Proposed IPSAS on leases: will it be business as usual for lessors?

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 accounting by lessors in the proposed IPSAS on leases remains substantially the same. Lessors will continue to classify leases as either finance or operating leases.

With all the changes made to the lessee accounting, lessors will be impacted by the new guidance on the definition of a lease, sublease and the accounting for sale and leasebacks.

The definition of the lease has not changed but its application is somewhat different. Lessors will be required to assess 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 is provided to determine whether a contract is a lease.

Subleases are transactions where a lessee leases an asset from a lessor (head lease), and the lessee then re-leases the same asset (as intermediate lessor) to another third-party lessee (sublease).

The proposed IPSAS changes the classification and accounting of the sublease. The classification by the intermediate lessor is done with reference to the right-of-use assets arising from the headlease rather than by reference to the economic useful life of the underlying asset. The intermediate lessor assesses whether it has a finance or operating lease by reference to the right-of-use asset arising from the head lease.  If the headlease is a short-term lease and the lessee applied the recognition exemption (i.e. recognised lease payments as an expense), the sublease must be classified as an operating lease. The intermediate lessor will therefore account for the sublease as either an operating lease or finance lease.

The accounting for sale and leaseback transactions has also changed. A sale and leaseback transaction is where an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) for consideration and leases that asset back from the buyer-lessor.

Accounting by the seller-lessee is simpler as the classification of leases has been removed for lessees. However, under the proposed requirements, both the seller-lessee and the buyer-lessor must first determine whether the transfer qualifies as a sale. The requirements for satisfying a performance obligation in terms of the proposed IPSAS on revenue are applied.

If the buyer-lessor has obtained control of the underlying asset and the transfer is classified as a sale:

• the seller-lessee measures a right-of-use asset arising from the leaseback as the proportion of the previous carrying amount of the asset that relates to the right of use retained; and
• the gain (or loss) that the seller-lessee recognises is limited to the proportion of the total gain (or loss) that relates to the rights transferred to the buyer-lessor.

If the consideration for the sale is not equal to the fair value of the asset, any resulting difference represents either a prepayment of lease payments (if the purchase price is below market terms) or an additional financing (if the purchase price is above market terms). The same logic applies if the lease payments are not at market rates.

The buyer-lessor accounts for the purchase in accordance with applicable standards for the underlying asset, and for the leaseback in accordance with the lease requirements.

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.