When AASB 1058 Income of Not-for-profit Entities was introduced, amendments were made to AASB 16 Leases to require all right-of-use (ROU) assets arising under concessionary (also known as peppercorn) leases to be measured at fair value on initial recognition. Any excess over the present value of the concessionary lease payments to be made in future was required to be recognised immediately as income in profit or loss.

It soon became evident that this requirement would be burdensome for the not-for-profit (NFP) sector. This is because of the challenges in applying certain principles in AASB 13 Fair Value Measurement to ROU assets that have restricted use and are often specialised in nature.

As a result, in 2018 the Australian Accounting Standards Board (AASB) issued AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities which provided a temporary option that allowed NFP lessees to elect to initially measure ROU assets arising from peppercorn leases at cost rather than fair value.

It was the AASB’s intention to revisit this temporary relief once the NFP financial reporting framework was finalised and appropriate guidance was developed to assist NFP entities in measuring the fair value of ROU assets.

Stakeholders have expressed concern that this temporary accounting policy choice creates uncertainty in the NFP sector because it is unclear what the ramifications would be if the AASB decided to remove the cost option. If this required retrospective restatement, it would mean NFP entities would need historical fair value information for ROU assets which would probably be costly and time-consuming to obtain.

Consequently, the AASB has decided to make the accounting policy choice in AASB 16.Aus25.1 and Aus25.2 permanent for private sector NFP entities. That is, these NFP lessees will always have the choice to initially measure ROU assets arising from concessionary leases at either cost or fair value. There is therefore no need for them to obtain fair value information for such ROU assets, either existing or future ones.

NFP entities in the public sector should take note that the cost option is still a temporary accounting policy choice for them. The AASB will continue its deliberations on the matter, taking into account any guidance that it may issue in the future relating to the application of fair value to concessionary leases in the NFP public sector.

Entities are reminded that where they elect to apply the cost option as allowed under the NFP-specific paragraphs in AASB 16, there are additional disclosures that must be included in their financial statements. These disclosures provide information about the entity’s dependency on concessionary leases and the nature and terms of such leases. These disclosures can be found in AASB 16 paragraphs Aus59.1 and 59.2.

This article was first published in The Bottom Line, issue 13.