Proposed changes to lease accounting for PBEs
For Public Benefit Entities with lease contracts, it should be noted that big changes are on the way in relation to lease accounting.
The International Public Sector Accounting Standards Board (IPSASB) is in the process of drafting a new lease standard that will replace IPSAS 13 Leases. This new standard will likely be adopted in New Zealand by the New Zealand Accounting Standard Board
The new standard will be partially based on the for-profit standard IFRS 16 Leases although adjustments will be made thereto to take into account issues such as concessionary leases.
In terms of the timeline for the new proposed standard, the IPSASB has issued an exposure draft (IASB ED 75 Leases) thereon as well as a Request for Information, Concessionary Leases and Other Arrangements Similar to Leases (RFI), with comments due by 17 May 2021.
The New Zealand External Reporting Board (XRB) has requested any comments on IASB ED 75 Leases and the RFI by 22 April 2021.
You can access IASB ED 75 Leases together with Request for Information, Concessionary Leases and Other Arrangements Similar to Leases here.
Background to IPSAB ED 75 Leases and Request for Information, Concessionary Leases and Other Arrangements Similar to Leases
Some of you may recall that in January 2018, the IPSASB sought comments on Exposure Draft 64 Leases (ED 64) which proposed new requirements for lease accounting based on IFRS 16, Leases issued by the International Accounting Stands Board (IASB). The XRB also held roundtables at the time to seek feedback on the proposals.
The feedback received on ED 64 was mixed. While it showed overall support for the proposals for lessee accounting, the IPSASB could not reach a consensus view on the proposals for lessor accounting and concessionary leases.
As a result, the IPSASB decided to proceed with their leases project in two phases:
- Phase One to deal with lease accounting for both lessees and lessors based on IFRS 16. The proposals have been re-exposed as IASB ED 75 Leases as part of this phase.
- Phase Two to deal with concessionary leases, and other ‘lease-like’ arrangements in the public sector. Issuing the RFI is the first part of this phase.
IASB ED 75 Leases is based on IFRS 16, Leases issued by the IASB and addresses accounting for leases which are fully within the scope of that standard.
IASB ED 75 Leases proposes a right-of-use model for lessees under which they are required to recognise:
- a right-of-use asset because they control the right to use the underlying asset; and
- a lease liability because they have a present obligation to make future lease payments in accordance with the underlying lease contract.
IASB ED 75 Leases proposes that both the right-of-use asset and lease liability be measured at cost (which is determined by the present value of the future lease payments).
IASB ED 75 Leases does not propose significant changes for lessors, instead proposing to substantially carry forward the lessor accounting currently required in IPSAS 13 Leases (which is also consistent with IFRS 16).
The XRB’s Policy Approach to Developing PBE Standards establishes a rebuttable presumption that the NZASB will adopt a new or amended IPSAS, so it is highly unlikely that this proposed new standard will not be adopted in New Zealand.
Request for Information
In the public sector (and in other not-for-profits in the New Zealand context), leases are often entered into by an entity at below-market terms. These leases are referred to as concessionary leases. It is also common for entities to enter into other arrangements similar to leases where rights to access or use assets are transferred, but which do not meet the definition of a lease under IFRS 16.
The RFI has been issued to gather constituent input on the characteristics of concessionary leases and other arrangements similar to leases entered into by public sector entities and how they are currently being accounted for. Feedback received on the RFI will assist the IPSASB in determining whether additional standards-level or other guidance is needed for these types of arrangements.
The New Zealand Accounting Standards Board (NZASB) encourages the reading of both IASB ED 75 Leases and the RFI (available here). and to comment on the proposals.
For more on the above, please contact your local BDO representative.
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