IPSASB continues discussions on concessionary leases

The IPSASB is developing an Exposure Draft on “other lease-type arrangements” to address public sector specific issues raised by constituents in accounting for leases. Changes are being developed to IPSAS 43 on Leases, and IPSAS 23 on Revenue from Non-exchange Transactions (Taxes and Transfers). The changes would primarily address accounting for concessionary leases.

Decisions on the Exposure Draft

At its June and September 2022 meetings, the IPSASB agreed principles to account for other lease-type arrangements, specifically concessionary leases. Read [https://www.asb.co.za/addressing-public-sector-specific-issues-on-leases/] where these principles were discussed.

Two remaining matters considered at the October 2022 check-in meeting were:

1. Initial measurement of “right-of-use assets in-kind” and “right-of-use assets in a concessionary lease”

The IPSASB considered a proposal to initially measure “right-of-use assets in-kind” and “right-of-use assets in a concessionary lease” using a technique that determines the present value of market-related lease payments for a similar asset. This was proposed instead of fair value to resolve potential tension with the new definition of fair value that the IPSASB is introducing in its literature through the measurement project, and information that would be useful for users. For example, fair value would require a lessee to consider the highest and best use of an asset, which may not be appropriate when measuring the right of use asset (and related concessionary component) in a concessionary lease.

The proposed technique will be refined for the December 2022 meeting to ensure the guidance is clear and would result in useful information for users in the financial statements.

2. Transitional provisions

The IPSASB considered the transitional requirements for entities applying the proposed requirements to concessionary leases for the first time.

In order not to require extra effort by preparers to apply the new proposed guidance, transitional requirements were considered as follows:

• for concessionary leases, requirements similar to the transitional requirements in IPSAS 43 on Leases for leases at market terms; and
• for “right-of-use assets in-kind”, requirements similar to the transitional requirements in IPSAS 43 for right-of-use assets acquired through leases at market terms.

This would broadly mean that entities would have a choice to either apply the requirements retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the Standard recognised at the date of initial application.

Next steps

The IPSASB will consider the Exposure Draft for approval at the December 2022 meeting. A feedback statement / staff Q&As will be developed to respond to issues that have not been incorporated in the Exposure Draft, e.g. scoping of arrangements that convey the right to use an underlying asset in the public sector.

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.