Peppercorn lease requirements

AASB defers requirements for NFP lessees to fair value peppercorn leases

AASB 16 Leases, paragraph Aus25.1 (inserted by AASB 1058 Income of Not-for-Profit Entities) requires not-for-profit (NFP) lessees to fair value their right-of-use (ROU) assets subject to ‘peppercorn leases’ (i.e. those with significantly below-market terms and conditions) for annual periods beginning on or after 1 January 2019.

However, at its meeting on 13 November 2018, the Australian Accounting Standards Board (AASB) announced that it is proposing a temporary option to defer these requirements.

Why the deferral?

One of the reasons for providing this temporary deferral option is because of difficulties experienced by some NFPs in determining fair value for these ROU assets.

‘Given the prevalence of restrictions on ROU assets in the NFP sector, the Board prefers the interpretative issues arising from fair valuing such leases to be resolved as part of the fair value measurement project.’

AASB Action Alert, 14 November 2018 

Another reason is that the AASB wants to avoid placing a financial reporting burden on smaller private-sector NFPs that may not need to report in future because of likely increases in reporting thresholds as a result of the ACNC Legislative Review recommendations.

How long will the temporary deferral option remain in place?

This is expected to remain until guidance has been developed for fair valuing such right-of-use assets, and the financial reporting requirements for private sector NFPs have been finalised.

How will entities apply this temporary relief for peppercorn leases in their 2019 financial statements?

ROU assets will be measured at the present value of the payments required, so usually an insignificant amount.

More disclosures

However, such NFPs will need to provide additional disclosure to ensure that users understand the effects on the financial position, financial performance and cash flows of the entity arising from leases with significantly below-market terms and conditions.

When the temporary relief is removed, the AASB will consider whether to provide transitional relief for existing ‘peppercorn’ leases.