NFPs - Lessee disclosures required even if you only have peppercorn leases measured at ‘cost’

Peppercorn leases are leases with significantly below-market terms, principally to enable the not-for-profit entity (NFP) to further its objectives. Typically peppercorn lease payments are really small (e.g. $1 per year, or $100 per year), and therefore not quantitatively material to the financial statements of lessees, meaning that such leases would seldom be capitalised on the balance sheet under IFRS 16 Leases.

With peppercorn leases being ‘off balance sheet’, NFPs may incorrectly overlook the lessee disclosures included in IFRS 16, in particular, paragraphs Aus59.1 and Aus59.2, which apply specifically to peppercorn leases.

NFP lessees that elect to use the ‘cost’ method for accounting for peppercorn leases must disclose additional qualitative and quantitative information about these leases to meet the disclosure objective in IFRS 16, paragraph 51.

The objective of the disclosures is for lessees to disclose information in the notes that, together with the information provided in the statement of financial position, statement of profit or loss and statement of cash flows, gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee...

Extract of IFRS 16, paragraph 51

What additional information is required?

The additional information regarding peppercorn leases must include, but is not limited to, information that helps users understand:

  • How dependent the NFP is on peppercorn leases in its operations
  • The nature and terms of peppercorn leases, including:
    • The lease payments
    • The lease term
    • Description of the underlying assets, and
    • Restrictions on the use of the underlying asset that are specific to the NFP (i.e. if leased on market terms, the underlying asset would not have such restrictions).

Separate disclosure for each material lease

Paragraph Aus59.2 requires the above disclosures for peppercorn leases to be provided individually for each material peppercorn lease.

By their nature, peppercorn leases will seldom be quantitatively material. Nevertheless, these may be qualitatively material. In the context of the NFPs operations, users would be expected to be concerned with the NFP’s ability to achieve its objectives (IFRS 16, BC18). Therefore, when assessing whether a peppercorn lease is material, NFPs could consider factors such as the significance of the lease to the NFPs operations.

For leases that are not individually material, NFPs are permitted to provide the paragraph Aus59.1 disclosures in aggregate for peppercorn leases for right-of-use assets of a similar nature. NFPs have discretion to aggregate or disaggregate information so that useful information is not obscured by too much insignificant detail, and information with substantially different characteristics is not aggregated.

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