New leases standard for PBEs
We recently sought feedback on our Exposure Draft (ED), which proposes a new lease accounting standard. The proposals are based on the IPSASB standard IPSAS 43 Leases, which is aligned with the for-profit standard IFRS 16 Leases.
The proposals require lessees to recognise almost all leases on the statement of financial position. For lessors, the accounting requirements remain largely unchanged.
The proposals will allow New Zealand public benefit entities (PBEs) to benefit from the latest international thinking on lease accounting. The proposals will enhance transparency around PBEs’ leases, and make it easier for ‘mixed groups’ containing both PBEs and for-profit entities to prepare group financial statements.
Note on concessionary leases
Our proposals did not include fair value measurement requirements for concessionary leases (i.e. leases with below-market terms). The IPSASB is considering this matter under a separate project, which resulted in a separate IPSASB consultation in 2023. We are continuing to monitor the IPSASB project and will consider any implications for New Zealand in due course.
This consultation is on the proposed new lease accounting standard for Tiers 1 & 2 Public Benefit Entities.
You can view our short presentation on the consultation here.
Submissions closed on 25 November 2022.
Thank you to everyone who provided feedback on this consultation. The feedback we received on the ED was mixed. A review of submissions identified the following key themes:
- Support from the public sector to align PBE lease accounting requirements with IPSAS 43 and NZ IFRS 16, with some recommendations to consider further the scope of the standard and some concerns relating to concessionary leases;
- Concern from not-for-profit entities regarding the cost/benefit of bringing most leases onto the balance sheet as right-of-use assets and lease liabilities.
Individual submissions can be viewed below.
In light of the mixed feedback received on the ED, during May–July 2023 we carried out additional effects analysis in relation to the proposed PBE IPSAS 43 Leases – to inform the next steps of this project for the public sector and the not-for-profit sector.
The key results of the additional effects analysis are summarised below.
We held additional discussions with key public sector stakeholders to further understand the effects of the proposed changes to lease accounting requirements in the public sector.
Public sector stakeholders continue to support the introduction of a standard based on IPSAS 43 into PBE Standards, particularly given the importance of alignment with international accounting standards for the public sector.
However, they see benefit in deferring the finalisation of PBE IPSAS 43 until certain matters are resolved and additional information is obtained. For example:
- It is important to consider the impact on the public sector in the context of other forthcoming major PBE Standards, some of which would cover matters that are more urgent to address as compared to lease accounting.
- Adoption of PBE IPSAS 43 would be more efficient if the Standard were to be finalised together with finalised requirements for concessionary leases.
- The forthcoming Post-Implementation Review of IFRS 16 Leases could uncover application issues in the for-profit sector that may be useful to address before PBE IPSAS 43 is finalised for application by the public sector.
We conducted a survey for Tier 1 and Tier 2 charities and another survey for funders of charities – to gather views from a broader range of not-for-profit stakeholders regarding the proposed changes in lease accounting.
We received a total of 93 survey responses (88 charities and 5 funders) – a huge thank you to all the respondents.
Highlights from our survey for Tier 1 and Tier 2 charities included the following:
- 72% of respondents have concerns relating to the proposed new standard (including concerns about the cost and complexity of applying the right-of-use requirements), while only 28% had no major concerns.
- 53% of respondents saw one or more benefits in the proposals, while 47% either selected the option ‘other’ and commented that they see very little benefit, or did not answer this question.
The majority of the funders who responded to our survey did not think that the proposed standard will help them make funding decisions, had concerns about the proposals, and did not have major concerns about the way charities currently report on leases.
The survey results communicate similar concerns to those expressed by the not-for-profit stakeholders who responded to our 2022 ED. These concerns relate to the cost and complexity of the proposed requirements, and that the benefits for users of not-for-profit entities’ financial statements would not outweigh the costs.
Further information on the effects analysis is available in the NZASB August 2023 meeting papers.
Having considered the feedback on the ED and the results of the additional effects analysis, in August 2023 the New Zealand Accounting Standards Board (NZASB) decided the following.
The Board agreed to commit to the finalisation of PBE IPSAS 43 Leases for application by the public sector, but to DEFER the finalisation, taking into account holistically the full NZASB work programme for public sector entities, including the expected timing of issuing other major new standards and these standards’ application dates. This deferral also enables the finalised version of PBE IPSAS 43 Leases to be informed by information from the Post-Implementation Review of IFRS 16 and further work by the IPSASB on concessionary leases.
The expected timing of finalisation would be heavily dependent on the full NZASB work programme for public sector entities, including careful consideration of the current projects on Revenue and Transfer Expenses. Subject to NZASB deliberations, and consultation outcomes, the preliminary indicative timeline for these Standards is that they would become mandatory to apply from 1 January 2027. We anticipate that the mandatory application date of PBE IPSAS 43 Leases for the public sector would be two years after Revenue and Transfer Expenses Standards become mandatory.
The NZASB agreed to commit to the stability of the current lease accounting requirements remaining in place for not-for-profit PBEs at this time. After public sector PBEs have adopted the right-of-use model, we will reassess whether the current requirements remain appropriate, having regard to learning from application by public sector PBEs and considering feedback from NFP stakeholders at that time.
The NZASB considered this appropriate in light of feedback highlighting concerns about the cost and complexity of the proposed requirements, and that the costs would not be justified by benefits for users of not-for-profit entities’ financial statements at this time, acknowledging this balance could change in the future.