18RU-005 To fair value right-of-use asset or not? NFPs | KPMG | AU
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18RU-005 To fair value right-of-use asset or not? – NFPs

18RU-005 To fair value right-of-use asset or not? NFPs

The AASB has issued ED 286 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities which proposes temporary optional relief for not-for-profit entities to fair value a right-of-use asset arising from the application of the new leases standard. Instead the right-of-use asset may be measured at cost. The proposed effective date is 1 January 2019, the same application date as AASB 16 Leases.

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Background

When AASB 1058 Income of Not-for-profit Entities was issued in December 2016, Australian-specific paragraphs were inserted to AASB 16 Leases.  These paragraphs require a not-for-profit (NFP) lessee to measure a right-of-use asset at fair value (in accordance with AASB 13 Fair Value Measurement) where the lease is at significantly below-market terms and principally for the NFP to further its objectives (a ‘peppercorn’ lease).

The AASB has received feedback from stakeholders of the challenges in the practical application of fair valuing such right-of-use assets.  Given the challenges experienced and the likelihood of changes to the financial reporting thresholds for NFP private sector entities as a result of the ACNC Legislative Review recommendations, the AASB has issued ED 286 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entitiee (ED 286) (PDF 555KB).

What ED 286 proposes

  • To provide temporary optional relief from the requirement to fair value the right-of-use asset in a peppercorn lease. This means a NFP has a choice to measure the right-of-use asset at:
    • fair value in accordance with AASB 13; or
    • cost in accordance with AASB 16, which would include the measurement of the lease liability.
  • Where the NFP chooses to measure the right-of-use asset at cost, the NFP discloses additional qualitative and quantitative information necessary for users of the financial statements to assess the effect that such leases have on the financial position, financial performance and cash flows of the lessee.
  • The temporary optional relief would remain until:
    • the ACNC finalises the reporting thresholds recommended in the recent ACNC Legislative Review; and
    • the AASB project relating to fair value measurement for public sector entities is complete.

The temporary relief will reassessed at this time.

Proposed effective date

The temporary optional relief is expected to apply for financial years beginning on or after 1 January 2019 (with earlier application permitted, provided that AASB 1058 is also applied at the same time) – the same application date of AASB 1058 and AASB 16.

Submissions to the AASB on ED 286 close on 7 December 2018.

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