Addressing public sector specific issues on leases

After the approval of IPSAS 43 on Leases in December 2021, the International Public Sector Accounting Standards Board (IPSASB) commenced with the second phase of the leases project. This phase will address public sector specific issues for lease-type arrangements, including concessionary leases. The Exposure Draft (ED) is likely to be approved at the IPSASB’s December 2022 meeting.  

Accounting for concessionary leases

At its June and September 2022 meetings, the IPSASB agreed principles to account for other lease-type arrangements, specifically  concessionary leases. These principles are highlighted below.

• Describing concessionary lease

The IPSASB agreed that a definition should not be provided for a  “concessionary lease”, but that the concept should be described in the ED. This approach was considered to be consistent with the approach in IPSAS 41 on Financial Instruments, where concessionary loans are described, but not defined. This approach will prevent an apparent contradiction of labelling “a lease” as an arrangement that conveys the right to use an underlying asset without exchange of consideration.

• Lessee accounting in a concessionary lease

In IPSAS 43, a lessee measures a right-of-use asset at cost. This is consistent with the measurement requirements in many other non-financial asset standards, such as assets that are within the scope of IPSAS 17 on Property, Plant and Equipment.

However, for non-exchange transactions, a cost measurement basis does not reflect the economics of the transaction because it does not capture the embedded concession. In developing the guidance for a lessee in the proposed ED, the IPSASB considered the guidance in IPSAS 23 on Revenue from Non-Exchange Transactions (Taxes and Transfers) and IPSAS 41 on Financial Instruments to provide guidance for the right-of-use asset and the concession component.

The IPSAS concluded that the right-of-use asset should, on initial recognition, be measured at fair value when the definition of a lease is met. This principle is consistent with the accounting for non-exchange transactions in IPSAS 23, including concessionary loans. As the IPSASB has not yet finalised the new IPSAS on Measurement, the current definition of fair value will be replaced once the measurement guidance has been finalised.

The IPSASB also agreed that the ED should propose that the concession component in a concessionary lease be recognised as revenue at inception of the lease. The IPSASB agreed that this component should be accounted in the same way as component in a concessionary loan, as, among others (a) both transactions are at below-market terms at inception; and (b) whether transferring a resource in cash or in-kind should not modify the accounting for the concessionary component.

The lease liability is measured at the present value of the lease payments.

• Lessor accounting in a concessionary lease

The IPSASB agreed that the current IPSAS 43 guidance for a lessor, is appropriate to apply to concessionary leases. Therefore, no additional accounting requirements will be included in the ED for a lessor who grants a concessionary lease.

This means that when a lessor enters into a concessionary finance lease, it will continue to measure the transfer of the underlying asset to the lessee at its carrying amount. In a concessionary operating lease, the lease payments received by the lessor, will be recognised as revenue, on either a straight-line basis or on another systematic basis.

Way forward

As part of the Accounting Standards Board’s ongoing commitment to influence the international standard setting process, the proposed ED will be issued concurrently for discussion locally. If you are interested in these developments, subscribe to the ASB’s newsletter to receive further updates, or follow the IPSASB’s Leases project by following this Other Lease-Type Arrangements | IFAC (ipsasb.org).

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.