On 24 December 2018 the AASB issued an amending standard AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities that provides a temporary option for Not-for-Profit (NFP) lessees to elect not measure right-of-use assets in peppercorn leases at initial recognition at fair value. Rather, the right-of-use asset will be valued based on the value of the lease liability, and the election is applied on a class-by-class basis.
Consequences of applying election
There are additional disclosure obligations if the election is applied, and include qualitative and quantitative information about those leases necessary to meet the disclosure objective in AASB 1058 paragraph 51. This additional information includes, but is not limited to, information that helps users of financial statements to assess:
(a) the entity’s dependence on leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives; and
(b) 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.
These disclosures are required for each for each peppercorn lease, and the entity must consider the level of detail necessary to satisfy the disclosure objective of AASB 1058 paragraph 51 and how much emphasis to place on each of the various requirements. Disclosures can be aggregated or disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.
Reasons for the deferral
The deferral was issued following consideration of comments from stakeholders in the NFP sector who identified difficulties in valuing the right-of-use asset in peppercorn leases in accordance with AASB 13 Fair Value Measurement. Issues that were identified included how often-significant restrictions on the right of use of the underlying assets and the specialised nature of the underlying assets are incorporated in the valuation of right-of-use assets arising from peppercorn leases. The AASB noted that the issues related to right-of-use assets for lessees might be different to the issues for owners of the assets, making it difficult to determine the fair value of right-of use assets simply by reference to the fair value of the underlying assets. Since the principles in AASB 13 are based on market participants buying and selling assets, further guidance appears to be needed to assist not-for-profit entities. The deferral is intended to avoid undue cost and effort being incurred by preparers in applying AASB 13 Fair Value Measurement in the absence of additional guidance for NFPs. The interpretative issues arising from fair valuing right-of-use assets arising under peppercorn leases will be addressed in the AASB’s Fair Value Measurement for Public Sector Entities project.
As well, it was noted that the financial reporting thresholds for not-for-profit private sector entities may be revised under the ACNC Legislative Review recommendations, and it is possible that entities at the lower level of the reporting thresholds might not be required in future to apply the requirements of AASB 16 and AASB 1058.
Our William Buck guidance on Accounting for Income in Not-for-Profit Entities has been revised to include this amendment and is available on our website here