At its meeting on 13 November 2018 the AASB decided to issue an Exposure Draft proposing a temporary option for NFP lessees to not initially fair value a right of use (“ROU”) asset arising from leases that have significantly below-market terms when AASB 1058 Income of Not-for-Profit Entities and AASB 16 Leases become effective from 1 January 2019 (e.g. 30 June 2020 year-ends).
The AASB acknowledges that NFPs were having significant difficulty in valuing many ROU assets, and also incurring considerable cost.
The optional relief is expected to remain in place until further guidance has been developed to assist NFP entities in fair valuing such ROU assets and the financial reporting requirements for private sector not-for-profit entities have been finalised.
NFPs choosing the temporary relief would value the ROU asset at the present value of the payments required.
The ED will propose that an entity applying this temporary option must include specific disclosures in the financial statements to ensure that users understand the effects on the financial position, financial performance and cash flows of the entity arising from leases with significantly below-market terms, however there is as yet no guidance on what these disclosures might be.
The “further guidance” might include changes to how to account for peppercorn leases, or it might make the relief from the requirements permanent.
As soon as the Exposure Draft is published, we will share what it means for you. In the interim, please get in touch if you have any questions or concerns.