Is the IPSASB’s new approach to align with IFRS 16 appropriate?

In January 2021 the IPSASB published revised proposals for leases. The proposed IPSAS is substantially aligned with International Financial Reporting Standard on Leases (IFRS^® 16), unlike the earlier proposals in Exposure Draft 64, Leases (ED 64) issued in 2018.

IFRS 16 came into effect on 1 January 2019. It takes a new approach to accounting for leases. Lessees will apply a new model called the “right-of-use” model, while lessors continue to apply the “risk and reward incidental to ownership” model carried forward from the previous lease requirements. These changes were made to address the downsides of the previous requirements in International Accounting Standard^® 17, Leases. In particular, there were concerns that operating leases are not reflected on balance sheets of lessees, despite their financing element. Other concerns related to the financial statements not providing adequate information about a lessor’s exposure to credit risk and asset risk.

In ED 64, the IPSASB proposed moving away from IFRS 16 accounting for lessors. It developed its own “right-of-use” model for lessors to mirror the lessee accounting. Respondents did not favour the departure from the IFRS 16 model and questioned the proposed accounting.  As a result, the IPSASB decided not to continue with the proposal but instead revised its approach to the leases project by aligning with IFRS 16 altogether.

The IPSASB considered the change in approach appropriate because:

• The objective of the leases project was always to maintain alignment with IFRS. Therefore, adopting IFRS 16 requirements for both lessee and lessor accounting reflects that objective.
• IFRS 16 introduced changes to the lessee accounting, and the lessor accounting remained relatively the same. Implementing the requirements will be less costly and challenging as only lessees will be affected.
• IFRS 16 was implemented in January 2016. This allows the public sector to benefit from lessons learnt from the private sector experience.
• The IPSASB will have more time to progress phase two of the project that will focus on developing guidance on public sector specific issues.

To achieve alignment, the IPSASB has not modified IFRS 16 significantly in developing the proposed IPSAS. Unlike ED 64, no specific guidance is provided on public sector specific issues (e.g. concessionary leases). The IPSASB will consider this guidance in the next phase of the project once the new IPSAS on leases is finalised. A Request for Information (RFI), Concessionary Leases and Other Arrangements Similar to Leases has been issued alongside the proposed IPSAS. This RFI will assist the IPSASB to determine whether to develop guidance for public sector specific lease arrangements such as concessionary leases.

These international amendments, once final, are likely to impact the local environment. The ASB has a policy to maintain alignment with the Standards issued by the IPSASB when they are consistent with its mandate and strategic objectives. The ASB will consider the impact of the amendments when the IPSASB finalises them in 2022.

Please share your views with us about these expected changes to lease accounting.

Access the proposed IPSAS and RFI by following this link.