informed going forward of any changes to leases, hires, and contracts. A lease template was attached for completion. 23. In February 2024 a new Accounting Policies document was finalised, this, applying to lease arrangements where Argyll and Bute Council is the lessee. In addition, in April 2024, the Finance Manager prepared an ‘Implementation of IFRS 16 Accounting for Leases’ document, clearly outlining the requirements of IFRS 16 are and what should be included. It also outlined what needed to be done to meet our obligations under IFRS 16. Although it was not clear whether the
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8 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 ‘Implementation of IFRS 16 Accounting for Leases’ document had been widely circulated it formed part of the preparation for the relevant Finance team. 24. Due to a combination of circumstances and staff changes little progress was made during 2024 until mid-February 2025 when the Executive Director and Section 95 Officer circulated an email to all third tier managers and above explaining IFRS 16, how it affects the services, what’s changing, describing what a lease is, outlining who will decide whether arrangements contain a lease, key dates and what is being asked of the services. The email also stressed that the requirement to notify financial services of any future lease agreements, any changes to existing lease arrangements was ongoing and provided a link to a corporate email address set up for the specific purpose. Importantly a deadline of 25 February 2025 was set for the gathering of information. 25. The Council has entered into a contract to use cloud software, LS2, as its lease register. The LS2 database will store all information required to meet the accounting and disclosure requirements of IFRS 16 on an ongoing basis. The LS2 database was recommended as a solution for the management of leases. By the end of the financial year the Council had obtained, from departments, an extensive list of contract arrangements that may indicate a lease for a Right of Use an asset as defined by IFRS 16 and adapted by the Code. As information was received, Financial Services assessed the information and applied the requirements of the Code to determine if the arrangement was within the scope of IFRS 16 and, if so, whether any exemptions or practical expedients could be applied. In addition, by the end of the financial year 2024-2025, Financial Services had substantially completed the list ready for forwarding to the lease register provider, the initial upload of data being carried out by the provider. The provider has confirmed they are operating on around 2-week turnaround which the Council deems to be satisfactory in terms of not hindering the production of the annual financial statements. 26. Continuing to meet the requirements of IFRS 16 will rely on good communication with departments and a clear understanding of the processes involved for updating Financial Services with new lease arrangements or changes to existing lease arrangements. In addition, a large part of the future recording and maintenance of the data base will be important to ensure continued compliance with IFRS 16. The Council’s Financial Services department will operate the database post-transition/implementation phase, adding and amending lease data. In addition to lease information that is provided to the team as new leases are entered into or contract variations occur, information will be sought from other Council departments to confirm that no changes have occurred other than those notified to Financial Services. Action Plan 1 Communication processes have been put in place between the services and Financial Services to ensure all leases within the scope of IFRS 16 have been accounted for 27. The success of gathering information relied on robust communication across the Council in particular with finance staff, procurement staff, budget holders, the HSCP, LiveArgyll and departments. Regular communication and support has been provided by our Treasury advisors. 28. Communication process were put in place, commencing in 2020 and continuing throughout the period to 2025 in order to ensure all lease information was gathered from Departments, all third tier managers being contacted in February 2025. In addition meetings were held throughout 2025 with key officers, contacts and in particular procurement and estates.
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9 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 29. Budget holders were contacted and provided with guidance on IFRS 16 in relation to leases and the importance of providing information to Financial Services. In addition, DMT’s (Department Management Teams) were presented with information on what is required in terms of IFRS. Training has been provided to relevant staff members or specialist services procured in order to ensure compliance with IFRS 16, with systems and processes updated accordingly 30. Training has been provided to relevant staff members to ensure there is a clear understanding of IFS 16 and our obligations on how to account for lease agreements. Training has been delivered by external providers and has been provided internally to key staff. 31. Training commenced in 2020 with several sessions being delivered by external providers and attended by, predominantly, the Senior Business Support Officer. These early training events focussing mainly on introducing and understanding IFRS 16. In 2021 an IFRS 16 Forum Webinar was attended with further training and workshops being delivered in 2023 and attended by delegates for various department within the Council. 32. During 2024 and 2025 a number of training courses were delivered by our leasing advisors, attended by a number of finance staff. A further technical workshop was delivered by CIPFA in 2025 which was attended by the Finance Manager.
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Appendix 1 – Action Plan No Finding Risk Agreed Action Responsibility / Due Date Low 4 Database Maintenance Continuing to meet the requirements of IFRS 16 will rely on good communication with departments and a clear understanding of the processes involved for updating Financial Services with new lease arrangements or changes to existing lease arrangements. Failure to maintain robust lease arrangement records Policy document and training will be developed to provide a framework for ongoing compliance with IFRS 16 Leases, and will be reviewed and updated as appropriate. Year-end processes will be developed to provide additional checks and Heads of Service will be provided with a current list of leases for their sign off. Finance Manager 31 December 2025 31 May 2026
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11 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 In order to assist management in using our reports a system of grading audit findings has been adopted to allow the significance of findings to be ascertained. The definitions of each classification are as follows: Grading Definition High A major observation on high level controls and other important internal controls or a significant matter relating to the critical success of the objectives of the system. The weakness may therefore give rise to loss or error. Medium Observations on less significant internal controls and/or improvements to the efficiency and effectiveness of controls which will assist in meeting the objectives of the system. The weakness is not necessarily substantial however the risk of error would be significantly reduced if corrective action was taken. Low Minor recommendations to improve the efficiency and effectiveness of controls or an isolated issue subsequently corrected. The weakness does not appear to significantly affect the ability of the system to meet its objectives. VFM An observation which does not highlight an issue relating to internal controls but represents a possible opportunity for the council to achieve better value for money (VFM).
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12 Argyll and Bute Council – Internal Audit Report – Preparedness for IFRS16, May 2025 Appendix 2 – Audit Opinion Level of Assurance Definition High Internal control, governance and the management of risk are at a high standard. Only marginal elements of residual risk have been identified with these either being accepted or dealt with. A sound system of control designed to achieve the system objectives is in place and being applied consistently. Substantial Internal control, governance and the management of risk is sound. However, there are minor areas of weakness which put some system objectives at risk and specific elements of residual risk that are slightly above an acceptable level and need to be addressed within a reasonable timescale. Reasonable Internal control, governance and the management of risk are broadly reliable. However, whilst not displaying a general trend, there are areas of concern which have been identified where elements of residual risk or weakness may put some of the system objectives at risk. Limited Internal control, governance and the management of risk are displaying a general trend of unacceptable residual risk above an acceptable level and placing system objectives are at risk. Weakness must be addressed with a reasonable timescale with management allocating appropriate resources to the issues raised. No Assurance Internal control, governance and the management of risk is poor. Significant residual risk and/or significant non-compliance with basic controls exists leaving the system open to error, loss or abuse. Residual risk must be addressed immediately with management allocating appropriate resources to the issues.