Flexibility on fair-valuing ‘peppercorn leases’
The Australian Accounting Standards Board has issued amending standard AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-profit Entities.
AASB 2018-8 provides a temporary option for NFP lessees to elect to measure a class (or classes) of right-of-use assets arising under ‘concessionary leases’ at initial recognition, either:
- At cost, in accordance with AASB 16 Leases paragraphs 23–25, which incorporates the amount of the initial measurement of the lease liability, or
- At fair value (under AASB 13 Fair value Measurement), in accordance with AASB 16 paragraph Aus25.1 (as amended).
In this context, concessionary leases have significantly below-market terms and conditions principally to enable an entity to further its objectives.
Entities choosing the temporary relief would value the right-of-use asset at the present value of payments required.
An entity applying the temporary option must include specific disclosures in financial statements to ensure that users understand the effects on financial positions and performances as well as cash-flows.
The temporary option allows NFPs to continue their work on fair-valuing right-of-use assets under peppercorn leases if they intend to measure the right-of-use assets at initial recognition at fair value.
Reasons for the temporary option are:
- Given the prevalence of restrictions on ROU assets in the NFP sector, the AASB prefers the interpretative issues arising from fair-valuing such leases to be resolved as part of the fair-value measurement project, and
- Financial-reporting thresholds of NFP private-sector entities are likely to be revised as a result of the ACNC legislative-review recommendations, and entities at lower levels of the reporting threshold might not be required in future to apply the requirements of AASB 16 and AASB 1058.
The optional relief is expected to remain in place until:
- Further guidance has been developed to assist NFP entities in fair-valuing ROU assets, and
- Financial-reporting requirements for private-sector NFPs have been finalised.
The AASB has set no firm date for removing the option, but it is unlikely to be removed in the next three to five years.
When the temporary relief is removed, the AASB will consider whether to provide transitional relief for leases with significantly below-market terms and conditions.
The board will reassess optional measurement when further guidance has been released to assist NFPs entities to fair-value ROU assets and financial-reporting requirements for private-sector NFPs have been finalised.
NFPs should appreciate the relief. It saves money and effort. Take advantage of the option.