Implementing RKR R5:
5 Steps for Successful Lease Accounting in Municipalities

Tiego conducted a webinar on experiences from implementing RKR R5 (link). The purpose of RKR R5 is to create neutral and comparable financial reporting, regardless of how municipalities and regions choose to finance resource acquisition. However, practice studies and other follow-ups have shown that there is fragmented practice when it comes to reporting leasing and rental agreements.

Under K3, lessees are required to report all financial leasing agreements on the balance sheet in their consolidated accounts. In practice, this has often only included leases for machinery and vehicles. The classification as financial or operational leases depends on whether "the economic risks and rewards associated with ownership of an asset are substantially transferred from the lessor to the lessee."

RKR has introduced a rule that everyone must follow: If the present value of minimum lease payments at the start of the lease term substantially equals the asset's fair value, the lease must always be reported as a financial lease. "Substantially" is defined as 80% of the asset's fair value at the beginning of the lease term. Additional factors to consider include:

  • The existence of purchase options.

  • The lease period covers the asset's entire useful life.

  • The asset is custom-built or strategically significant.

  • Other circumstances may also apply.

The consequences of this regulation are the need for property valuation and estimation of future values. Alternatively, the municipality or region may calculate the present value using their incremental borrowing rate based on rental costs.

During the webinar, Tiego’s Kevin Hall presented the five recommended steps for complying with RKR R5 and shared an Excel template that can assist in inventorying lease contracts.

  1. Gather fundamental contract information.

  2. Follow a process for evaluation, categorizing contracts, and determining whether they are financial or operational leases.

  3. Iterate to calculate the implicit interest rate using Excel or mathematical formulas.

  4. Choose a strategy when the implicit interest rate cannot be used.

  5. Analyze the accounting implications and prepare accounting entries.