For reporting periods beginning on or after 1 January 2019, AASB 1058 Income of Not-for-Profit Entities and AASB 16 Leases currently requires not-for-profit (“NFP”) entities to measure and recognise right-of-use assets at fair value for all existing and new below-market (‘peppercorn leases’) leases.
The AASB has now proposed amendments to AASB 16 to permit NFP lessees to recognise those right-of-use assets for below-market or peppercorn leases, either:
- at cost, which reflects the amount of the initial measurement of the lease liability; or
- at fair value.
This proposed accounting policy choice would have to be applied consistently to all existing below-market leases on initial adoption of AASB 16 and AASB 1058, as well as new leases entered into from 1 January 2019. It will assist those entities that may be having difficulty in determining the fair value of peppercorn leases by permitting them to recognise those right-of-use assets at cost. At the same time, the option allows NFPs that wish to recognise right-of-use assets for peppercorn leases at fair value to do so.
The AASB also proposes adding additional disclosures to AASB 16 for NFP entities that elect to measure the right-of-use asset at cost.
It should be noted that the AASB views the proposed cost option as only a temporary measure. The AASB intends to revisit permitting NFP entities to use the cost basis once it has developed further guidance to assist NFP entities in fair valuing right-of-use assets. The AASB has provided no suggestion on how it will deal with the removal of the cost option in the future, what further transitional provisions may be necessary, or the time frame for doing so.
The proposals are contained in Exposure Draft ED 286 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities which is open for comment until 7 December 2018. The AASB expects to issue the final amending Standard before the end of 2018.