In late December, the Australian Accounting Standards Board (AASB) published amendments to AASB 16 Leases and AASB 1058 Income of Not-for-Profit Entities that will temporarily relieve not-for-profit entities (NFPs) from being required to measure at fair value any lease arrangements to which they are a lessee and that have significantly below-market terms and conditions principally to enable the NFP to further its objectives (‘peppercorn’ leases).
AASB 16 and AASB 1058, which were both published approximately three years ago, originally required NFPs to initially measure the right-of-use (RoU) asset arising from a peppercorn lease at its fair value. Both during and subsequent to the publication of the two Standards, the AASB received feedback from NFP constituents expressing concerns regarding application of the requirements and guidance in AASB 13 Fair Value Measurement to RoU assets arising from peppercorn leases. Respondents to the AASB noted a number of difficulties, including how to reflect in the fair value of the RoU asset any significant restrictions on the use of the underlying asset and, when applicable, the specialised nature of the asset.
In addition to the aforementioned practical difficulties, the AASB also note that if the Commonwealth Government accepts the recommendations in Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislation Review (ACNC Legislative Review) to increase the reporting thresholds applicable to ACNC-registered entities, many entities at the lower levels of the reporting thresholds might only be required to apply AASB 16 or AASB 1058 for a short period of time between the mandatory application date of the two Standards and the date on which the applicable amendments to the ACNC legislation come into effect.
Consequently, the AASB decided to amend a number of Australian Accounting Standards, including AASB 16 and AASB 1058, to provide a temporary option permitting NFP entities to initially recognise ROU assets arising from peppercorn leases at either:
The option is applicable on a class-by-class basis (i.e. it cannot be applied on an individual ROU asset-by-asset basis). In addition, NFPs electing to initially measure ROU assets arising from peppercorn leases at cost will be required to disclose additional qualitative and quantitative information about those leases, including information that helps users of the NFP’s financial statements to assess:
- the NFP’s dependence on peppercorn leases; and
- the nature and terms of the peppercorn leases, such as the lease payments and terms, a description of the underlying assets and restrictions on the use of the underlying assets specific to the NFP.
AASB 16, AASB 1058 and the AASB’s subsequent amendments to permit NFPs to initially measure ROU assets arising from peppercorn leases at cost are mandatorily applicable to NFPs for annual reporting periods beginning on or after 1 January 2019.