AASB Standard | AASB 2019-8 |
[AASB 16 & AASB 1049]
This Standard is available on the AASB website: www.aasb.gov.au.
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ISSN 1036-4803
PREFACE
ACCOUNTING STANDARD
AASB 2019-8 AMENDMENTS TO AUSTRALIAN ACCOUNTING STANDARDS – CLASS OF RIGHT-OF-USE ASSETS ARISING UNDER CONCESSIONARY LEASES
from paragraph
APPLICATION 2
AMENDMENTS TO AASB 16 5
AMENDMENTS TO AASB 1049 6
COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT 7
BASIS FOR CONCLUSIONS
Australian Accounting Standard AASB 2019-8 Amendments to Australian Accounting Standards – Class of Right-of-Use Assets arising under Concessionary Leases is set out in paragraphs 1 – 7. All the paragraphs have equal authority.
This Standard makes amendments to AASB 16 Leases (February 2016) and AASB 1049 Whole of Government and General Government Sector Financial Reporting (October 2007).
In December 2018, the AASB issued AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities to provide a temporary option for not-for-profit entities to elect to measure a class or classes of right‑of‑use assets arising under concessionary leases at initial recognition at cost or at fair value. Concessionary leases in this context are leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives.
The AASB received feedback that public sector entities would need to revalue their right‑of‑use assets under concessionary leases (and other leases) at fair value at subsequent measurement to satisfy the requirements of AASB 1049 to elect accounting treatments in Accounting Standards that align with the principles in the ABS GFS Manual. Stakeholders also requested clarification of whether right‑of‑use assets arising under concessionary leases can be treated as a separate class of right‑of‑use assets to right‑of‑use assets arising under other leases.
The AASB considered stakeholders’ feedback and decided to amend AASB 16 and AASB 1049 to address these issues.
Main requirements
This Standard makes amendments to AASB 16 and AASB 1049 to:
(a) specify for not-for-profit entities that right‑of‑use assets arising under concessionary leases can be treated as a separate class of right‑of‑use assets to right‑of‑use assets arising under other leases for the purposes of AASB 16; and
(b) provide an option for a Whole of Government and General Government Sector to measure right‑of‑use assets arising under concessionary leases at cost or at fair value in subsequent measurements.
Application date
This Standard applies to annual periods beginning on or after 1 January 2019, with earlier application permitted, provided that AASB 1058 Income of Not-for-Profit Entities is also applied at the same time.
The Australian Accounting Standards Board makes Accounting Standard AASB 2019-8 Amendments to Australian Accounting Standards – Class of Right-of-Use Assets arising under Concessionary Leases under section 334 of the Corporations Act 2001.
| Kris Peach |
Dated 19 December 2019 | Chair – AASB |
Amendments to Australian Accounting Standards – Class of Right-of-Use Assets arising under Concessionary Leases
1 This Standard amends AASB 16 Leases (February 2016) and AASB 1049 Whole of Government and General Government Sector Financial Reporting (October 2007) to clarify that right-of-use assets arising under leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives can be treated as a separate class of right-of-use assets to right-of-use assets arising under other leases. This Standard also provides an option for a Whole of Government and General Government Sector to subsequently measure right-of-use assets at cost or at fair value for leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives.
2 The amendments set out in this Standard apply to entities and financial statements in accordance with the application of AASB 16 and AASB 1049 set out in AASB 1057 Application of Australian Accounting Standards.
3 This Standard applies to annual periods beginning on or after 1 January 2019. Earlier application of this Standard is permitted, provided AASB 1058 Income of Not-for-Profit Entities is also applied to the period.
4 This Standard uses underlining, striking out and other typographical material to identify some of the amendments to a Standard, in order to make the amendments more understandable. However, the amendments made by this Standard do not include that underlining, striking out or other typographical material. Amended paragraphs are shown with deleted text struck through and new text underlined. Ellipses (…) are used to help provide the context within which amendments are made and also to indicate text that is not amended.
5 Paragraphs Aus25.2 and Aus35.1 are added:
Aus25.2 Right-of-use assets arising under leases that have significantly below-market terms and conditions principally to enable a not-for-profit entity to further its objectives may be treated as a separate class of right-of-use assets to right-of-use assets arising under other leases, despite their similar nature and use in the entity’s operations. Identifying separate classes of right-of-use assets despite their similar nature and use in the entity’s operations applies for the purposes of this Standard and other Standards that refer to classes of assets. However, this approach shall not be applied by analogy to distinguish sub-classes of other assets as separate classes of assets.
…
Aus35.1 Notwithstanding paragraph 35, a not-for-profit public sector entity may elect to measure a class of right-of-use assets at cost or at fair value if the entity applies the revaluation model in AASB 116 to the related class of property, plant and equipment.
6 Paragraph 13D is amended as follows:
13D Notwithstanding paragraph 13, a government may elect to measure a class of right-of-use assets at initial recognition at cost or at fair value in accordance with AASB 16 Leases for leases that had at inception significantly below-market terms and conditions principally to enable the entity to further its objectives.
7 For legal purposes, this legislative instrument commences on 31 December 2019.
Basis for Conclusions
This Basis for Conclusions accompanies, but is not part of, AASB 2019-8 Amendments to Australian Accounting Standards – Class of Right-of-Use Assets arising under Concessionary Leases.
Introduction
BC1 This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in this Standard. It sets out the reasons why the Board developed the Standard, the approach taken to developing the Standard and the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.
Reasons for issuing this Standard
BC2 AASB 1058 Income of Not-for-Profit Entities and AASB 16 Leases are effective for annual reporting periods beginning on or after 1 January 2019. These Standards originally required not-for-profit entities to measure right-of-use assets at initial recognition at fair value for leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives.
BC3 For ease of reference in this Basis for Conclusions, leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives are referred to as ‘concessionary leases’.
BC4 The Board considered comments from stakeholders that some not-for-profit entities are encountering difficulties in applying the principles in AASB 13 Fair Value Measurement in determining the fair value of right-of-use assets arising under concessionary leases. The Board considered the prevalence and magnitude of concessionary leases in the not‑for‑profit sector, and in December 2018 issued AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities to provide a temporary option for not-for-profit lessees to measure a class (or classes) of right‑of‑use assets at initial recognition at cost or at fair value arising under concessionary leases.
BC5 Subsequently the Board received feedback that public sector entities preparing Whole of Government and General Government Sector financial statements would need to revalue their right-of-use assets arising under concessionary leases (and other leases) at fair value at subsequent measurement to satisfy the requirements of AASB 1049 Whole of Government and General Government Sector Financial Reporting to elect accounting treatments in Accounting Standards that align with the principles in the ABS GFS Manual. The Board considered the issue and decided to provide an option for the Whole of Government and the General Government Sector to measure right-of-use assets arising under concessionary leases at cost or at fair value in subsequent measurements, which is an extension of the existing temporary relief provided in AASB 2018‑8 in relation to initial recognition.
BC6 Stakeholders also requested clarification of whether right-of-use assets arising under concessionary leases can be treated as a separate class of right-of-use assets to right-of-use assets arising under other leases so that entities can have the option to measure right-of-use assets arising under concessionary leases under a different basis to right-of-use assets arising under other leases. The Board decided to amend the Standards to clarify this.
Subsequent measurement of right-of-use assets of Whole of Government and General Government Sector
BC7 The Board received feedback from stakeholders that public sector entities apply the revaluation model in AASB 116 Property, Plant and Equipment to measure their property, plant and equipment at fair value to align with Government Finance Statistics (GFS) principles (ie measurement of assets at current market value). They are concerned that, to satisfy the requirements in paragraph 13 of AASB 1049, public sector entities would be required to also apply the revaluation model to measure right-of-use assets arising under concessionary leases at fair value at subsequent measurement.
BC8 As stated in paragraph BC6 of AASB 2018-8, temporarily permitting not‑for‑profit entities to elect to measure right-of-use assets arising under concessionary leases at either cost or fair value at initial recognition was intended to avoid not-for-profit entities, including those in the public sector, incurring undue cost and effort in applying the principles of AASB 13 to measure the fair value of right-of-use assets arising under concessionary leases in the absence of further guidance on fair value measurement. However, stakeholders commented that limiting the relief only to initial measurement did not appear to have achieved this for public sector not-for-profit entities.
BC9 The Board noted that there is precedent for deferring measurement requirements for the not‑for‑profit public sector. For example, the Board deferred the requirement to recognise defence weapons platforms at fair value when the ABS GFS Manual was amended to treat defence weapons platforms as assets rather than immediate expenses. Paragraph BC3 to the amending Standard AASB 2012-8 Amendments to AASB 1049 – Extension of Transitional Relief for the Adoption of Amendments to the ABS GFS Manual relating to Defence Weapons Platforms (appended to AASB 1049) suggested that the Board considered the magnitude and complexity of the valuation exercise for defence weapons platforms and decided that an extension of transitional relief for two years would be required for the Australian Government to be able to comply. The Board also deferred the requirement to recognise land under roads (first from 31 December 2002 to 31 December 2006, then further to 31 December 2007) considering the lack of international convergence on the recognition of land under roads. When finalising AASB 1051 Land Under Roads, the Board considered that it might be onerous for entities to be required to retrospectively identify, assess the recognition criteria, recognise and measure land under roads previously acquired, and decided to allow entities to elect whether to recognise land under roads acquired before the end of the first reporting period ending on or after 31 December 2007 (AASB 1051, paragraph BC11).
BC10 The Board also considered that its project on reforming the Australian public sector financial reporting framework could reduce the magnitude of having material right-of-use assets arising under concessionary leases being measured at fair value if it is determined that general purpose financial statements are not required to be prepared by all public sector entities, other than Whole of Government and General Government Sector. The Board also considered that it might also be prudent to not introduce further amendments to AASB 1049 until the planned post-implementation review of AASB 1049 has been completed.
BC11 However, since the public sector financial reporting framework reform, the post-implementation review of AASB 1049 and the guidance on fair value measurement are not expected to be completed when public sector entities need to prepare their financial statements for the 2019/20 financial year, the Board decided to extend the current temporary relief in relation to initial measurement to provide an option for the Whole of Government and the General Government Sector to measure right-of-use assets arising under concessionary leases at cost or at fair value in subsequent measurements. The Board made this decision in accordance with The AASB’s Not-for-Profit Entity Standard-Setting Framework (paragraph 28(d)) to avoid undue cost and effort in applying the principles of AASB 13 in measuring the fair value of these assets before the Board issues further fair value measurement guidance. The Board therefore amended paragraph 13D of AASB 1049 to remove the initial recognition proviso for measuring a class of right-of-use assets arising under concessionary leases at cost or fair value.
BC12 The temporary relief described in paragraph BC11, in relation to subsequent measurements of right-of-use assets arising under concessionary leases, is provided only to Whole of Government and General Government Sector because AASB 1049 specifies requirements only for Whole of Government and General Government Sector financial statements. Other public sector entities, such as government agencies and local governments, are not subject to AASB 1049 and are not required by current Accounting Standards to adopt a fair-value approach in measuring non‑financial assets. These entities therefore do not need the temporary relief provided under AASB 1049. Whether these entities are required to adopt a fair-value approach is a matter for the Treasury or Finance Department or other authority in each jurisdiction.
BC13 Consistent with its decisions in AASB 2018-8 (see paragraph BC16 of AASB 2018-8), the Board considers that the additional disclosure requirements in paragraphs Aus59.1 and Aus59.2 of AASB 16 apply in the absence of fair value information at any reporting date when right-of-use assets arising under concessionary leases are measured at cost, subsequent to their initial recognition at cost. This ensures adequate information is disclosed for users of financial statements to understand the effects on the financial position, financial performance and cash flows of the entity arising from concessionary leases.
Class of right‑of‑use assets
BC14 Current accounting standards (eg AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets) describe a class of assets as ‘a grouping of assets of a similar nature and use in an entity’s operations’. Some stakeholders commented that applying this description – grouping right‑of‑use assets of a similar nature and use in an entity’s operations – would mean that a right‑of‑use asset arising under a concessionary lease would be classified in the same class as right‑of‑use assets arising under other leases, if they exhibit the similar nature and use. Therefore, further guidance or amendments would be required to define or clarify ‘a class (or classes) of right‑of‑use assets’ if it was intended to provide temporary relief to not‑for‑profit entities by permitting them to elect to measure right‑of‑use assets arising under concessionary leases at cost or fair value, whether or not right‑of‑use assets arising under other leases that are in the same class are measured on the same basis.
BC15 The Board considered that the amendments made to paragraph Aus25.1 of AASB 16 and the commentary in paragraph BC14 to AASB 2018-8 already distinguished a class of right‑of‑use assets based on whether the right‑of‑use assets arise under concessionary or non-concessionary leases, in addition to the requirement for a similar asset nature and use. Given the uncertainty whether the current measurement option is effective given the existing description of a class of asset, the Board decided to clarify this in the further amendment of AASB 16.
Options for addressing the issues
BC16 The Board considered three possible options for resolving the issues:
BC17 The Board considered the advantages and disadvantages of each option and decided to adopt Option 3 – specify that right‑of‑use assets of not-for-profit entities arising under concessionary leases may be treated as a separate class of right‑of‑use assets from right‑of‑use assets arising under other leases. This option is expected to be the simplest to apply without limiting the scope of the exemption from the requirements to measure right‑of‑use assets at fair value in advance of public sector not‑for‑profit entity guidance on applying fair value. The Board noted specifying that right‑of‑use assets arising under concessionary leases can be treated as a separate class of right‑of‑use assets from right‑of‑use assets arising under other leases would not be consistent with the concept of a class of assets in other Standards, which looks only at the nature and use of the assets. However, the Board considered this would be a pragmatic and limited response to the issue for not-for-profit entities, and added paragraph Aus25.2 to AASB 16. The Board decided that this approach of treating sub-classes of assets as separate classes should not be applied by analogy in other circumstances.
Measuring some right‑of‑use assets arising under concessionary leases at cost and others at fair value
BC18 Some stakeholders commented that some public sector entities have been measuring at fair value leased assets arising under finance leases pursuant to AASB 117 Leases, and expressed a desire to continue measuring at fair value right‑of‑use assets related to concessionary leases that were classified previously as finance leases, and measure right‑of‑use assets of other concessionary leases at cost. They questioned whether right‑of‑use assets related to concessionary finance leases can be considered a separate class of right‑of‑use assets.
BC19 Even though electing measurement models based on the GFS categories of operating lease and finance lease could achieve better GFS alignment, the Board considered that this would conflict with the accounting measurement basis for leases, given the removal of the operating and finance lease distinction for lessees. AASB 1049 paragraph 13 does not require consistency with GFS in the event of a conflict. Permitting the election of cost or fair value measurement based on GFS categories would risk prioritising GFS alignment over faithful and comparable presentation of right‑of‑use assets in statements of financial position. Therefore, the Board considered that lessees’ election of cost or fair value measurement should not be based on the superseded categories of finance lease and operating lease for lessees.
BC20 However, the Board concluded that it would be appropriate to permit not-for-profit public sector entities to measure separate classes of right-of-use assets based on those arising from concessionary leases and those arising under other leases on different bases. That is, one of those classes could be measured at cost and the other at fair value, if the lessee applies the revaluation model to the class of property, plant and equipment to which the right-of-use assets relate. Thus a modification to paragraph 35, which does not refer to classes of right-of-use assets, is required, and so the Board added paragraph Aus35.1 to AASB 16.
BC21 The Board noted that entities would not be required to remeasure right‑of‑use assets of existing concessionary finance leases at cost if they have already applied the fair value model to those lease assets under AASB 117 and would now measure the class of right‑of‑use assets at cost. Under paragraph C11 of AASB 16, entities can use the AASB 117 carrying amounts (fair value) as the basis for applying AASB 16 under the modified transition approach, without having to remeasure those amounts.