Proposed IPSAS on leases: what is a lease?

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 issued in 2018.

The proposed IPSAS will change the accounting treatment of leases. For the most part, lessees will be affected. The classification of leases as operating or finance lease has been removed. This means that lessees need to recognise all lease contracts in their statement of financial position unless they take advantage of certain optional exemptions.

At first glance, the accounting seems straightforward as the guesswork behind lease classification is gone. However, under the new “right-of-use” model lessees will recognise a lease asset (representing the right to use the leased asset) as well as a lease liability (representing the lease payments). Leases need to be recognised on the statement of financial position when they meet the definition of a lease.

The definition of a lease is unchanged. A lease is defined as “a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration”. Lessees need to assess each contract to identity if there is a lease. One of the practical challenges will be assessing whether a contract conveys the right to use an asset or is, instead, a contract for a service that is provided using the asset. Guidance on how to apply the definition is provided. The difference is that a lease provides a customer with the right to control the use of an asset over the lease period; whereas, in a service contract, the supplier retains control. In simple terms, a contract is a lease if the lessee can make important decisions about the use of the leased asset in the same manner as it makes decisions about assets it owns.

The result of the assessment is that the lessee accounts separately for the lease component and non-lease components of the lease. The lease is recognised in the statement of financial position while the non-lease component is expensed. For example, a contract for the lease of an asset does not include the maintenance service during the lease term and should be accounted for separately.

A lessee may apply a practical expedient by class of underlying asset and ignore the requirement to separate non-lease components from the lease components. Instead, it may account for the entire contract as a single lease contract. This practical expedient is only available to lessees; it does not apply to lessors.

While there is more work to be done in identifying leases and their various elements, the proposed IPSAS introduces other practical expedients that lessees can apply. For example, short-term leases and leases for which the underlying asset is of low value can be expensed.

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 Request for Information by following this link.

Disclaimer

This content 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.