Peppercorn leases standards amended following sector concern

Due to concerns in the social sector, a new accounting standard on peppercorn leases has been released, changing the way not-for-profits manage and determine values.

The Australian Accounting Standards Board (AASB) has issued an amended standard on peppercorn leases after stakeholders reported undue cost and effort in the absence of additional guidelines specifically for not-for-profit entities.

In a statement, accounting firm William Buck said: “The complexity of these standards require detailed analysis of arrangements, it’s important NFPs have developed new accounting processes and are transitioning into these new standards.”

The changes are part of a move to fix failings of a prior AASB standard, which did not match income and expenditure, affecting grants, volunteers and peppercorn leases. The standards are applicable to financial years beginning on or after 1st January 2019.

Under the new standard, revenue from grants and donations will be recognised when the associated performance obligations to provide goods and services are satisfied, provided the performance obligations have sufficient specificity.

It is instead of immediately upon receipt as usually occurs. If there are no performance obligations or aren’t sufficiently specific, they will continue to be recognised on receipt.

The peppercorn lease section of the changes was deferred so AASB could clarify the fair value of the right-of-use asset. Rather lessees can elect not to measure the right-of-use assets in peppercorn leases at initial recognition at fair value.

Instead, the assets can be value-based on the lease liability and the election applied on a case-by-case basis.

The issues on fair valuing the right-of-use asset included how often significant restrictions on the right-of-use of the underlying assets and the specialised nature of the assets are incorporated in valuing the right-of-use.

Since the principals are based on market participants buying and selling assets, NFP entities needed further guidance.

It was noted that the financial reporting thresholds for NFPs would be changing under the revised Australian Charities and Not-for-profits Commission (ACNC) Legislative Review recommendations, which makes it possible that NFP entities at the lowest level of reporting thresholds may not be required to apply some AASB requirements.

Of the peppercorn lease changes in the new standard, William Buck said: “There are additional disclosure obligations if the election is applied, and include quantitative and qualitative information about the leases necessary to meet the disclosure.”

This includes disclosing information on the entity’s dependence on leases that have a significantly below-market terms and conditions principal to enable the entity to further its objective and the nature and terms of the leases. This includes the lease term and payments, a description of underlying assets and the restrictions of these assets.

“These disclosures are required for each of the peppercorn lease, and the entity must consider the level of detail necessary to satisfy the disclosure of AASB 1058 paragraph 51 and how much emphasis to place on each of the requirements,” William Buck said.

“Disclosures can be aggregated or disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have subsequently different characteristics.”