The AASB has provided relief for not for profit organisations from having to calculate the fair value of a right-to-use asset from ‘peppercorn’ leases i.e. leases that are significantly below market price. Peppercorn leases are often represented by a nominal lease charge for the use of a potentially valuable property. The calculation of the fair value of the right-to-use asset for the purposes of initial recognition under AASB 16: Leases was raised from the outset of the introduction of this standard as a potentially major burden for the not for profit sector to ensure compliance.
AASB 16: Leases is applicable for annual reporting periods beginning on or after 1 January 2019, a major feature of this standard is to bring operating lease commitments onto the balance sheet by requiring the recognition of a liability for these future commitments and also a corresponding asset to represent the right-to-use the underlying leased asset.
The AASB has now issued AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities. Which provides a temporary option for not-for-profit lessees to elect to measure a class (or classes) of right-of-use assets arising under ‘concessionary leases’ at initial recognition, either:
- at cost, which incorporates the amount of the initial measurement of the lease liability; or
- at fair value
Concessionary leases in this context are leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives. This covers the standard ‘peppercorn lease’ scenario and allows these entities to measure right-of-use asset from peppercorn leases at fair value or to adopt a cost approach.
This relief is considered temporary while the AASB consider a more permanent option.
The option to use the cost method will undoubtably save time, money and effort for many not-for-profit entities which may not be able to draw on the expertise needed to calculate fair value of these assets without substantial additional costs. These resources are in many cases better off spent contributing to the purpose of not-for-profits or adding value to their operations.