Recognition of peppercorn leases deferred

IFRS news

The Australian Accounting Standards Board (AASB) has postponed the requirement for not-for-profit entities to bring peppercorn leases into their financial reports at fair value, having been made aware of the difficulty and cost constraints of determining the fair value of properties subject to such leases.

Under the current drafts of AASB 1058 Income of Not-for-Profit Entities and  AASB 16 Leases, not-for-profit (NFP) entities would have had to recognise the fair value of any peppercorn or below-market leases for periods beginning on or after 1 January 2019.peppercorn leases

The AASB decided at its recent board meeting to release an exposure draft which will provide temporary relief from this process. This is a response to the difficulties encountered by NFPs in fair valuing peppercorn leases due to restrictions on their use, and to the expected increase to financial reporting thresholds for NFP entities likely to arise from the ongoing Australian Charities and Not-for-profits Commission (ACNC) Legislative Review.  the requirement for not-for-profit entities to bring peppercorn leases into their financial reports at fair value

A permanent grandfathering arrangement is being considered for private sector NFP entities on initial application of the standard, meaning that only new peppercorn leases would need to be fair-valued.

Where the temporary relief is applied, right of use assets associated with peppercorn leases will be measured at the present value of payments required, which may be insignificant; and disclosures will be made to clarify to users the effects on the financial statements of peppercorn leases.

“This is a pragmatic approach by the AASB to what has the potential to be a significant problem,”

said Ralph Martin, RSM’s National Technical Director. 

 “Determining the fair value of a peppercorn lease granted many years in the past is a complex valuation exercise.  We agree with the AASB that it would make no sense for smaller not-for-profit entities to undertake such a process, when they may soon have relief from needing to prepare a financial report.”

Until the AASB reaches a final position on this issue, we recommend that not-for-profit entities hold off from engaging valuation experts, or from undertaking further analysis on peppercorn or below-market leases in place today.

If you have any questions about this article, please contact Ralph Martin. Alternatively, contact your local RSM office today.