Peppercorn lease change

 Community housing organisations that are lessees under peppercorn leases (and do not have service concession arrangements) will no longer be required to fair value the right-of-use asset.

The change follows the Australian Accounting Standards Board (AASB) announcement that it is proposing a temporary option to defer requirements for not-for-profit lessees to determine the fair value of right-of-use assets subject to peppercorn leases, meaning that those with below-market payments will be capitalised on the balance sheet at insignificant amounts – i.e. not at fair value.

This will impact all NFPs who are lessees under a peppercorn lease.

The requirement in AASB 16 & AASB 1058 to fair value peppercorn leases in the financial statements of NFP lessees, which was originally supposed to be effective from 1 January 2019, has been very problematic for NFP clients. The main issues were how to determine the fair value of the right-of-use assets under peppercorn leases, as well as the accounting treatment of the resulting income (often recognised immediately).

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