Naz Randeria, Managing Director of Reliance Auditing Services, discusses the Australian Accounting Standards Board’s new AASB 2018-8: Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities. The cost-saving benefit of this standard for clients in this sector is significant, she writes.
Charities and not-for-profits are created with a specific purpose in mind. These organisations use their funding to advance their purpose, which benefit millions of lives daily. Like any other entity, running these charities results in inevitable costs. These costs take valuable funds away from their core purpose. The obvious costs include administration and employee costs, but there is also the cost to comply with reporting obligations.
To keep overheads to a minimum, it is not uncommon for some to take advantage of offers from organisations or local councils to provide them with premises on a lease that is significantly below market terms and conditions. These leases enable charities to keep their costs down and are referred to as peppercorn leases. Peppercorn leases are generally leases with a nil or nominal lease payment, however, they also include lease payments that are more than nominal but significantly below market value.
In 2016, the Australian Accounting Standards Board (AASB) issued two new accounting standards, AASB 16 Leases and AASB 1058 Income of Not-for-Profit Entities. Both of these new accounting standards have an effective date for all not-for-profit entities, with an annual reporting period which began on or after 1 January, 2019.
The application of these new standards requires not-for-profit entities to measure right-of-use assets at initial recognition at fair value in respect of any peppercorn leases. This is a significant change in accounting treatment for these peppercorn leases which will have a significant impact on not-for-profit entities.
As a practical example, while preparing the impact of this new standard, one of our not-for-profit clients realised that they had in excess of 70 peppercorn leases. This meant that they had to go through a process of reviewing and classifying each of the lease agreements, and assessing the fair value in accordance with the accounting standards to determine the impact of the new accounting standard, AASB 16.
In December, the AASB issued Accounting Standard AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities. The ED provides an option for not-for-profit entities to measure right-of-use assets at initial recognition for peppercorn leases either at cost, in accordance with AASB 16 paragraphs 23-25, or at fair value, in accordance with AASB 16 paragraph Aus25.1.
In accordance with the changes to the measurement, the standard also proposes additional disclosure requirements in the financial statements. This will ensure users understand the effect on the financial position, financial performance and cash flows of the entity arising from peppercorn leases, when the entity elects to measure the right-of-use asset at initial measurement at cost, rather than at fair value.
The cost-saving benefit of this standard for clients will be significant. Organisations can avoid obtaining valuations to determine the fair value when they adopt AASB 16. The money saved from this can go towards their core purpose.
The financial reporting threshold for not-for-profit sector entities may be revised as a result of ACNC Legislative Review recommendations. This ED will pre-empt entities at the lower level of the reporting threshold, who might not be required to apply AASB 1058 and AASB 16 in future, from incurring costs in measuring right-of-use assets at initial recognition at fair value in the interim period.
Read the full details of AASB 2018-8: Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities here.
Naz Randeria established Reliance Auditing Services almost a decade ago. She has more than 20 years’ experience in the accounting profession gained in working for one of the largest accounting firms in the world, prior to establishing Reliance Auditing Services. Naz regularly presents at accounting conferences and SMSF association State Chapter events and enjoys sharing her knowledge and experience with both her clients and her professional colleagues. Naz holds the following qualifications: ASIC registered SMSF Auditor, SMSF Specialist Auditor (SSAud), Registered Company Auditor, Chartered Accountant from Chartered Accountants Australia & New Zealand, Certified Public Accountant from the Delaware State Board of Accountancy USA, Chartered Accountant from the Institute of Chartered Accountants of India, Bachelor of Commerce (Major in Accounting and Finance). Naz is a member of the following professional organisations: Self-Managed Super Fund Association (SMSFA), Chartered Accountants Australia & New Zealand (CAANZ) and National Tax and Accountants’ Association (NTAA). Contact Naz at [email protected] or connect with Reliance Auditing Services via LinkedIn