Not for Profit Entities and Peppercorn Leases
A significant number of not-for-profit entities, in particular sporting and surf clubs, have entered into leases for land or buildings, with lease payments significantly below market value. These are known as ‘peppercorn’ leases and typically have rentals of $1 per year or thereabouts. The Lessor is normally a government entity, such as a Local Council, that is contributing to the community by granting such a lease.
On the release of AASB 16 ‘Leases’ in 2017, representing a significant change to the accounting treatment of leases, the AASB provided some draft guidance in relation to the accounting treatment of these Peppercorn leases in the not-for-profit sector. The advice effectively outlined the requirement to obtain a fair valuation of the property leased, using that value as the basis for recognising a new Right of Use asset. Understandably, the sector was not happy, citing the cost and resource concerns that obtaining such a valuation would no doubt present. Not-for-profit clubs are typically run by generous volunteers in the community who receive a nominal wage, if any at all so forking out 20K for a valuation simply isn’t a good use of funds for the clubs, which could otherwise go to other useful projects such a capital infrastructure, upgrades, repairs and most importantly in the sporting clubs sector, giving back to the junior and senior programs through purchase of jerseys’, training resources, field maintenance etc etc.
As a result of a number of submissions by the not-for-profit sector, in 2018 the AASB issued ‘AASB 2018-8’ – Amendments to accounting of not-for-profit entities which provided what as at the time deemed a ‘temporary’ grace period of allowing these leases to be measured at cost. Keeping in mind that the cost of a lease recognised in the financial statements involves discounting future lease cash flows over the term of the lease to present value and using that as the basis for the cost recorded in the financial statements. You can easily see the conundrum of discounting a 99 year lease at $1 per year – a frivolous exercise equating to an amount far from material for your audit teams.
Now, the present situation as a result of the changes is that clubs may choose to have a fair valuation done or simply recognise the leased at cost. Unsurprisingly, the majority have taken the latter option, which we certainly recommend. The AASB has continued to assert that this change is temporary; however, our view is that this will become the norm moving forward and no requirement to fair value a leased asset will be required for peppercorn leases.
If you would like some further guidance as to your particular leased asset, please reach out to us here at CJG services and we would certainly love to help.
