On 24 December 2018 the Australian Accounting Standards Board (AASB) issued an amending standard AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities which provides a temporary option for Not-for-Profit (NFP) lessees to elect not to measure right-of-use (ROU) assets arising from leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives. Such leases are referred to as ‘concessionary leases’ and include peppercorn leases.
AASB 2018-8 is effective for annual periods beginning on or after 1 January 2019, which is the effective date of AASB 16 Leases and AASB 1058 Income of Not-for-Profit Entities.
Please note that this option is temporary. The AASB is further looking into this issue and it might be that the option becomes permanent, however we will have to wait for the outcome on this.
The standard allows for two measurement options at initial recognition of concessionary leases:
- Cost; or
- Fair value
If the cost option is elected, the ROU asset will initially be recognised based on the value of the lease liability (present value of future lease payments). Note that the election is applied to ROU assets on a class-by-class basis.
The new standard requires additional qualitative and quantitative disclosures to be made when the cost option is elected. This includes, but is not limited to, information that helps users of financial statements to assess:
the entity’s dependence on leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives; and
the nature and terms of the leases, including:
- the entity’s dependence on leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives; and
- the nature and terms of the leases, including;
(i) the lease payments;
(ii) the lease term;
(iii) a description of the underlying assets; and
(iv) restrictions on the use of the underlying assets specific to the entity.
The above disclosures are required for each material concessionary (peppercorn) lease. NFP entities will have to consider the level of detail necessary to satisfy the disclosure objective of the standard and how much emphasis to place on each of the various requirements.
The reason for the temporary relief is two-fold. Firstly, stakeholders expressed difficulties in applying the principles of AASB 13 Fair Value Measurement in determining the fair value of ROU assets arising under concessionary leases. The difficulties related mainly to restrictions on and the often-specialised nature of the underlying assets and how these should be incorporated in the valuation of ROU assets. The AASB would prefer that these valuation issues be resolved as part of the fair value measurement project that is currently underway. The outcome of this project will be detailed guidance to assist NFP entities in fair valuing ROU assets.
Secondly, the financial reporting thresholds for NFP private sector entities may be revised because of the ACNC Legislative Review recommendations, and it is possible that NFP entities at the lower end of the reporting threshold might not be required in future to apply the requirements of AASB16 Leases and AASB 1058 Income of Not-for-Profit Entities.
Should you have any questions or wish to learn more, please speak with your HLB Mann Judd contact.