90 A lessor shall disclose the following amounts for the reporting period:
(a) for finance leases:
(i) selling profit or loss;
(ii) finance income on the net investment in the lease; and
(iii) income relating to variable lease payments not included in the measurement of the net investment in the lease.
(b) for operating leases, lease income, separately disclosing income relating to variable lease payments that do not depend on an index or a rate.
91 A lessor shall provide the disclosures specified in paragraph 90 in a tabular format, unless another format is more appropriate.
92 A lessor shall disclose additional qualitative and quantitative information about its leasing activities necessary to meet the disclosure objective in paragraph 89. This additional information includes, but is not limited to, information that helps users of financial statements to assess:
(a) the nature of the lessor’s leasing activities; and
(b) how the lessor manages the risk associated with any rights it retains in underlying assets. In particular, a lessor shall disclose its risk management strategy for the rights it retains in underlying assets, including any means by which the lessor reduces that risk. Such means may include, for example, buy-back agreements, residual value guarantees or variable lease payments for use in excess of specified limits.
93 A lessor shall provide a qualitative and quantitative explanation of the significant changes in the carrying amount of the net investment in finance leases.
94 A lessor shall disclose a maturity analysis of the lease payments receivable, showing the undiscounted lease payments to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. A lessor shall reconcile the undiscounted lease payments to the net investment in the lease. The reconciliation shall identify the unearned finance income relating to the lease payments receivable and any discounted unguaranteed residual value.
95 For items of property, plant and equipment subject to an operating lease, a lessor shall apply the disclosure requirements of AASB 116. In applying the disclosure requirements in AASB 116, a lessor shall disaggregate each class of property, plant and equipment into assets subject to operating leases and assets not subject to operating leases. Accordingly, a lessor shall provide the disclosures required by AASB 116 for assets subject to an operating lease (by class of underlying asset) separately from owned assets held and used by the lessor.
96 A lessor shall apply the disclosure requirements in AASB 136, AASB 138, AASB 140 and AASB 141 for assets subject to operating leases.
97 A lessor shall disclose a maturity analysis of lease payments, showing the undiscounted lease payments to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
Sale and leaseback transactions
98 If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor, both the seller-lessee and the buyer-lessor shall account for the transfer contract and the lease applying paragraphs 99–103.
Assessing whether the transfer of the asset is a sale
99 An entity shall apply the requirements for determining when a performance obligation is satisfied in AASB 15 to determine whether the transfer of an asset is accounted for as a sale of that asset.
Transfer of the asset is a sale
100 If the transfer of an asset by the seller-lessee satisfies the requirements of AASB 15 to be accounted for as a sale of the asset:
(a) the seller-lessee shall measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, the seller-lessee shall recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.
(b) the buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the lease applying the lessor accounting requirements in this Standard.
101 If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if the payments for the lease are not at market rates, an entity shall make the following adjustments to measure the sale proceeds at fair value:
(a) any below-market terms shall be accounted for as a prepayment of lease payments; and
(b) any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the seller-lessee.
102 The entity shall measure any potential adjustment required by paragraph 101 on the basis of the more readily determinable of:
(a) the difference between the fair value of the consideration for the sale and the fair value of the asset; and
(b) the difference between the present value of the contractual payments for the lease and the present value of payments for the lease at market rates.
102A After the commencement date, the seller-lessee shall apply paragraphs 29–35 to the right-of-use asset arising from the leaseback and paragraphs 36–46 to the lease liability arising from the leaseback. In applying paragraphs 36–46, the seller-lessee shall determine ‘lease payments’ or ‘revised lease payments’ in a way that the seller-lessee would not recognise any amount of the gain or loss that relates to the right of use retained by the seller-lessee. Applying the requirements in this paragraph does not prevent the seller-lessee from recognising in profit or loss any gain or loss relating to the partial or full termination of a lease as required by paragraph 46(a).
Transfer of the asset is not a sale
103 If the transfer of an asset by the seller-lessee does not satisfy the requirements of AASB 15 to be accounted for as a sale of the asset:
(a) the seller-lessee shall continue to recognise the transferred asset and shall recognise a financial liability equal to the transfer proceeds. It shall account for the financial liability applying AASB 9.
(b) the buyer-lessor shall not recognise the transferred asset and shall recognise a financial asset equal to the transfer proceeds. It shall account for the financial asset applying AASB 9.
Commencement of the legislative instrument
Aus103.1 [Repealed]
Temporary exception arising from interest rate benchmark reform
104 A lessee shall apply paragraphs 105–106 to all lease modifications that change the basis for determining future lease payments as a result of interest rate benchmark reform (see paragraphs 5.4.6 and 5.4.8 of AASB 9). These paragraphs apply only to such lease modifications. For this purpose, the term ‘interest rate benchmark reform’ refers to the market-wide reform of an interest rate benchmark as described in paragraph 6.8.2 of AASB 9.
105 As a practical expedient, a lessee shall apply paragraph 42 to account for a lease modification required by interest rate benchmark reform. This practical expedient applies only to such modifications. For this purpose, a lease modification is required by interest rate benchmark reform if, and only if, both of these conditions are met:
(a) the modification is necessary as a direct consequence of interest rate benchmark reform; and
(b) the new basis for determining the lease payments is economically equivalent to the previous basis (ie the basis immediately preceding the modification).
106 However, if lease modifications are made in addition to those lease modifications required by interest rate benchmark reform, a lessee shall apply the applicable requirements in this Standard to account for all lease modifications made at the same time, including those required by interest rate benchmark reform.
Appendix A Defined terms
This appendix is an integral part of the Standard.
| commencement date of the lease (commencement date) | The date on which a lessor makes an underlying asset available for use by a lessee. |
| economic life | Either the period over which an asset is expected to be economically usable by one or more users or the number of production or similar units expected to be obtained from an asset by one or more users. |
| effective date of the modification | The date when both parties agree to a lease modification. |
| fair value | For the purpose of applying the lessor accounting requirements in this Standard, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. |
| finance lease | A lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset. |
| fixed payments | Payments made by a lessee to a lessor for the right to use an underlying asset during the lease term, excluding variable lease payments. |
| gross investment in the lease | The sum of:<br>(a) the lease payments receivable by a lessor under a finance lease; and<br>(b) any unguaranteed residual value accruing to the lessor. |
| inception date of the lease (inception date) | The earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease. |
| initial direct costs | Incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, except for such costs incurred by a manufacturer or dealer lessor in connection with a finance lease. |
| interest rate implicit in the lease | The rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor. |
| lease | A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. |
| lease incentives | Payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee. |
| lease modification | A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term). |
| lease payments | Payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term, comprising the following:<br>(a) fixed payments (including in-substance fixed payments), less any lease incentives;<br>(b) variable lease payments that depend on an index or a rate;<br>(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and<br>(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.<br>For the lessee, lease payments also include amounts expected to be payable by the lessee under residual value guarantees. Lease payments do not include payments allocated to non-lease components of a contract, unless the lessee elects to combine non-lease components with a lease component and to account for them as a single lease component.<br>For the lessor, lease payments also include any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee. Lease payments do not include payments allocated to non-lease components. |
| lease term | The non-cancellable period for which a lessee has the right to use an underlying asset, together with both:<br>(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and<br>(b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. |
| lessee | An entity that obtains the right to use an underlying asset for a period of time in exchange for consideration. |
| lessee’s incremental borrowing rate | The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. |
| lessor | An entity that provides the right to use an underlying asset for a period of time in exchange for consideration. |
| net investment in the lease | The gross investment in the lease discounted at the interest rate implicit in the lease. |
| operating lease | A lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. |
| optional lease payments | Payments to be made by a lessee to a lessor for the right to use an underlying asset during periods covered by an option to extend or terminate a lease that are not included in the lease term. |
| period of use | The total period of time that an asset is used to fulfil a contract with a customer (including any non-consecutive periods of time). |
| residual value guarantee | A guarantee made to a lessor by a party unrelated to the lessor that the value (or part of the value) of an underlying asset at the end of a lease will be at least a specified amount. |
| right-of-use asset | An asset that represents a lessee’s right to use an underlying asset for the lease term. |
| short-term lease | A lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease. |
| sublease | A transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head lessor and lessee remains in effect. |
| underlying asset | An asset that is the subject of a lease, for which the right to use that asset has been provided by a lessor to a lessee. |
| unearned finance income | The difference between:<br>(a) the gross investment in the lease; and<br>(b) the net investment in the lease. |
| unguaranteed residual value | That portion of the residual value of the underlying asset, the realisation of which by a lessor is not assured or is guaranteed solely by a party related to the lessor. |
| variable lease payments | The portion of payments made by a lessee to a lessor for the right to use an underlying asset during the lease term that varies because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. |
Terms defined in other Standards and used in this Standard with the same meaning
| contract | An agreement between two or more parties that creates enforceable rights and obligations. |
| useful life | The period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from an asset by an entity. |
Appendix B Application guidance
This appendix is an integral part of the Standard. It describes the application of paragraphs 1–103 and has the same authority as the other parts of the Standard.
Portfolio application
B1 This Standard specifies the accounting for an individual lease. However, as a practical expedient, an entity may apply this Standard to a portfolio of leases with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this Standard to the portfolio would not differ materially from applying this Standard to the individual leases within that portfolio. If accounting for a portfolio, an entity shall use estimates and assumptions that reflect the size and composition of the portfolio.
Combination of contracts
B2 In applying this Standard, an entity shall combine two or more contracts entered into at or near the same time with the same counterparty (or related parties of the counterparty), and account for the contracts as a single contract if one or more of the following criteria are met:
(a) the contracts are negotiated as a package with an overall commercial objective that cannot be understood without considering the contracts together;
(b) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or
(c) the rights to use underlying assets conveyed in the contracts (or some rights to use underlying assets conveyed in each of the contracts) form a single lease component as described in paragraph B32.
Recognition exemption: leases for which the underlying asset is of low value (paragraphs 5–8)
B3 Except as specified in paragraph B7, this Standard permits a lessee to apply paragraph 6 to account for leases for which the underlying asset is of low value. A lessee shall assess the value of an underlying asset based on the value of the asset when it is new, regardless of the age of the asset being leased.
B4 The assessment of whether an underlying asset is of low value is performed on an absolute basis. Leases of low-value assets qualify for the accounting treatment in paragraph 6 regardless of whether those leases are material to the lessee. The assessment is not affected by the size, nature or circumstances of the lessee. Accordingly, different lessees are expected to reach the same conclusions about whether a particular underlying asset is of low value.
B5 An underlying asset can be of low value only if:
(a) the lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee; and
(b) the underlying asset is not highly dependent on, or highly interrelated with, other assets.
B6 A lease of an underlying asset does not qualify as a lease of a low-value asset if the nature of the asset is such that, when new, the asset is typically not of low value. For example, leases of cars would not qualify as leases of low-value assets because a new car would typically not be of low value.
B7 If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value asset.
B8 Examples of low-value underlying assets can include tablet and personal computers, small items of office furniture and telephones.
Identifying a lease (paragraphs 9–11)
B9 To assess whether a contract conveys the right to control the use of an identified asset (see paragraphs B13–B20) for a period of time, an entity shall assess whether, throughout the period of use, the customer has both of the following:
(a) the right to obtain substantially all of the economic benefits from use of the identified asset (as described in paragraphs B21–B23); and
(b) the right to direct the use of the identified asset (as described in paragraphs B24–B30).
B10 If the customer has the right to control the use of an identified asset for only a portion of the term of the contract, the contract contains a lease for that portion of the term.
B11 A contract to receive goods or services may be entered into by a joint arrangement, or on behalf of a joint arrangement, as defined in AASB 11 Joint Arrangements. In this case, the joint arrangement is considered to be the customer in the contract. Accordingly, in assessing whether such a contract contains a lease, an entity shall assess whether the joint arrangement has the right to control the use of an identified asset throughout the period of use.
B12 An entity shall assess whether a contract contains a lease for each potential separate lease component. Refer to paragraph B32 for guidance on separate lease components.
Identified asset
B13 An asset is typically identified by being explicitly specified in a contract. However, an asset can also be identified by being implicitly specified at the time that the asset is made available for use by the customer.
Substantive substitution rights
B14 Even if an asset is specified, a customer does not have the right to use an identified asset if the supplier has the substantive right to substitute the asset throughout the period of use. A supplier’s right to substitute an asset is substantive only if both of the following conditions exist:
(a) the supplier has the practical ability to substitute alternative assets throughout the period of use (for example, the customer cannot prevent the supplier from substituting the asset and alternative assets are readily available to the supplier or could be sourced by the supplier within a reasonable period of time); and
(b) the supplier would benefit economically from the exercise of its right to substitute the asset (ie the economic benefits associated with substituting the asset are expected to exceed the costs associated with substituting the asset).
B15 If the supplier has a right or an obligation to substitute the asset only on or after either a particular date or the occurrence of a specified event, the supplier’s substitution right is not substantive because the supplier does not have the practical ability to substitute alternative assets throughout the period of use.
B16 An entity’s evaluation of whether a supplier’s substitution right is substantive is based on facts and circumstances at inception of the contract and shall exclude consideration of future events that, at inception of the contract, are not considered likely to occur. Examples of future events that, at inception of the contract, would not be considered likely to occur and, thus, should be excluded from the evaluation include:
(a) an agreement by a future customer to pay an above market rate for use of the asset;
(b) the introduction of new technology that is not substantially developed at inception of the contract;
(c) a substantial difference between the customer’s use of the asset, or the performance of the asset, and the use or performance considered likely at inception of the contract; and
(d) a substantial difference between the market price of the asset during the period of use, and the market price considered likely at inception of the contract.
B17 If the asset is located at the customer’s premises or elsewhere, the costs associated with substitution are generally higher than when located at the supplier’s premises and, therefore, are more likely to exceed the benefits associated with substituting the asset.
B18 The supplier’s right or obligation to substitute the asset for repairs and maintenance, if the asset is not operating properly or if a technical upgrade becomes available does not preclude the customer from having the right to use an identified asset.
B19 If the customer cannot readily determine whether the supplier has a substantive substitution right, the customer shall presume that any substitution right is not substantive.
Portions of assets
B20 A capacity portion of an asset is an identified asset if it is physically distinct (for example, a floor of a building). A capacity or other portion of an asset that is not physically distinct (for example, a capacity portion of a fibre optic cable) is not an identified asset, unless it represents substantially all of the capacity of the asset and thereby provides the customer with the right to obtain substantially all of the economic benefits from use of the asset.
Right to obtain economic benefits from use
B21 To control the use of an identified asset, a customer is required to have the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use (for example, by having exclusive use of the asset throughout that period). A customer can obtain economic benefits from use of an asset directly or indirectly in many ways, such as by using, holding or sub-leasing the asset. The economic benefits from use of an asset include its primary output and by-products (including potential cash flows derived from these items), and other economic benefits from using the asset that could be realised from a commercial transaction with a third party.
B22 When assessing the right to obtain substantially all of the economic benefits from use of an asset, an entity shall consider the economic benefits that result from use of the asset within the defined scope of a customer’s right to use the asset (see paragraph B30). For example:
(a) if a contract limits the use of a motor vehicle to only one particular territory during the period of use, an entity shall consider only the economic benefits from use of the motor vehicle within that territory, and not beyond.
(b) if a contract specifies that a customer can drive a motor vehicle only up to a particular number of miles during the period of use, an entity shall consider only the economic benefits from use of the motor vehicle for the permitted mileage, and not beyond.
B23 If a contract requires a customer to pay the supplier or another party a portion of the cash flows derived from use of an asset as consideration, those cash flows paid as consideration shall be considered to be part of the economic benefits that the customer obtains from use of the asset. For example, if the customer is required to pay the supplier a percentage of sales from use of retail space as consideration for that use, that requirement does not prevent the customer from having the right to obtain substantially all of the economic benefits from use of the retail space. This is because the cash flows arising from those sales are considered to be economic benefits that the customer obtains from use of the retail space, a portion of which it then pays to the supplier as consideration for the right to use that space.
Right to direct the use
B24 A customer has the right to direct the use of an identified asset throughout the period of use only if either:
(a) the customer has the right to direct how and for what purpose the asset is used throughout the period of use (as described in paragraphs B25–B30); or
(b) the relevant decisions about how and for what purpose the asset is used are predetermined and:
(i) the customer has the right to operate the asset (or to direct others to operate the asset in a manner that it determines) throughout the period of use, without the supplier having the right to change those operating instructions; or
(ii) the customer designed the asset (or specific aspects of the asset) in a way that predetermines how and for what purpose the asset will be used throughout the period of use.
How and for what purpose the asset is used
B25 A customer has the right to direct how and for what purpose the asset is used if, within the scope of its right of use defined in the contract, it can change how and for what purpose the asset is used throughout the period of use. In making this assessment, an entity considers the decision-making rights that are most relevant to changing how and for what purpose the asset is used throughout the period of use. Decision-making rights are relevant when they affect the economic benefits to be derived from use. The decision-making rights that are most relevant are likely to be different for different contracts, depending on the nature of the asset and the terms and conditions of the contract.
B26 Examples of decision-making rights that, depending on the circumstances, grant the right to change how and for what purpose the asset is used, within the defined scope of the customer’s right of use, include:
(a) rights to change the type of output that is produced by the asset (for example, to decide whether to use a shipping container to transport goods or for storage, or to decide upon the mix of products sold from retail space);
(b) rights to change when the output is produced (for example, to decide when an item of machinery or a power plant will be used);
(c) rights to change where the output is produced (for example, to decide upon the destination of a truck or a ship, or to decide where an item of equipment is used); and
(d) rights to change whether the output is produced, and the quantity of that output (for example, to decide whether to produce energy from a power plant and how much energy to produce from that power plant).
B27 Examples of decision-making rights that do not grant the right to change how and for what purpose the asset is used include rights that are limited to operating or maintaining the asset. Such rights can be held by the customer or the supplier. Although rights such as those to operate or maintain an asset are often essential to the efficient use of an asset, they are not rights to direct how and for what purpose the asset is used and are often dependent on the decisions about how and for what purpose the asset is used. However, rights to operate an asset may grant the customer the right to direct the use of the asset if the relevant decisions about how and for what purpose the asset is used are predetermined (see paragraph B24(b)(i)).
Decisions determined during and before the period of use
B28 The relevant decisions about how and for what purpose the asset is used can be predetermined in a number of ways. For example, the relevant decisions can be predetermined by the design of the asset or by contractual restrictions on the use of the asset.
B29 In assessing whether a customer has the right to direct the use of an asset, an entity shall consider only rights to make decisions about the use of the asset during the period of use, unless the customer designed the asset (or specific aspects of the asset) as described in paragraph B24(b)(ii). Consequently, unless the conditions in paragraph B24(b)(ii) exist, an entity shall not consider decisions that are predetermined before the period of use. For example, if a customer is able only to specify the output of an asset before the period of use, the customer does not have the right to direct the use of that asset. The ability to specify the output in a contract before the period of use, without any other decision-making rights relating to the use of the asset, gives a customer the same rights as any customer that purchases goods or services.
Protective rights
B30 A contract may include terms and conditions designed to protect the supplier’s interest in the asset or other assets, to protect its personnel, or to ensure the supplier’s compliance with laws or regulations. These are examples of protective rights. For example, a contract may (i) specify the maximum amount of use of an asset or limit where or when the customer can use the asset, (ii) require a customer to follow particular operating practices, or (iii) require a customer to inform the supplier of changes in how an asset will be used. Protective rights typically define the scope of the customer’s right of use but do not, in isolation, prevent the customer from having the right to direct the use of an asset.
B31 The following flowchart may assist entities in making the assessment of whether a contract is, or contains, a lease.
Decision tree to assist in applying the definition of a lease
Assessing whether a contract is, or contains, a lease.
Separating components of a contract (paragraphs 12–17)
B32 The right to use an underlying asset is a separate lease component if both:
(a) the lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available to the lessee. Readily available resources are goods or services that are sold or leased separately (by the lessor or other suppliers) or resources that the lessee has already obtained (from the lessor or from other transactions or events); and
(b) the underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying assets in the contract. For example, the fact that a lessee could decide not to lease the underlying asset without significantly affecting its rights to use other underlying assets in the contract might indicate that the underlying asset is not highly dependent on, or highly interrelated with, those other underlying assets.
B33 A contract may include an amount payable by the lessee for activities and costs that do not transfer a good or service to the lessee. For example, a lessor may include in the total amount payable a charge for administrative tasks, or other costs it incurs associated with the lease, that do not transfer a good or service to the lessee. Such amounts payable do not give rise to a separate component of the contract, but are considered to be part of the total consideration that is allocated to the separately identified components of the contract.
Lease term (paragraphs 18–21)
B34 In determining the lease term and assessing the length of the non-cancellable period of a lease, an entity shall apply the definition of a contract and determine the period for which the contract is enforceable. A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty.
B35 If only a lessee has the right to terminate a lease, that right is considered to be an option to terminate the lease available to the lessee that an entity considers when determining the lease term. If only a lessor has the right to terminate a lease, the non-cancellable period of the lease includes the period covered by the option to terminate the lease.
B36 The lease term begins at the commencement date and includes any rent-free periods provided to the lessee by the lessor.
B37 At the commencement date, an entity assesses whether the lessee is reasonably certain to exercise an option to extend the lease or to purchase the underlying asset, or not to exercise an option to terminate the lease. The entity considers all relevant facts and circumstances that create an economic incentive for the lessee to exercise, or not to exercise, the option, including any expected changes in facts and circumstances from the commencement date until the exercise date of the option. Examples of factors to consider include, but are not limited to:
(a) contractual terms and conditions for the optional periods compared with market rates, such as:
(i) the amount of payments for the lease in any optional period;
(ii) the amount of any variable payments for the lease or other contingent payments, such as payments resulting from termination penalties and residual value guarantees; and
(iii) the terms and conditions of any options that are exercisable after initial optional periods (for example, a purchase option that is exercisable at the end of an extension period at a rate that is currently below market rates).
(b) significant leasehold improvements undertaken (or expected to be undertaken) over the term of the contract that are expected to have significant economic benefit for the lessee when the option to extend or terminate the lease, or to purchase the underlying asset, becomes exercisable;
(c) costs relating to the termination of the lease, such as negotiation costs, relocation costs, costs of identifying another underlying asset suitable for the lessee’s needs, costs of integrating a new asset into the lessee’s operations, or termination penalties and similar costs, including costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location;
(d) the importance of that underlying asset to the lessee’s operations, considering, for example, whether the underlying asset is a specialised asset, the location of the underlying asset and the availability of suitable alternatives; and
(e) conditionality associated with exercising the option (ie when the option can be exercised only if one or more conditions are met), and the likelihood that those conditions will exist.
B38 An option to extend or terminate a lease may be combined with one or more other contractual features (for example, a residual value guarantee) such that the lessee guarantees the lessor a minimum or fixed cash return that is substantially the same regardless of whether the option is exercised. In such cases, and notwithstanding the guidance on in-substance fixed payments in paragraph B42, an entity shall assume that the lessee is reasonably certain to exercise the option to extend the lease, or not to exercise the option to terminate the lease.
B39 The shorter the non-cancellable period of a lease, the more likely a lessee is to exercise an option to extend the lease or not to exercise an option to terminate the lease. This is because the costs associated with obtaining a replacement asset are likely to be proportionately higher the shorter the non-cancellable period.
B40 A lessee’s past practice regarding the period over which it has typically used particular types of assets (whether leased or owned), and its economic reasons for doing so, may provide information that is helpful in assessing whether the lessee is reasonably certain to exercise, or not to exercise, an option. For example, if a lessee has typically used particular types of assets for a particular period of time or if the lessee has a practice of frequently exercising options on leases of particular types of underlying assets, the lessee shall consider the economic reasons for that past practice in assessing whether it is reasonably certain to exercise an option on leases of those assets.
B41 Paragraph 20 specifies that, after the commencement date, a lessee reassesses the lease term upon the occurrence of a significant event or a significant change in circumstances that is within the control of the lessee and affects whether the lessee is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term. Examples of significant events or changes in circumstances include:
(a) significant leasehold improvements not anticipated at the commencement date that are expected to have significant economic benefit for the lessee when the option to extend or terminate the lease, or to purchase the underlying asset, becomes exercisable;
(b) a significant modification to, or customisation of, the underlying asset that was not anticipated at the commencement date;
(c) the inception of a sublease of the underlying asset for a period beyond the end of the previously determined lease term; and
(d) a business decision of the lessee that is directly relevant to exercising, or not exercising, an option (for example, a decision to extend the lease of a complementary asset, to dispose of an alternative asset or to dispose of a business unit within which the right-of-use asset is employed).
In-substance fixed lease payments (paragraphs 27(a), 36(c) and 70(a))
B42 Lease payments include any in-substance fixed lease payments. In-substance fixed lease payments are payments that may, in form, contain variability but that, in substance, are unavoidable. In-substance fixed lease payments exist, for example, if:
(a) payments are structured as variable lease payments, but there is no genuine variability in those payments. Those payments contain variable clauses that do not have real economic substance. Examples of those types of payments include:
(i) payments that must be made only if an asset is proven to be capable of operating during the lease, or only if an event occurs that has no genuine possibility of not occurring; or
(ii) payments that are initially structured as variable lease payments linked to the use of the underlying asset but for which the variability will be resolved at some point after the commencement date so that the payments become fixed for the remainder of the lease term. Those payments become in-substance fixed payments when the variability is resolved.
(b) there is more than one set of payments that a lessee could make, but only one of those sets of payments is realistic. In this case, an entity shall consider the realistic set of payments to be lease payments.
(c) there is more than one realistic set of payments that a lessee could make, but it must make at least one of those sets of payments. In this case, an entity shall consider the set of payments that aggregates to the lowest amount (on a discounted basis) to be lease payments.
Lessee involvement with the underlying asset before the commencement date
Costs of the lessee relating to the construction or design of the underlying asset
B43 An entity may negotiate a lease before the underlying asset is available for use by the lessee. For some leases, the underlying asset may need to be constructed or redesigned for use by the lessee. Depending on the terms and conditions of the contract, a lessee may be required to make payments relating to the construction or design of the asset.
B44 If a lessee incurs costs relating to the construction or design of an underlying asset, the lessee shall account for those costs applying other applicable Standards, such as AASB 116. Costs relating to the construction or design of an underlying asset do not include payments made by the lessee for the right to use the underlying asset. Payments for the right to use an underlying asset are payments for a lease, regardless of the timing of those payments.
Legal title to the underlying asset
B45 A lessee may obtain legal title to an underlying asset before that legal title is transferred to the lessor and the asset is leased to the lessee. Obtaining legal title does not in itself determine how to account for the transaction.
B46 If the lessee controls (or obtains control of) the underlying asset before that asset is transferred to the lessor, the transaction is a sale and leaseback transaction that is accounted for applying paragraphs 98–103.
B47 However, if the lessee does not obtain control of the underlying asset before the asset is transferred to the lessor, the transaction is not a sale and leaseback transaction. For example, this may be the case if a manufacturer, a lessor and a lessee negotiate a transaction for the purchase of an asset from the manufacturer by the lessor, which is in turn leased to the lessee. The lessee may obtain legal title to the underlying asset before legal title transfers to the lessor. In this case, if the lessee obtains legal title to the underlying asset but does not obtain control of the asset before it is transferred to the lessor, the transaction is not accounted for as a sale and leaseback transaction, but as a lease.
Lessee disclosures (paragraph 59)
B48 In determining whether additional information about leasing activities is necessary to meet the disclosure objective in paragraph 51, a lessee shall consider:
(a) whether that information is relevant to users of financial statements. A lessee shall provide additional information specified in paragraph 59 only if that information is expected to be relevant to users of financial statements. In this context, this is likely to be the case if it helps those users to understand:
(i) the flexibility provided by leases. Leases may provide flexibility if, for example, a lessee can reduce its exposure by exercising termination options or renewing leases with favourable terms and conditions.
(ii) restrictions imposed by leases. Leases may impose restrictions, for example, by requiring the lessee to maintain particular financial ratios.
(iii) sensitivity of reported information to key variables. Reported information may be sensitive to, for example, future variable lease payments.
(iv) exposure to other risks arising from leases.
(v) deviations from industry practice. Such deviations may include, for example, unusual or unique lease terms and conditions that affect a lessee’s lease portfolio.
(b) whether that information is apparent from information either presented in the primary financial statements or disclosed in the notes. A lessee need not duplicate information that is already presented elsewhere in the financial statements.
B49 Additional information relating to variable lease payments that, depending on the circumstances, may be needed to satisfy the disclosure objective in paragraph 51 could include information that helps users of financial statements to assess, for example:
(a) the lessee’s reasons for using variable lease payments and the prevalence of those payments;
(b) the relative magnitude of variable lease payments to fixed payments;
(c) key variables upon which variable lease payments depend and how payments are expected to vary in response to changes in those key variables; and
(d) other operational and financial effects of variable lease payments.
B50 Additional information relating to extension options or termination options that, depending on the circumstances, may be needed to satisfy the disclosure objective in paragraph 51 could include information that helps users of financial statements to assess, for example:
(a) the lessee’s reasons for using extension options or termination options and the prevalence of those options;
(b) the relative magnitude of optional lease payments to lease payments;
(c) the prevalence of the exercise of options that were not included in the measurement of lease liabilities; and
(d) other operational and financial effects of those options.
B51 Additional information relating to residual value guarantees that, depending on the circumstances, may be needed to satisfy the disclosure objective in paragraph 51 could include information that helps users of financial statements to assess, for example:
(a) the lessee’s reasons for providing residual value guarantees and the prevalence of those guarantees;
(b) the magnitude of a lessee’s exposure to residual value risk;
(c) the nature of underlying assets for which those guarantees are provided; and
(d) other operational and financial effects of those guarantees.
B52 Additional information relating to sale and leaseback transactions that, depending on the circumstances, may be needed to satisfy the disclosure objective in paragraph 51 could include information that helps users of financial statements to assess, for example:
(a) the lessee’s reasons for sale and leaseback transactions and the prevalence of those transactions;
(b) key terms and conditions of individual sale and leaseback transactions;
(c) payments not included in the measurement of lease liabilities; and
(d) the cash flow effect of sale and leaseback transactions in the reporting period.
Lessor lease classification (paragraphs 61–66)
B53 The classification of leases for lessors in this Standard is based on the extent to which the lease transfers the risks and rewards incidental to ownership of an underlying asset. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the underlying asset’s economic life and of gain from appreciation in value or realisation of a residual value.
B54 A lease contract may include terms and conditions to adjust the lease payments for particular changes that occur between the inception date and the commencement date (such as a change in the lessor’s cost of the underlying asset or a change in the lessor’s cost of financing the lease). In that case, for the purposes of classifying the lease, the effect of any such changes shall be deemed to have taken place at the inception date.
B55 When a lease includes both land and buildings elements, a lessor shall assess the classification of each element as a finance lease or an operating lease separately applying paragraphs 62–66 and B53–B54. In determining whether the land element is an operating lease or a finance lease, an important consideration is that land normally has an indefinite economic life.
B56 Whenever necessary in order to classify and account for a lease of land and buildings, a lessor shall allocate lease payments (including any lump-sum upfront payments) between the land and the buildings elements in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception date. If the lease payments cannot be allocated reliably between these two elements, the entire lease is classified as a finance lease, unless it is clear that both elements are operating leases, in which case the entire lease is classified as an operating lease.
B57 For a lease of land and buildings in which the amount for the land element is immaterial to the lease, a lessor may treat the land and buildings as a single unit for the purpose of lease classification and classify it as a finance lease or an operating lease applying paragraphs 62–66 and B53–B54. In such a case, a lessor shall regard the economic life of the buildings as the economic life of the entire underlying asset.
Sublease classification
B58 In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows:
(a) if the head lease is a short-term lease that the entity, as a lessee, has accounted for applying paragraph 6, the sublease shall be classified as an operating lease.
(b) otherwise, the sublease shall be classified by reference to the right-of-use asset arising from the head lease, rather than by reference to the underlying asset (for example, the item of property, plant or equipment that is the subject of the lease).
Appendix C Effective date and transition
This appendix is an integral part of the Standard and has the same authority as the other parts of the Standard.
Effective date
C1 An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted for entities that apply AASB 15 Revenue from Contracts with Customers at or before the date of initial application of this Standard. If an entity applies this Standard earlier, it shall disclose that fact.
C1A AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions, issued in June 2020, added paragraphs 46A, 46B, 60A, C20A and C20B. A lessee shall apply that amendment for annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted, including in financial statements not authorised for issue at the date AASB 2020-4 was issued.
C1B AASB 2020-8 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2, which amended AASB 4, AASB 7, AASB 9, AASB 16 and AASB 139, issued in September 2020, added paragraphs 104–106 and C20C–C20D. An entity shall apply these amendments for annual reporting periods beginning on or after 1 January 2021. Earlier application is permitted. If an entity applies these amendments for an earlier period, it shall disclose that fact.
C1C AASB 2021-3 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions beyond 30 June 2021, issued in April 2021, amended paragraph 46B and added paragraphs C20BA–C20BC. A lessee shall apply that amendment for annual reporting periods beginning on or after 1 April 2021. Earlier application is permitted, including in financial statements not authorised for issue at the date AASB 2021-3 was issued.
C1D AASB 2022-5 Amendments to Australian Accounting Standards – Lease Liability in a Sale and Leaseback, issued in November 2022, amended paragraph C2 and added paragraphs 102A and C20E. A seller-lessee shall apply these amendments for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted. If a seller-lessee applies these amendments for an earlier period, it shall disclose that fact.
Transition
C2 For the purposes of the requirements in paragraphs C1–C20E, the date of initial application is the beginning of the annual reporting period in which an entity first applies this Standard.
Definition of a lease
C3 As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, the entity is permitted:
(a) to apply this Standard to contracts that were previously identified as leases applying AASB 117 Leases and Interpretation 4 Determining whether an Arrangement contains a Lease. The entity shall apply the transition requirements in paragraphs C5–C18 to those leases.
(b) not to apply this Standard to contracts that were not previously identified as containing a lease applying AASB 117 and Interpretation 4.
C4 If an entity chooses the practical expedient in paragraph C3, it shall disclose that fact and apply the practical expedient to all of its contracts. As a result, the entity shall apply the requirements in paragraphs 9–11 only to contracts entered into (or changed) on or after the date of initial application.
AusC4.1 Notwithstanding paragraphs C3 and C4, a public sector entity is not required to apply this Standard to assets that would be classified as service concession assets in accordance with AASB 1059 Service Concession Arrangements: Grantors. The entity shall continue to apply its existing accounting policy to these assets until AASB 1059 is applied.
Lessees
C5 A lessee shall apply this Standard to its leases either:
(a) retrospectively to each prior reporting period presented applying AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors; or
(b) retrospectively with the cumulative effect of initially applying the Standard recognised at the date of initial application in accordance with paragraphs C7–C13.
AusC5.1 Not-for-profit entities electing to measure a class of right-of-use assets at initial recognition at fair value and applying this Standard retrospectively in accordance with paragraph C5(a) to leases that at inception had significantly below-market terms and conditions principally to enable the entity to further its objectives shall:
(a) measure each right-of-use asset in the class at fair value;
(b) measure the lease liability in accordance with this Standard; and
(c) recognise any related items in accordance with paragraph 9 of AASB 1058 Income of Not-for-Profit Entities.
Any income arising shall be recognised as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the earliest prior period presented.
AusC5.2 Notwithstanding paragraph AusC5.1, not-for-profit entities that adopted AASB 1058 in an earlier reporting period are not required to remeasure the fair value of the right-of-use asset arising from leases that (1) at inception had significantly below-market terms and conditions principally to enable the entity to further its objectives and (2) were previously classified as finance leases applying AASB 117. Instead, the entity shall transition those leases in accordance with paragraph C11, regardless of which transition option in paragraph C5 is applied.
C6 A lessee shall apply the election described in paragraph C5 consistently to all of its leases in which it is a lessee.
C7 If a lessee elects to apply this Standard in accordance with paragraph C5(b), the lessee shall not restate comparative information. Instead, the lessee shall recognise the cumulative effect of initially applying this Standard as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application.
Leases previously classified as operating leases
C8 If a lessee elects to apply this Standard in accordance with paragraph C5(b), the lessee shall:
(a) recognise a lease liability at the date of initial application for leases previously classified as an operating lease applying AASB 117. The lessee shall measure that lease liability at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application.
(b) recognise a right-of-use asset at the date of initial application for leases previously classified as an operating lease applying AASB 117. The lessee shall choose, on a lease-by-lease basis, to measure that right-of-use asset at either:
(i) its carrying amount as if the Standard had been applied since the commencement date, but discounted using the lessee’s incremental borrowing rate at the date of initial application; or
(ii) an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of initial application.
(c) apply AASB 136 Impairment of Assets to right-of-use assets at the date of initial application, unless the lessee applies the practical expedient in paragraph C10(b).
AusC8.1 Not-for-profit entities electing to measure a class of right-of-use assets at initial recognition at fair value and applying this Standard retrospectively in accordance with paragraph C5(b) to leases that (1) at inception had significantly below-market terms and conditions principally to enable the entity to further its objectives and (2) were previously classified as operating leases applying AASB 117 shall:
(a) notwithstanding paragraph C8(b), measure each right-of-use asset in the class at fair value at the date of initial application of this Standard;
(b) measure the lease liability in accordance with paragraph C8(a); and
(c) recognise any related items in accordance with paragraph 9 of AASB 1058.
Any income arising shall be recognised as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application of this Standard.
C9 Notwithstanding the requirements in paragraph C8, for leases previously classified as operating leases applying AASB 117, a lessee:
(a) is not required to make any adjustments on transition for leases for which the underlying asset is of low value (as described in paragraphs B3–B8) that will be accounted for applying paragraph 6. The lessee shall account for those leases applying this Standard from the date of initial application.
(b) is not required to make any adjustments on transition for leases previously accounted for as investment property using the fair value model in AASB 140 Investment Property. The lessee shall account for the right-of-use asset and the lease liability arising from those leases applying AASB 140 and this Standard from the date of initial application.
(c) shall measure the right-of-use asset at fair value at the date of initial application for leases previously accounted for as operating leases applying AASB 117 and that will be accounted for as investment property using the fair value model in AASB 140 from the date of initial application. The lessee shall account for the right-of-use asset and the lease liability arising from those leases applying AASB 140 and this Standard from the date of initial application.
C10 A lessee may use one or more of the following practical expedients when applying this Standard retrospectively in accordance with paragraph C5(b) to leases previously classified as operating leases applying AASB 117. A lessee is permitted to apply these practical expedients on a lease-by-lease basis:
(a) a lessee may apply a single discount rate to a portfolio of leases with reasonably similar characteristics (such as leases with a similar remaining lease term for a similar class of underlying asset in a similar economic environment).
(b) a lessee may rely on its assessment of whether leases are onerous applying AASB 137 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review. If a lessee chooses this practical expedient, the lessee shall adjust the right-of-use asset at the date of initial application by the amount of any provision for onerous leases recognised in the statement of financial position immediately before the date of initial application.
(c) a lessee may elect not to apply the requirements in paragraph C8 to leases for which the lease term ends within 12 months of the date of initial application. In this case, a lessee shall:
(i) account for those leases in the same way as short-term leases as described in paragraph 6; and
(ii) include the cost associated with those leases within the disclosure of short-term lease expense in the annual reporting period that includes the date of initial application.
(d) a lessee may exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application.
(e) a lessee may use hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease.
Leases previously classified as finance leases
C11 If a lessee elects to apply this Standard in accordance with paragraph C5(b), for leases that were classified as finance leases applying AASB 117, the carrying amount of the right-of-use asset and the lease liability at the date of initial application shall be the carrying amount of the lease asset and lease liability immediately before that date measured applying AASB 117. For those leases, a lessee shall account for the right-of-use asset and the lease liability applying this Standard from the date of initial application.
AusC11.1 Subject to paragraph AusC5.2 and notwithstanding paragraph C11, not-for-profit entities electing to measure a class of right-of-use assets at initial recognition at fair value and applying this Standard retrospectively in accordance with paragraph C5(b) to leases that (1) at inception had significantly below-market terms and conditions principally to enable the entity to further its objectives and (2) were previously classified as finance leases applying AASB 117 shall:
(a) measure each right-of-use asset in the class at fair value at the date of initial application of this Standard;
(b) measure the lease liability in accordance with this Standard; and
(c) recognise any related items in accordance with paragraph 9 of AASB 1058.
Any income arising shall be recognised as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application of this Standard.
C12 If a lessee elects to apply this Standard in accordance with paragraph C5(b), the lessee shall disclose information about initial application required by paragraph 28 of AASB 108, except for the information specified in paragraph 28(f) of AASB 108. Instead of the information specified in paragraph 28(f) of AASB 108, the lessee shall disclose:
(a) the weighted average lessee’s incremental borrowing rate applied to lease liabilities recognised in the statement of financial position at the date of initial application; and
(b) an explanation of any difference between:
(i) operating lease commitments disclosed applying AASB 117 at the end of the annual reporting period immediately preceding the date of initial application, discounted using the incremental borrowing rate at the date of initial application as described in paragraph C8(a); and
(ii) lease liabilities recognised in the statement of financial position at the date of initial application.
C13 If a lessee uses one or more of the specified practical expedients in paragraph C10, it shall disclose that fact.
Lessors
C14 Except as described in paragraph C15, a lessor is not required to make any adjustments on transition for leases in which it is a lessor and shall account for those leases applying this Standard from the date of initial application.
C15 An intermediate lessor shall:
(a) reassess subleases that were classified as operating leases applying AASB 117 and are ongoing at the date of initial application, to determine whether each sublease should be classified as an operating lease or a finance lease applying this Standard. The intermediate lessor shall perform this assessment at the date of initial application on the basis of the remaining contractual terms and conditions of the head lease and sublease at that date.
(b) for subleases that were classified as operating leases applying AASB 117 but finance leases applying this Standard, account for the sublease as a new finance lease entered into at the date of initial application.
Sale and leaseback transactions before the date of initial application
C16 An entity shall not reassess sale and leaseback transactions entered into before the date of initial application to determine whether the transfer of the underlying asset satisfies the requirements in AASB 15 to be accounted for as a sale.
C17 If a sale and leaseback transaction was accounted for as a sale and a finance lease applying AASB 117, the seller-lessee shall:
(a) account for the leaseback in the same way as it accounts for any other finance lease that exists at the date of initial application; and
(b) continue to amortise any gain on sale over the lease term.
C18 If a sale and leaseback transaction was accounted for as a sale and operating lease applying AASB 117, the seller-lessee shall:
(a) account for the leaseback in the same way as it accounts for any other operating lease that exists at the date of initial application; and
(b) adjust the leaseback right-of-use asset for any deferred gains or losses that relate to off-market terms recognised in the statement of financial position immediately before the date of initial application.
Amounts previously recognised in respect of business combinations
C19 If a lessee previously recognised an asset or a liability applying AASB 3 Business Combinations relating to favourable or unfavourable terms of an operating lease acquired as part of a business combination, the lessee shall derecognise that asset or liability and adjust the carrying amount of the right-of-use asset by a corresponding amount at the date of initial application.
References to AASB 9
C20 If an entity applies this Standard but does not yet apply AASB 9 Financial Instruments, any reference in this Standard to AASB 9 shall be read as a reference to AASB 139 Financial Instruments: Recognition and Measurement.
Covid-19-related rent concessions for lessees
C20A A lessee shall apply AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions (see paragraph C1A) retrospectively, recognising the cumulative effect of initially applying that amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment.
C20B In the reporting period in which a lessee first applies AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions, a lessee is not required to disclose the information required by paragraph 28(f) of AASB 108.
C20BA A lessee shall apply AASB 2021-3 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions beyond 30 June 2021 (see paragraph C1C) retrospectively, recognising the cumulative effect of initially applying that amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment.
C20BB In the reporting period in which a lessee first applies AASB 2021-3 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions beyond 30 June 2021, a lessee is not required to disclose the information required by paragraph 28(f) of AASB 108.
C20BC Applying paragraph 2 of this Standard, a lessee shall apply the practical expedient in paragraph 46A consistently to eligible contracts with similar characteristics and in similar circumstances, irrespective of whether the contract became eligible for the practical expedient as a result of the lessee applying AASB 2020‑4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions (see paragraph C1A) or AASB 2021-3 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions beyond 30 June 2021 (see paragraph C1C).
Interest Rate Benchmark Reform – Phase 2
C20C An entity shall apply these amendments retrospectively in accordance with AASB 108, except as specified in paragraph C20D.
C20D An entity is not required to restate prior periods to reflect the application of these amendments. The entity may restate prior periods if, and only if, it is possible without the use of hindsight. If an entity does not restate prior periods, the entity shall recognise any difference between the previous carrying amount and the carrying amount at the beginning of the annual reporting period that includes the date of initial application of these amendments in the opening retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application of these amendments.
Lease liability in a sale and leaseback
C20E A seller-lessee shall apply AASB 2022-5 Amendments to Australian Accounting Standards – Lease Liability in a Sale and Leaseback (see paragraph C1D) retrospectively in accordance with AASB 108 to sale and leaseback transactions entered into after the date of initial application.
Withdrawal of other Standards
C21 [Deleted by the AASB]
Withdrawal of AASB pronouncements
AusC21.1 This Standard repeals AASB 117 Leases issued in August 2015. Despite the repeal, after the time this Standard starts to apply under section 334 of the Corporations Act (either generally or in relation to an individual entity), the repealed Standard continues to apply in relation to any period ending before that time as if the repeal had not occurred.
[Note: When this Standard applies under section 334 of the Corporations Act (either generally or in relation to an individual entity), it supersedes the application of the repealed Standard.]
AusC21.2 When applied or operative, this Standard supersedes:
(a) Interpretation 4 Determining whether an Arrangement contains a Lease;
(b) Interpretation 115 Operating Leases—Incentives; and
(c) Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
Appendix D Amendments to other Standards
This appendix sets out the amendments to other Standards that are a consequence of the AASB issuing this Standard. An entity shall apply the amendments for annual periods beginning on or after 1 January 2019. If an entity applies this Standard for an earlier period, it shall also apply these amendments for that earlier period.
[Deleted by the AASB – the amendments have been incorporated into the text of the relevant pronouncements.]
Appendix E Australian simplified disclosures for Tier 2 entities
This appendix is an integral part of the Standard.
AusE1 Paragraphs 51–60A, 89–92 and B48–B52 do not apply to entities preparing general purpose financial statements that apply AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.
Compilation details Accounting Standard AASB 16 Leases (as amended)
Compilation details are not part of AASB 16.
This compiled Standard applies to annual periods beginning on or after 1 January 2024. It takes into account amendments up to and including 10 November 2022 and was prepared on 18 December 2023 by the staff of the Australian Accounting Standards Board (AASB).
This compilation is not a separate Accounting Standard made by the AASB. Instead, it is a representation of AASB 16 (February 2016) as amended by other Accounting Standards, which are listed in the table below.
Table of Standards
Standard
Date made
FRL identifier
Commence-ment date
Effective date (annual periods … on or after …)
Application, saving or transitional provisions
AASB 16
23 Feb 2016
F2016L00233
31 Dec 2018
(beginning) 1 Jan 2019
see (a) below
AASB 1058
9 Dec 2016
F2017L00042
31 Dec 2018
(beginning) 1 Jan 2019
see (a) below
AASB 1059
14 Jul 2017
F2017L01183
31 Dec 2018
(beginning) 1 Jan 2020
see (b) below
AASB 2018-3
8 Aug 2018
F2018L01152
31 Dec 2018
(beginning) 1 Jan 2019
see (c) below
AASB 2018-4
4 Sep 2018
F2018L01392
31 Dec 2018
(beginning) 1 Jan 2019
see (d) below
AASB 2018-8
24 Dec 2018
F2019L00023
31 Dec 2018
(beginning) 1 Jan 2019
see (e) below
AASB 2019-2
18 Sep 2019
F2019L01441
31 Dec 2019
(beginning) 1 Jan 2020
see (b) below
AASB 2019-8
19 Dec 2019
F2020L00062
31 Dec 2019
(beginning) 1 Jan 2019
see (e) below
AASB 1060
6 Mar 2020
F2020L00288
30 Jun 2021
(beginning) 1 Jul 2021
see (f) below
AASB 2020-4
15 Jun 2020
F2020L00877
15 Jun 2020
(beginning) 1 Jun 2020
see (g) below
AASB 2020-7
10 Aug 2020
F2020L01050
30 Jun 2021
(beginning) 1 Jul 2021
see (h) below
AASB 2020-8
17 Sep 2020
F2020L01241
31 Dec 2020
(beginning) 1 Jan 2021
see (i) below
AASB 2021-3
21 Apr 2021
F2021L00545
21 Apr 2021
(beginning) 1 Apr 2021
see (j) below
AASB 2021-7
20 Dec 2021
F2021L01883
31 Dec 2021
(beginning) 1 Jan 2022
see (k) below
AASB 2022-5
10 Nov 2022
F2022L01500
31 Dec 2023
(beginning) 1 Jan 2024
see (l) below
(a) Entities may elect to apply this Standard to annual periods beginning before 1 January 2019, provided that AASB 15 Revenue from Contracts with Customers is also applied to the same period.
(b) Entities may elect to apply this Standard to annual periods beginning before 1 January 2020.
(c) Entities may elect to apply this Standard to annual periods beginning before 1 January 2019.
(d) Entities may elect to apply this Standard to annual periods beginning before 1 January 2019, provided that AASB 15 and AASB 16 Leases are also applied to the same period.
(e) Entities may elect to apply this Standard to annual periods beginning before 1 January 2019, provided that AASB 1058 Income of Not-for-Profit Entities is also applied to the same period.
(f) Entities may elect to apply this Standard to annual periods beginning before 1 July 2021.
(g) Entities may elect to apply this Standard to annual periods beginning before 1 June 2020.
(h) Entities are required to apply this Standard to annual periods beginning before 1 July 2021 if the entity has applied AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions and AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities to such a period.
(i) Entities may elect to apply this Standard to annual periods beginning before 1 January 2021.
(j) Entities may elect to apply this Standard to annual periods beginning before 1 April 2021.
(k) Entities may elect to apply this Standard to annual periods beginning before 1 January 2022.
(l) Entities may elect to apply this Standard to annual periods beginning before 1 January 2024.
Table of amendments
Paragraph affected
How affected
By … [paragraph/page]
3
amended
AASB 2021-7 [25]
Aus3.1
added
AASB 1059 [page 26]
Aus3.1
added<br>renumbered as Aus3.2
AASB 2018-4 [8]<br>AASB 2021-7 [26]
18 (preceding heading)
amended
AASB 2021-7 [27]
Aus25.1
added<br>amended
AASB 1058 [page 22]<br>AASB 2018-8 [page 6]
Aus25.2
added
AASB 2019-8 [5]
Aus35.1
added
AASB 2019-8 [5]
46A-46B
added
AASB 2020-4 [page 5]
46B
amended
AASB 2021-3 [page 6]
Aus59.1
added
AASB 2018-8 [page 6]
Aus59.2
added
AASB 2018-8 [page 6]
60A
added
AASB 2020-4 [page 6]
Aus103.1
repealed
Legislation Act 2003, s. 48D
102A
added
AASB 2022-5 [page 5]
104-106 (and heading)
added
AASB 2020-8 [page 11]
C1A
added
AASB 2020-4 [page 6]
C1B
added
AASB 2020-8 [page 11]
C1C
added
AASB 2021-3 [page 6]
C1D
added
AASB 2022-5 [page 6]
C2
amended
AASB 2022-5 [page 6]
AusC4.1
added
AASB 2019-2 [5]
AusC5.1<br>
added<br>amended
AASB 1058 [page 22]<br>AASB 2018-8 [page 7]
AusC5.2
added
AASB 1058 [page 22]
AusC8.1<br>
added<br>amended
AASB 1058 [page 22]<br>AASB 2018-8 [page 7]
AusC11.1<br>
added<br>amended
AASB 1058 [page 22]<br>AASB 2018-8 [page 7]
C20A-C20B (and heading)
added
AASB 2020-4 [page 6]
C20BA-C20BC
added
AASB 2021-3 [page 6]
C20C-C20D (and heading)
added
AASB 2020-8 [page 11]
C20E (and heading)
added
AASB 2022-5 [page 6]
Appendix D
deleted
AASB 2021-7 [28]
Appendix E
added<br>replaced
AASB 2018-3 [5]<br>AASB 1060 [page 60]
AusE1
amended
AASB 2020-7 [5]
Deleted IFRS 16 text
Deleted IFRS 16 text is not part of AASB 16.
C21 This Standard supersedes the following Standards and Interpretations:
(a) IAS 17 Leases;
(b) IFRIC 4 Determining whether an Arrangement contains a Lease;
(c) SIC-15 Operating Leases—Incentives; and
(d) SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
Basis for Conclusions on AASB 2018-8
This Basis for Conclusions accompanies, but is not part of, AASB 16. The Basis for Conclusions was originally published with AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities.
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.
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 require 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 in the not-for-profit sector preparing for the implementation of AASB 16 and AASB 1058, some of whom expressed 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 difficulties noted included how often-significant restrictions on the right of use of the underlying assets and the specialised nature of the underlying assets should be incorporated in the valuation of right‑of‑use assets arising from concessionary leases.
BC5 Whilst other assets required by other Standards to be fair valued might also be subject to restrictions on use or specialised in nature, the Board noted that the issues related to right-of-use assets for lessees might be different to the issues for owners of the assets, making it difficult to determine the fair value of right-of‑use assets simply by reference to the fair value of the underlying assets. Since the principles in AASB 13 are based on market participants buying and selling assets, further guidance appears to be needed to assist not‑for‑profit entities in applying the principles to right-of-use assets in concessionary lease arrangements.
BC6 The Board considered the prevalence and magnitude of concessionary leases in the not‑for‑profit sector, and the significance of restrictions on rights of use of the underlying assets in many cases. The Board also noted that a temporary option for not-for-profit lessees to not measure a class (or classes) of right‑of‑use assets at initial recognition at fair value for concessionary leases would avoid undue cost and effort being incurred by preparers in applying AASB 13 in the absence of additional guidance. The Board assessed these factors with reference to The AASB’s Not-for-Profit Entity Standard-Setting Framework and decided to propose the temporary option. The interpretative issues arising from fair valuing right-of-use assets arising under concessionary leases will be addressed in the AASB’s Fair Value Measurement for Public Sector Entities project.
BC7 The Board also noted that the financial reporting thresholds for not-for-profit private sector entities may be revised as a result of the ACNC Legislative Review recommendations. It is possible that entities at the lower level of the reporting thresholds might not be required in future to apply the requirements of AASB 16 and AASB 1058. The temporary option would avoid such smaller entities incurring costs in measuring right‑of‑use assets at initial recognition at fair value when they might be exempted from this requirement in future by not being required to prepare financial statements that comply with Accounting Standards.
BC8 However, as some not‑for‑profit entities had already commenced the process of determining the fair value of right‑of‑use assets in concessionary leases, the Board decided to make the temporary relief optional. This allows these entities to continue their work on fair valuing concessionary leases and applying the fair value initial recognition measurement requirements to measure right‑of‑use assets.
BC9 Entities electing not to measure the right-of-use assets in concessionary leases at fair value will recognise the assets at cost in accordance with AASB 16 (paragraphs 23–25), which incorporates the amount of the initial measurement of the lease liability.
BC10 The optional relief will be reassessed when further guidance has been developed to assist not‑for‑profit entities in fair valuing right-of-use assets and the financial reporting requirements for private sector not‑for‑profit entities have been finalised. The Board will consider whether to provide a permanent option for not‑for‑profit entities to measure a class of right‑of‑use assets at initial recognition either at cost or at fair value for those concessionary leases entered into prior to the application date of AASB 16 or for all concessionary leases.
Issue of ED 286 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities
BC11 The Board’s proposals were exposed for public comment in November 2018 through Exposure Draft ED 286 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities.
BC12 The Board received feedback on its proposals through 20 submissions on ED 286. The responses to ED 286 indicated that:
(a) all respondents agreed that not-for-profit entities should be given some form of relief to not measure right‑of‑use assets for concessionary leases at initial recognition at fair value. Some respondents agreed that the relief should only be given on a temporary basis until further guidance has been developed to assist not‑for‑profit entities in fair valuing right‑of‑use assets and the financial reporting requirements for not‑for‑profit private sector entities have been finalised. However, other respondents were of the view that the option to elect either cost or fair value measurement should be made available on a permanent basis for all concessionary leases and for not‑for‑profit entities in both the private sector and the public sector; and
(b) most respondents agreed that the proposed additional disclosure requirements in AASB 16 would provide adequate information for users of the financial statements to understand the effects on the financial position, financial performance and cash flows of the entity arising from concessionary leases in the absence of fair value information. However, some respondents suggested providing further clarification to ensure not‑for‑profit entities understand the disclosure requirements.
BC13 The Board considered the feedback and in December 2018 decided to finalise its decisions to provide a temporary option for not‑for‑profit entities to elect to measure a class of right‑of‑use assets arising under concessionary leases at cost or at fair value at initial recognition. At a later time, when fair value measurement guidance has been developed and the not‑for‑profit private sector financial reporting requirements have been finalised, the Board will consider whether the temporary option should be made permanent.
Election of measurement basis
BC14 Some ED 286 respondents noted that there might be instances where an entity may wish to apply the option of not fair valuing right-of-use assets for concessionary leases only to some, but not all, of the right-of-use assets. This may be the case for example where the not‑for‑profit entity has elected to apply the revaluation model under AASB 116 Property, Plant and Equipment to a class of property, plant and equipment and would therefore likely elect to measure right‑of‑use assets that relate to that class also at fair value, as permitted by AASB 16, paragraph 35. However, this should not force the entity to also measure all other right-of-use assets arising from concessionary leases on initial recognition at fair value.
BC15 Consequently, the Board decided that the election of the measurement basis for initial recognition of right‑of‑use assets of concessionary leases should be made by class of right‑of‑use assets. As specified in other Standards, a class is a grouping of assets of a similar nature and use in an entity’s operations.
Disclosures
BC16 In the absence of fair value information, the Board decided that entities electing to measure a class of right‑of‑use assets at initial recognition at cost rather than at fair value would need to make additional disclosures. This will ensure 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.
BC17 A number of ED 286 respondents expressed concerns that, without reference to fair value information, it might be difficult to assess whether a concessionary lease is material and therefore requires individual disclosures under AASB 16, paragraph Aus59.2.
BC18 AASB 101 paragraph 7 defines when information is material and AASB Practice Statement 2 Making Materiality Judgements provides further guidance, including in relation to disclosure requirements. When making materiality judgements, an entity needs to take into account how information could reasonably be expected to influence the primary users of its financial statements when they make decisions on the basis of those statements. In respect of not‑for‑profit entities, primary users of financial statements are concerned with the ability of the entity to achieve its objectives. Therefore, when assessing whether a concessionary lease is material to the financial statements, the entity could consider factors such as the significance of the concessionary lease to the entity’s operations in fulfilling its objectives.
BC19 Some respondents recommended the Board consider clarifying the extent of disclosures required in AASB 16 paragraphs Aus59.1 and Aus59.2. Consistent with AASB Practice Statement 2, an entity applies judgement in determining the level of detail necessary to satisfy the disclosure objective, including the level of aggregation or disaggregation of disclosures so that useful information is not obscured. The Board notes that AASB 16 paragraph Aus59.2 requires disclosures to be made individually for each material lease and permits aggregated disclosures for other concessionary leases involving right‑of‑use assets of a similar nature.
GAAP/GFS convergence
BC20 Several respondents commented that measuring right‑of‑use assets at either cost or fair value could result in Government Finance Statistics (GFS) convergence differences. As the ABS GFS Manual continues to distinguish operating leases and finance leases, some of these convergence differences relate to the underlying principles of AASB 16. However, a new convergence difference would arise if right‑of‑use assets under concessionary leases that would previously have been classified as finance leases are measured at cost under the temporary option, rather than at fair value. On balance, the Board considered that it was appropriate to provide not‑for‑profit entities with the temporary option in respect of such concessionary leases.
BC21 Consequently, the Board added an exception to AASB 1049 (paragraph 13D) to permit public sector entities to measure right‑of‑use assets arising under concessionary leases at initial recognition at cost, rather than fair value.
Basis for Conclusions on AASB 2019-8
This Basis for Conclusions accompanies, but is not part of, AASB 16. The Basis for Conclusions was originally published with AASB 2019-8 Amendments to Australian Accounting Standards – Class of Right-of-Use Assets arising under Concessionary Leases.
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.
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:
Option 1 – permit the election of the measurement basis for right‑of‑use assets on a lease-by-lease basis. This option would reduce comparability between not-for-profit entities and amongst assets of an entity. The Board considered there is a risk that entities might choose a measurement method for the purpose of achieving a particular outcome;
Option 2 – introduce a definition of ‘class of right‑of‑use assets’ to clarify that concessionary leases may have a different nature and use in the entity’s operations compared with other leases. The Board was of the view that the definition created 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 in an entity’s operations. AASB 16 paragraphs 53(a) and (j) require disclosure of the depreciation charge and the carrying amount for right‑of‑use assets by class of underlying asset, this will be less meaningful when the disclosures aggregate amounts for different right‑of‑use asset classes measured on different bases. The Board also considered that developing a new definition might require further guidance to be developed to assist preparers in applying the new definition; and
Option 3 – specify that right‑of‑use assets 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. As with Option 2, this option 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 and aggregated right‑of‑use asset disclosures under AASB 16 may be less meaningful.
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.
Basis for Conclusions on AASB 2022-3
This Basis for Conclusions accompanies, but is not part of, AASB 16. The Basis for Conclusions was originally published with AASB 2022-3 Amendments to Australian Accounting Standards – Illustrative Examples for Not-for-Profit Entities accompanying AASB 15.
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 bases for the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.
BC2 The Board considered comments from stakeholders in the not-for-profit sector following the implementation of AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not-for-Profit Entities. Some stakeholders were concerned that the analysis and accounting treatment set out in the cash scholarship endowment example in Illustrative Example 3A accompanying AASB 1058 potentially was unclear and may lead to diversity in the recognition of financial liabilities.
BC3 Stakeholders also noted concerns about the diversity of practice in accounting for upfront fees received by not-for-profit entities recognised as revenue within the scope of AASB 15.
BC4 The Board noted feedback from not-for-profit private sector stakeholders that, despite having the accounting policy choice to initially measure right-of-use assets arising under concessionary leases at cost under AASB 16 Leases as amended by AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities, uncertainty exists whether fair value information needs to be obtained for such right-of-use assets. (For ease of reference in this Basis for Conclusions, ‘concessionary leases’ refers to leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives.)
BC5 To address the feedback received, the Board proposed amendments to the illustrative examples in AASB 15 and AASB 1058. The Board also proposed to retain the accounting policy choice to initially measure right-of-use assets arising under concessionary leases at cost on an ongoing basis, to provide certainty to not-for-profit private sector lessees.
BC6 The Board decided to proceed with some of the proposed amendments, as set out in this Standard. This Basis for Conclusions sets out the due process followed and the Board’s conclusions in determining the amendments to be included in the Standard.
Issue of ED 318 Illustrative Examples for Income of Not-for-Profit Entities and Right-of-Use Assets arising under Concessionary Leases
BC7 The Board’s proposals with respect to the amendments finalised in this Standard were exposed for public comment in January 2022 through Exposure Draft ED 318 Illustrative Examples for Income of Not-for-Profit Entities and Right-of-Use Assets arising under Concessionary Leases.
BC8 The significant issues considered by the Board in developing ED 318 are addressed in the following sections.
Income of not-for-profit entities
BC9 In developing ED 318, the Board considered comments from stakeholders that Illustrative Example 3A in AASB 1058 may lead to diversity in the recognition of financial liabilities as it does not explain adequately whether recognition of a financial liability is required for any funding received by an entity that is subsequently directed to other recipients and income recognised for the portion retained.
BC10 The Board also noted concerns about the diversity of practice in accounting for upfront fees received by not-for-profit entities. Where the not-for-profit entity recognised revenue within the scope of AASB 15 and a non-refundable upfront payment is charged to the customer, AASB 15 paragraphs 22–30, B48–B51 and F20–F27 require an entity to assess whether the upfront fees relate to the transfer of a promised good or service. If the upfront fees do relate to a transfer of goods or services, revenue is recognised over the time the service or goods are provided rather than on receipt of the funds.
BC11 Stakeholders raised this issue from the perspective of diversity in practice, where some entities are deferring revenue (and recognising a contract liability in accordance with AASB 15) and other entities are continuing to recognise revenue on receipt of fees which, prima facie, look very similar. Stakeholders also indicated that the principle of deferral is confusing to boards, management committees, members and other users as the amounts received are not refundable. Stakeholders requested further guidance to clarify the principle and why a contract liability is recognised when the funds will never be repaid.
BC12 The Board considered the stakeholder comments and assessed the feedback with reference to the AASB Not-for-Profit Entity Standard-Setting Framework. Whilst the original conclusions in Illustrative Example 3A in AASB 1058 are appropriate, the Board proposed amending the example to clarify the conclusion further and adding an additional example to illustrate a contrasting scenario. The Board also proposed adding an additional illustrative example to AASB 15 (Example 7A) to address the issues that stakeholders raised regarding upfront fees received that are in the scope of AASB 15. The Board did not propose amendments to AASB 15 and AASB 1058 in regard to other comments received from stakeholders and decided to consider that feedback in the forthcoming post-implementation review of AASB 1058 and guidance for not-for-profit entities in AASB 15. The Board also decided to provide further educational material to assist with the application of these Standards.
Initial measurement of right-of-use assets arising under concessionary leases
BC13 When the Board issued AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities, it intended to reassess the accounting policy choice in AASB 16 Leases paragraphs Aus25.1–Aus25.2 for the initial measurement of right-of-use assets arising under concessionary leases at cost or fair value when it had finalised two other projects (as noted in paragraph BC10 to AASB 2018-8, which accompanies versions of AASB 16 that incorporate those amendments). The two projects were the Not-for-Profit Private Sector Financial Reporting Framework project and the project to provide further guidance to assist not-for-profit entities in measuring the fair value of right-of-use assets.
Not-for-profit private sector lessees
BC14 The Board noted feedback from not-for-profit private sector stakeholders that, despite having the accounting policy choice to initially measure right-of-use assets arising under concessionary leases at cost, uncertainty exists whether fair value information needs to be obtained for such right-of-use assets. This uncertainty exists because it is unclear whether the Board would be likely to require retrospective application of the initial fair value requirement if it decides in the future to remove the accounting policy choice to initially measure such right-of-use assets at cost. Stakeholders commented that if retrospective application was required, the collection of fair value information for historical concessionary leases, particularly those leases that have been in place for a significant period, would be costly and time consuming. At its November 2021 meeting, the Board discussed the initial measurement requirements for concessionary right-of-use assets with a view to providing certainty to not-for-profit private sector lessees.
BC15 The Board acknowledged that, conceptually, requiring right-of use assets arising under concessionary leases to be initially measured at fair value is consistent with the accounting treatment applied to other assets acquired on below-market terms and conditions and better reflects the value of the right-of-use asset obtained by the lessee in its financial position and financial performance. However, the Board considered that the costs required to obtain the fair value of such right-of-use assets would outweigh the benefits for not-for-profit private sector entities. This is because:
(a) many not-for-profit private sector entities may not have the knowledge and experience in applying the principles of AASB 13 Fair Value Measurement because they generally do not measure non-financial assets at fair value. The cost and effort required to understand and apply AASB 13 requirements for the one-off purpose of initially recognising a right-of-use asset under a concessionary lease might be considered unjustified;
(b) some stakeholders have commented that the disclosures required by AASB 16, including the requirements in AASB 16 paragraphs Aus59.1─Aus59.2, appear to provide sufficient information to users of financial statements about concessionary leases for them to understand the effects of the leases on the financial position, financial performance and cash flows of the entity, in the absence of fair value information; and
(c) some stakeholders have commented that recognising income resulting from initially measuring such right-of-use assets at fair value, and the subsequent amortisation of the right-of-use assets, might not meet the information needs of users of financial statements. This might particularly be the case when a user is more interested in the entity’s expenses that need to be funded rather than the value of an asset consumed during the financial period that would not need to be funded.
BC16 Therefore, having regard to the AASB Not-for-Profit Entity Standard-Setting Framework, the Board decided to propose retaining the accounting policy choice in AASB 16 paragraphs Aus25.1–Aus25.2 on an ongoing basis (ie with no plan to reconsider the accounting policy choice) for not-for-profit private sector lessees to elect to initially measure a class of concessionary right-of-use assets at cost or fair value.
Not-for-profit public sector lessees
BC17 Regarding not-for-profit public sector lessees, the Board considered that a decision about the initial measurement of right-of-use assets arising under concessionary leases should be deferred until additional guidance on how to measure the fair value of such right-of-use assets is discussed.
BC18 The Board decided to consider outcomes of the concessionary leases part of the IPSASB’s current Leases project and the Board’s Exposure Draft proposing modifications to AASB 13 for not-for-profit public sector entities before reconsidering the application of fair value for concessionary leases in the not-for-profit public sector.
BC19 The Board noted concerns raised by public sector stakeholders regarding the difficulty of measuring the fair value of historical concessionary leases. However, the Board decided not to propose grandfathering concessionary leases currently in place from a possible future fair value requirement at this time but to consider grandfathering if in the future it considers removing the accounting policy choice to initially measure right-of-use assets arising under concessionary leases at cost.
Finalisation of the ED 318 proposals
BC20 The Board received nine formal comment letters in response to ED 318. Following the consultation period, and after considering the comments received, the Board decided to proceed with issuing this Standard, with some changes from the proposals in ED 318.
Income of not-for-profit entities
BC21 The feedback received indicated that, whilst respondents to ED 318 did not raise concerns with the illustrated application of the recognition and measurement requirements in the proposed amendments to the illustrative examples in AASB 15, some of the respondents suggested that the proposed Illustrative Example 7A is too generic and recommended that any changes be dealt with as part of the forthcoming post-implementation review of the guidance for not-for-profit entities in AASB 15. The Board considered this feedback and noted that the example is intended to assist not-for-profit entities with limited resources in the application of AASB 15 requirements. The Board therefore decided to add the proposed Illustrative Example 7A to AASB 15, incorporating some editorial improvements suggested by the respondents.
BC22 Most respondents to ED 318 did not support the proposed amendment to AASB 1058 Illustrative Example 3, noting their concerns with the potential impact of the illustrated scenario and accounting analysis on current practice. A majority of the respondents indicated the amendments were not desirable at this time and recommended considering any amendments as part of the forthcoming post-implementation review of AASB 1058. After considering the feedback from stakeholders, the Board decided to retain Illustrative Example 3 in AASB 1058 without any amendment and to consider any changes as part of the post-implementation review.
Initial measurement of right-of-use assets arising under concessionary leases
BC23 Almost all respondents agreed with the Board’s decision to retain the accounting policy choice in AASB 16 paragraphs Aus25.1-Aus25.2 on an ongoing basis for not-for-profit private sector lessees to elect to initially measure a class of right-of-use assets arising under concessionary leases at cost or at fair value.
BC24 The Board noted that some feedback received disagreed with the decision to consider outcomes of the concessionary leases part of the IPSASB’s current Leases project and the Board’s proposals in Exposure Draft ED 320 Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities before reconsidering the application of fair value for concessionary leases in the not-for-profit public sector. The Board acknowledged stakeholders’ concerns regarding the difficulty of measuring the fair value of historical concessionary leases when developing the ED 318 proposals. The Board concluded that it is still appropriate to defer a decision about the initial measurement of right-of-use assets arising under concessionary leases for not-for-profit public sector lessees until additional guidance on how to measure the fair value of such right-of-use assets is discussed.
BC25 Accordingly, after considering the feedback to ED 318, the Board decided to proceed with the proposals in ED 318 to retain the accounting policy choice on an ongoing basis for not-for-profit private sector lessees and to defer consideration of the accounting policy choice for not-for-profit public sector lessees until the Board decides on any additional guidance for measuring the fair value of right-of-use assets under concessionary leases. This decision would be made after considering the outcomes of the concessionary leases part of the IPSASB’s current Leases project and the Board’s ED 320.
Effective date
BC26 The Board confirmed that the amendments would be effective for annual periods beginning on or after 1 July 2022, with earlier application permitted, as proposed in ED 318.