IPSASB develops proposed guidance on public sector specific leases

At its meeting in December 2022, the International Public Sector Accounting Standards Board (IPSASB) issued proposed guidance to address public sector leases. This is the second phase of the IPSASB’s leases project. The first phase was completed with the approval of IPSAS 43 on Leases in December 2021. IPSAS 43 is aligned with IFRS 16 on Leases.

What are the public sector specific lease issues?

The guidance proposed by the IPSASB deals specifically with the accounting for concessionary leases, and proposes new guidance for right-of-use assets in-kind.

Accounting for the concessionary component of a lease

Even though a “concessionary lease” is not defined in the proposed guidance, the concept is described as “a lease at below market terms”. When an entity enters into a concessionary lease, the lease will have both an exchange and non-exchange component.

The non-exchange component is the difference between the present value of payments for the lease at market rates, and the present value of the contractual payments. This component is accounted for in accordance with IPSAS 23 on Revenue from Non-Exchange Transactions (Taxes and Transfers).

Lessee’s accounting in a concessionary lease

The lessee’s lease liability is measured at the present value of the lease payments. These payments are discounted using the interest rate implicit to the lease. If this rate cannot be readily determined, the lessee applies its incremental borrowing rate, i.e. the rate that it would have to pay to borrow over a similar term, and with a similar security to enable it to obtain an asset of a similar value in a similar economic environment.

When a right-of-use asset is acquired through a concessionary lease, the lessee measures its cost at the present value of payments for a lease at market rate, as at the commencement of the lease. A “right-of-use asset” is an asset that represents the lessee’s right to use the underlying asset over the lease term.

After initial recognition, the lessee measures a right-of-use asset by applying either IPSAS 16 on Investment Property, or IPSAS 17 on Property, Plant and Equipment.

Lessor’s accounting in a concessionary lease

The IPSASB proposes that a lessor applies the current IPSAS 43 guidance to account for 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.

Right-of-use assets in-kind

Some entities enter into arrangements that convey the right to use an underlying asset for zero consideration. As there is no exchange when entering into the arrangement, these type of arrangements do not meet the definition of a lease.  A lease is defined as “a contract that conveys the right to use an asset for a period of time in exchange for consideration”.

The IPSAS proposes that the accounting for a “right-of-use asset in-kind” should be similar to the accounting for a right-of-use asset acquired through a concessionary lease as both are non-exchange transactions. Therefore, a right-of-use asset in-kind is measured at the present value of the payments for the lease at market rate based on the current use of the asset as at the commencement of the lease.

How can you comment on the proposals?

As part of the Accounting Standards Board’s ongoing commitment to influence the international standard setting process, the IPSASB Exposure Draft will be issued concurrently for discussion locally. The Secretariat will host workshops to obtain comment from local stakeholders on the proposals. 

If you are interested in commenting on the proposals in the IPSASB Exposure Draft subscribe to the ASB’s Newsletter for further updates, follow us on social media for updates on this project, or contact Amanda Botha on amandab@asb.co.za

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.