Tiego has conducted a webinar on experiences from the implementation of RKR R5, organized by the Swedish Association of Municipal Economists (KEF). The Swedish Local Government Accounting Council (RKR) has for many years provided recommendations for leasing accounting, culminating in the publication of recommendation R5 in May 2023, followed by the idea paper "Leasing and Rental Agreement Accounting" in November 2023. Tiego has long provided solutions for the needs of businesses in group reporting and leasing accounting. Applying RKR is similar but has some distinct differences, which is why Tiego conducted this training. The goal was to give more municipalities and regions the opportunity to benefit from experiences and possibly consider using Tiego's systems and consulting services to comply with the regulations.
A survey was sent out before the training, with 14 municipalities/regions responding. Some of the questions and answers are summarized below. Responses were given with a number: 1: Not at all, 2: Partially, 3: Okay, 4: Good, 5: Very good.
Part 1: Background and Regulations
Question A: How well did the 2023 annual report meet the updated RKR R5?
Answer A: Average score 2.1, with six respondents answering "1: Not at all."
The purpose of RKR R5 is to create neutral and comparable accounting, regardless of how municipalities and regions choose to finance their resource acquisitions. When RKR included what we refer to as the "80%-rule" together with otherwise relatively clear rules, this has led to more municipalities and regions beginning to apply or at least start projects to apply RKR R5.
80%-Rule: "If the present value of the minimum lease payments at the beginning of the lease period essentially equals the fair value of the asset, the lease agreement must always be classified as a financial lease. Essentially means 80% of the asset's fair value at the beginning of the lease period."
In addition to the 80%-rule, R5 states that a rental agreement should also be considered financial if: 1) There is a purchase option, 2) The lease term covers the entire asset's life, 3) The asset has a special design or is of strategic importance, 4) Other situations/conditions exist that cause the lease agreement to be classified as financial.
Part 2: The Five Steps for Implementing RKR R5
1. Gather the Basic Contract Information – The following information needs to be collected, regardless of whether it is a rental agreement for a property, a machine, or a car: Company, Contract ID, Description, Categorization, Start period, End period, Period length, Prepaid or postpaid payment, Interest calculation method, Monthly cost.
2. Follow a process for evaluation with categorization of contracts and decisions on whether the contracts are financial or operational – To analyze whether the present value of future payments is greater than 80% of the market value, it is required to estimate the market value.
3. Iteratively calculate the implicit interest rate with Excel or mathematical formulas – Even if the municipality/region buys a system like the one Tiego offers, it is valuable to understand the mathematical formula for present value calculation.
4. Choose a strategy when the implicit interest rate cannot be used – RKR R5 advocates for using market value and non-guaranteed residual value to calculate the implicit interest rate, but if the inputs are misleading, this can lead to interest rates that are far from market-based. In such cases, a simpler method is to use the municipality's/region's alternative borrowing rate.
5. Analyze the accounting consequences and create accounting documentation – We recommend analyzing the accounting consequences already during the contract inventory, evaluating contracts based on both implicit interest rate and alternative borrowing rate side by side.
Part 3: Do It Yourself or Use a System Solution
Many municipalities/regions are faced with the choice of doing the work of accounting according to RKR R5 themselves or collaborating with a system provider. Tiego's suggestion is to carry out steps 1 to 5 yourself (possibly together with an accounting expert), and then collaborate with Tiego for steps 6-12.
Do it yourself: 1. Inventory all basic information, 2. Follow the steps for evaluation, 3. Decide per contract if the information is sufficient for the implicit interest rate, 4. Choose a base for the marginal borrowing rate, 5. Create an understanding of accounting handling.
Collaborate with Tiego: 6. Send the inventory, 7. Determine contract categories and accounts, 8. Prepare for importing accounting entries, 9. Prepare for group elimination of internal lease agreements, 10. Practice and understand how the system handles new contracts, changes, and complexities, 11. Analysis and creation of documentation, 12. Presentation in the annual report.
Tiego is happy to conduct a workshop based on contracts sent to Tiego in the Excel format presented in this webinar (or other readable formats). Contact Tiego via "Book a demo" to get access to the Excel file.