Peppercorn Leases & the New Revenue Standard AASB 1058: Right-of-Use Asset at Fair Value

The following just in ‘hot off the press’ from our financial reporting content expert, Carmen Ridley AASB member. An update from the Nov 2018 meeting has been added to this article.
The accounting treatment of peppercorn leases under the new revenue standard AASB 1058 Income of NFP Entities has caused significant discussion in relation to the recognition of a right-of-use asset at fair value at the date of inception of the lease (or transition to AASB 1058 for existing leases).
The AASB board papers for the 13 November meeting in Sydney include a proposal to grandfather peppercorn leases due to the uncertainties around the ACNC Legislative Review and future reporting requirements for NFP entities.
The alternatives proposed are:

  • Do nothing, i.e. require NFP entities to fair value the right of use arising from peppercorn leases on adoption of AASB 1058
  • Relieve all NFP entities (public and private sector) from initially measuring ROU assets from all peppercorn leases at fair value
  • Relieve private sector NFP entities from initially measuring ROU assets from all peppercorn leases at fair value
  • Relieve all NFP entities (public and private sector) from initially measuring ROU assets from existing (i.e. those in place at application date of AASB 1058) peppercorn leases at fair value
  • Relieve private sector entities from initially measuring ROU assets from existing (i.e. those in place at application date of AASB 1058) peppercorn leases at fair value

The link to the relevant paper is included here: https://www.aasb.gov.au/admin/file/content102/c3/8.1_SP_PeppercornLeaseRelief_M168.pdfIf you or your clients are currently working through your peppercorn leases then you might want to consider pausing the project until the decisions of the AASB meeting on 13 November – READ UPDATE BELOW FROM THE MEETING.
We would encourage you to read the paper before the board meeting and feel from to send any feedback/thoughts to Carmen at cridley@afrs.com.au prior to the Board meeting or if you want to come along and listen to the discussions on 13 November in Sydney then you can register to attend on the AASB website (https://www.aasb.gov.au/AASB-Board/Public-attending-meetings.aspx)

LATEST UPDATE FROM AASB BOARD MEETING HELD NOV 13

The AASB met in Sydney yesterday and the following decisions were made in relation to peppercorn (and other significantly below market value leases):

Exposure draft to be released which considers:

  • Temporary relief for all not for profit entities in relation to peppercorns until the ACNC thresholds have been set and guidance is issued by the Fair Value panel in relation to valuation of right of use assets
  • Potential permanent relief for peppercorn leases in place on transition to AASB 1058 for private sector NFP entities.

The exposure draft should be released very shortly and we STRONGLY encourage all entities in the NFP space (or with clients in the NFP space) to respond to the exposure draft through the AASB directly or emails via Carmen which she will forward on (cridley@afrs.com.au)

In the meantime, NFPs should not engage any valuers nor perform any further detailed analysis on peppercorn leases in place today until the outcomes of the standard is released.