Proposals to extend the ‘cost’ option for recognising right-of-use assets for concessionary leases

Proposals to extend the ‘cost’ option for recognising right-of-use assets for concessionary leases

AASB 1058 (and consequential amendments to AASB 16) initially required all right-of-use (ROU) assets from concessionary leases (peppercorn leases) to be measured at fair value, with any excess over peppercorn lease payments due being recognised immediately as income in profit or loss. However, because of the lack of guidance on how to measure fair value for such ROU assets, in 2018, the Australian Accounting Standards Board (AASB) provided what was intended to be a temporary exemption, whereby NFP lessees could choose to measure these ROU assets at ‘cost’ (refer option added in AASB 16, Aus 25.1).

The exemption was only ever intended to be temporary, to be reassessed when further guidance has been developed to assist NFPs in fair valuing ROU assets, and the financial reporting requirements for private sector NFPs was finalised.

Stakeholders have expressed concern that if the ‘cost’ option is removed in future, they could get caught in a situation where retrospective restatement of ROU assets at fair value would be required, without requisite notice to obtain relevant fair valuations.

What is the AASB proposing for private sector NFP lessees?

At its November 2021 meeting, the AASB considered feedback from NFP private sector stakeholders and decided to propose to retain the ‘cost’ option for concessionary ROU assets on an ongoing basis.

What is the AASB proposing for public sector NFP lessees?

For public sector NFP lessees, the AASB is proposing to defer a decision on whether to extend the ‘cost’ option until additional guidance about how to measure fair value for such ROU assets is discussed. It will also consider outcomes from the International Public Sector Accounting Standards Board (IPSASB’s) current leases project, as well as its own forthcoming Exposure Draft proposing changes to AASB 13 Fair Value Measurement for NFP public sector entities.

Many public sector stakeholders have raised concerns about determining historical fair values for ROU assets under concessionary leases if the ‘cost option’ is removed. Nevertheless, the AASB has decided not to propose ‘grandfathering’ existing concessionary leases from a future requirement to determine fair value until it decides to remove the ‘cost’ option.

More information

Please refer to ED 318 Illustrative Examples for Income of Not-for-Profit Entities and Right-of-Use assets arising under Concessionary Leases for more information regarding these proposals.

Comments due

Comments on these proposals close on 11 March 2022.