Last chance to share your views on the IPSASB’s proposals on public sector specific leases

The approval of IPSAS 43 on Leases in December 2021 by the International Public Sector Accounting Standards Board (IPSASB) marked the completion of the IPSASB’s first phase of its leases project. IPSAS 43 is aligned with IFRS 16 on Leases.

As part of the second phase of the leases project, the IPSASB developed proposed guidance on concessionary leases and right-of-use assets in-kind. An Exposure Draft was issued by the IPSASB during December 2021, with the ASB issuing the proposed guidance concurrently for comment. Local comment on the IPSASB Exposure Draft is due on 6 April 2023 to enable the Board to draft a comment letter to the IPSASB. 

Proposals for the concessionary component of a lease

Describing a concessionary lease

The proposed guidance does not define a “concessionary lease” –  an approach that is similar to concessionary loans in IPSAS 41 on Financial Instruments. Instead, a “concessionary lease” is described in the Exposure Draft as “a lease at below market terms”.

Lessee’s accounting in a concessionary lease

When an entity enters into a concessionary lease, the lease will have an exchange and non-exchange component.

For the exchange component of the concessionary lease, a lessee measures:

• the right-of-use asset acquired, at the present value of payments for a lease at market rate 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; and
• the lease liability, at the present value of the lease payments. The payments are discounted using the interest rate implicit in 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.

The non-exchange component of the concessionary lease is the difference between the present value of the 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).

Lessor’s accounting in a concessionary lease

The IPSASB agreed that the current IPSAS 43 guidance for a lessor is appropriate to apply to concessionary leases. If 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.

Proposals for the a right-of-use asset in-kind

Lease arrangements that convey the right to use an underlying asset for zero consideration do not meet the definition of a lease because there is no exchange of consideration by the lessee to “use” the asset. A lease is defined as “a contract that conveys the right to use an asset for a period of time in exchange for consideration”.

These type of arrangements are a lease of a “right-of-use asset in-kind”. The IPSASB proposes that the accounting requirements should be similar to those of  a right-of-use asset acquired through a concessionary lease.

A lessee will measure a right-of-use asset in-kind 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?

If you would like to comment on the proposals in the IPSASB Exposure Draft, submit your comment to Amanda Botha on amandab@asb.co.za, on or before 6 April 2023.

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.