Leases—Peppercorn leases

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Do you have a peppercorn lease? Peppercorn leases are leases with nominal rent. This might be $1, or even as low as a peppercorn.

In November 2018, the Australian Accounting Standards Board (AASB) proposed to defer the mandatory valuation requirements of peppercorn leases. Entities choosing to defer valuation will be required to make relevant disclosures about their arrangements. Any amendments to the valuation requirements are subject to consultation and due process.

The original requirements under the new standards (leases, income of not‑for‑profit entities, and revenue) were to fair value peppercorn leases. This would have meant recognising a right-of-use lease asset. The corresponding amount would likely be an upfront revenue contribution, though it might be an equity contribution if the lease is from your owner.  

Subsequently, the right-of-use asset would be depreciated without a corresponding revenue amount, which would decrease your net result. This is like the current accounting for capital grants.

The requirements to fair value peppercorn leases would have applied to leases that ‘at inception had significantly below‑market terms and conditions principally to enable the entity to further its objectives’. An important point with this requirement is that the assessment is made at the inception of the lease. Merely having a lease where your rental changes have not matched market movements would not trigger the fair value recognition requirement.

Part of the reasons for the deferral are significant valuation issues. Issues we have raised with staff at the AASB include whether fair value should be based on ‘commercial rate’ that a hypothetical for-profit entity would pay, or the value is based on the specific restrictions of being granted to a not-for-profit entity. Another main reason for deferral is to wait for the resolution of private sector not-for-profit entity reporting thresholds.