Take Survey
MEDIA, JOBS & RESOURCES for the COMMON GOOD
Sponsored  |  Finance

Peppercorn Leases and Other Leases With Significantly Below-market Terms and Conditions


Thursday, 29th November 2018 at 8:00 am
Contributor
With not for profits struggling to come to grips with the concept of valuing peppercorn leases and other leases with significantly below-market terms and conditions, HLB Mann Judd explains what the issues are and what the Australian Accounting Standards Board has recently decided on this matter.


Thursday, 29th November 2018
at 8:00 am
Contributor


0 Comments


FREE SOCIAL
SECTOR NEWS

 Print
Peppercorn Leases and Other Leases With Significantly Below-market Terms and Conditions
Thursday, 29th November 2018 at 8:00 am

With not for profits struggling to come to grips with the concept of valuing peppercorn leases and other leases with significantly below-market terms and conditions, HLB Mann Judd explains what the issues are and what the Australian Accounting Standards Board has recently decided on this matter.

We have previously reported on the significant impact that new accounting standards will have on NFP entities, particularly in the areas of revenue recognition and lease accounting. There is a common misconception among some NFPs that produce special purpose financial reports, that the new standards will not apply to them as they do not consider themselves to be reporting entities. As such, they believe that they can “pick and choose” which accounting standards they should apply.

Our view on this is taken from the Australian Securities and Investments Commission’s view in relation to entities that are governed by the Corporations Act (including NFPs that are companies limited by guarantee) – and that is that all such entities are required to comply with the measurement and recognition provisions of all relevant accounting standards, but not necessarily all of the disclosure provisions. This is supported by Australian Charities and Not-for-profits Commission requirements for all ACNC-registered entities to mandatorily adopt AASB 101 Presentation of Financial Statements, which requires financial statements to comply with Australian accounting standards in order to achieve a fair presentation of their financial position, financial performance and cash flows.

AASB 16 Leases will provide enough issues for NFPs, especially those that do not have significant resources to put to the identification of operating leases and accounting for them. On top of this, NFPs will need to deal with certain provisions of AASB 1058 Income of Not-for-Profit Entities, which requires NFPs to identify transactions where “the consideration to acquire an asset is significantly less than the fair value principally to enable an NFP to further its objectives”. The previous NFP standard, AASB 1004 Contributions had a similar requirement, however it used the words “nil or nominal consideration” instead of “significantly less than the fair value”. This has led to two scenarios:

  1. Leases which are clearly “peppercorn leases”. Peppercorn leases are those where a nominal amount is made as a payment to the lessor. This typically occurs in situations where local councils provide leased premises to an entity (commonly an NFP) for a nominal payment (eg $1) each year for a significant period (eg 50 years).
  2. Other leases where the lessor provides tenancy arrangements to an NFP for a heavy discount – not a peppercorn arrangement, but for a lease amount significantly less than what would be offered in a commercial arrangement.

Peppercorn leases

Since AASB 1058 was first issued, many NFPs have been struggling with the concept of having to obtain independent market valuations of peppercorn lease arrangements. These valuations could come at a significant cost to the organisation – in times where revenue generation is becoming more difficult and cost containment is becoming critical.

Other leases with significantly below-market terms and conditions

The issue here is the identification of such leases. As mentioned above, peppercorn leases would be relatively easy to identify.  Other leases with significantly below-market terms and conditions may not be. AASB 1058 does not define “significantly”, therefore it would be up to each entity to determine what this means in their particular circumstances and it would be wise to consult widely on this.

AASB reaction

In recognition of these issues, the AASB met in Sydney on 13 November 2018 and decided to issue an exposure draft which considers:

  • Temporary relief for all NFPs in relation to peppercorn leases until the ACNC thresholds have been set and guidance issued by the Fair Value Panel in relation to valuation of right of use assets; and
  • Potential permanent relief for peppercorn lease in place on transition to AASB 1058 for private sector NFP entities.

The exposure draft has just been released and has a very short exposure period to enable the standard to be issued prior to 1 January 2019. Comments on the exposure draft are to be made by 7 December 2018.

Our advice to NFPs

In light of the AASB’s actions above, we recommend that any NFPs that have commenced the process of engaging external valuers to value their peppercorn lease arrangements or other lease arrangements with significantly below-market terms and conditions, put this process on hold pending the release of the new standard.

We also encourage NFPs who would like to provide a response to the exposure draft to do so either directly to the AASB or to provide your HLB Mann Judd contact your comments and we will ensure that these are passed on to the AASB.

For more information, please contact Lucio Di Giallonardo at HLB Mann Judd Perth at lucio@hlbwa.com.au, or call (08) 9227 7500.




Got a story to share?

Got a news tip or article idea for Pro Bono News? Or perhaps you would like to write an article and join a growing community of sector leaders sharing their thoughts and analysis with Pro Bono News readers?

Get in touch at news@probonoaustralia.com.au

Get more stories like this

FREE SOCIAL
SECTOR NEWS

Write a Reply or Comment

Your email address will not be published. Required fields are marked *



YOU MAY ALSO LIKE

Possible Backlash Caused by Planned Changes to Charities Act

Luke Michael

Friday, 14th December 2018 at 4:13 pm

What’s Your Fundraising New Year’s Resolution?

Contributor

Thursday, 13th December 2018 at 7:45 am

Bringing New Meaning to the Classic Wrist Watch

Contributor

Tuesday, 11th December 2018 at 7:30 am

Single-Parent Households Suffering Rental Stress

Andrew Cairns

Thursday, 6th December 2018 at 7:45 am

POPULAR

NDIS Service Providers Cautious Over Complex Needs Pricing Shake-Up

Maggie Coggan

Monday, 10th December 2018 at 5:11 pm

Australians With Disability Twice as Likely to be Evicted Without Cause

Luke Michael

Wednesday, 5th December 2018 at 5:29 pm

Putting Disability and Leadership in the Same Sentence

Maggie Coggan

Monday, 3rd December 2018 at 8:56 am

Glyn Davis Confirmed as New Head of the Ramsay Foundation

Maggie Coggan

Wednesday, 5th December 2018 at 6:00 pm

Take Survey
pba inverse logo
Subscribe Twitter Facebook

Get the social sector's most essential news coverage. Delivered free to your inbox every Tuesday and Thursday morning.

You have Successfully Subscribed!