Changes to accounting for leases

The International Public Sector Accounting Standards Board (IPSASB) is debating whether, or how, the accounting for leases should change in the public sector. Much of the discussion has focused on whether the IPSASB should adopt IFRS 16 on Leases for both lessees and lessors. IFRS 16 introduces a new ‘right-of-use’ model for lessees but retains the previous accounting for based on operating/finance leases for lessors. Exposure Draft 64 on Leases issued by the IPSASB in 2018 proposed aligning the approach to lessees. Instead of retaining the operating/finance lease distinction for lessors, the IPSASB proposed implementing the ‘’right of use model. The IPSASB was of the view that because public sector entities are often both the lessor and lessee in an arrangement, consistent principles should be used by both parties. The IPSASB also noted similarities between the principles of the ‘right of use model’ and the principles to account for service concession arrangements. 

The right of use model for lessees means recognising a ‘right of use’ asset (which is accounted for as a physical asset using existing IPSAS), equal to the payments the lessee is required to make over the lease term. Applying the same approach to lessors, the IPSASB proposed that the lessor should recognise a right to receive the payments it is entitled to receive over the lease term, along with a corresponding liability to make the asset available over the period. The lessor would continue to account for the leased asset, with no changes proposed to its accounting. 

The IPSASB received mixed support for the proposal to depart from IFRS 16 for lessor accounting. Some respondents did not agree with departure from IFRS 16 as leases have the same characteristics in the public and private sector. Some respondents agreed with departing from IFRS 16 but did not agree with the model the IPSASB suggested. While the reasons for disagreeing with the model varied; many respondents were of the view that recognising a receivable for the lease payments as well as the underlying leased asset (with its accounting unchanged), resulted in ‘double accounting’ for the same rights. 

While the Secretariat of the ASB believes that the IPSASB will need to address the perceived issues of ‘double accounting’ (possibly by changing the measurement of the leased asset), one advantage to applying the ‘right of use’ model for lessors means that the leased asset is always recognised by at least one party to the lease. Under the operating/finance lease approach, neither party may recognise the asset. Having the asset recognised by lessors ensures that government assets are reflected on balance sheet, and entities can be held accountable for their use. 

Given the mixed reactions to the lessor model, the IPSASB is debating whether to depart from IFRS 16. A list of criteria has been developed by the IPSASB which will be used to guide its decisions on this issue. The criteria will, among others, assess the information produced by either the right of use of finance/operating lease approach and how this information helps to hold entities accountable and to make decisions. The IPSASB plans to decide on the lessor model at its December 2019 meeting. 

While there was support for lessee accounting, it is currently unclear whether the IPSASB will progress the both lessee and lessor accounting simultaneously. If the approach to the lessor model in ED 64 is substantially changed, it may warrant re-exposure. The IPSASB may decide to issue the requirements for lessees and issue revised requirements for lessors for comment. There will be more clarity on this issue in December 2019. 

Impact locally

The ASB has agreed to consider changes to GRAP 13 on Leases in 2022/2023. Until the ASB changes GRAP 13, entities continue to apply this Standard to account for leases. 

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