Great news for NFPs re peppercorn leases

In our February article we discussed the Australian Accounting Standards Board’s (AASB’s) proposal contained in ED 318 Illustrative Examples for Income of Not-for-Profit Entities and Right-of-Use assets arising under Concessionary Leases to extend the temporary exemption whereby not-for-profit (NFP) private sector lessees can choose to measure their right-of-use (ROU) assets arising from peppercorn (concessionary) leases at cost rather than fair value (refer option added in AASB 16, Aus 25.1).

At its April 2022 meeting, the AASB announced it will retain the accounting policy choice on an ongoing basis for NFP private sector lessees to recognise ROU assets arising from peppercorn (concessionary) leases at cost. The AASB considered the costs of obtaining fair valuations outweigh the benefits because:

  • Many NFP private sector entities do not have the knowledge and experience to apply the fair value principles contained in AASB 13 Fair Value Measurement as they do not generally measure non-financial assets at fair value
  • The additional disclosures about peppercorn (concessionary) leases contained in AASB 16, paragraphs Aus 59.1-Aus 59.2 appear to provide users with sufficient information to understand the effects of leases on the financial statements.

This decision provides certainty to lessees that they do not have to obtain fair valuations for either existing or future ROU assets arising from peppercorn (concessionary) leases if they continue to use the cost option.

What about public sector NFP lessees?

No decision was made at the April 2022 AASB meeting regarding the ongoing applicability of the accounting policy choice for public sector NFPs. This will be considered at future meetings once the Board decides on any additional guidance for measuring the fair value of ROU assets under peppercorn (concessionary leases).