Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities
Under the current drafts of AASB 1058 Income of Not-for-Profit Entities and AASB 16 Leases, Not-for-Profit (NFP) entities would have had to fair value their right-of-use (ROU) assets subject to any peppercorn or below-market leases for periods beginning on or after 1 January 2019.
However, 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 NFP lessees to elect not to 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.
If the election is applied, there are additional disclosure obligations. Lessees are required to include qualitative and quantitative information about those leases necessary to meet the disclosure objective in paragraph 51. This additional information shall include, 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 peppercorn lease, and an entity must consider the level of detail necessary to satisfy the disclosure objective of AASB 1058 paragraph 51.
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.
The days of preparing Special Purpose Financial Statements (SPFS) can soon be over
Entities that currently prepare SPFS should be aware that these are going to be phased out in the next few years, particularly those lodged with ASIC under Part 2M.3 of the Corporations Act 2001 or Part 3-2 of the Australian Charities and Not-for-profits Commission Act 2012.
The main reason for the change is to ensure that Australian Accounting Standards are aligned with IFRS, considering the new Conceptual Framework (Framework) that was issued in March 2018 by the International Accounting Standards Board. The new conceptual framework is applicable from 1 January 2020 and includes a much broader concept of a ‘reporting entity’ than SAC 1 Definition of the Reporting Entity.
Due to the significant amount of work involved for preparers to upgrade SPFS to GPFS (either Tier 1 full GPFS or Tier 2 applying reduced disclosures), the AASB has proposed a two-phased approach to apply the Revised Conceptual Framework in Australia. The two-phased approach would result in the end of the ability to prepare SPFS and will result in two robust tiers of GPFS:
- Tier 1 GPFS for all publicly accountable entities and those that voluntarily prepare Tier 1 GPFS. The Tier 1 framework is IFRS compliant.
- Tier 2 GPFS for all other entities, which will consist of either the existing Tier 2 GPFS Reduced Disclosure Requirements OR a new Tier 2 GPFS Specified Disclosure Requirements. Both of these Tier 2 frameworks are based on IFRS, modified where appropriate by the AASB for not-for-profit private and public sector amendments.
The revised Conceptual Framework also sets out the following:
— the qualitative characteristics of useful financial information;
— definitions of an asset, a liability, equity, income and expenses and guidance supporting these definitions;
— criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition);
— measurement bases and guidance on when to use them;
— concepts and guidance on presentation and disclosure; and
— concepts relating to capital and capital maintenance.