Pastoral Leases_1

Dec 2020 4 Minutes

Accounting for Pastoral Leases under AASB 16 “Leases”

By Richard Gregson, Director

This reporting season we have received a number of queries about the application of AASB 16 Leases to Pastoral Leases. Below we provide a brief overview of the application of this standard to Pastoral Leases in Western Australia.

 

Background

The majority of Pastoral Leases in Western Australia were extended by the State of Western Australia effective 1 July 2015 for a period of 49 years, and it is these leases that are the subject of commentary.

 

Do Pastoral Leases need to be accounted for in accordance with AASB 16?

In short, yes.

Entities are required to apply AASB 16 to all leases unless the leases fall with the exceptions detailed in paragraph 3, items (a) through (e). These exceptions are:

  • leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
  • leases of biological assets within the scope of AASB 141 Agriculture held by a lessee;
  • service concession arrangements within the scope of Interpretation 12 Service Concession Arrangements;
  • licenses of intellectual property granted by a lessor within the scope of AASB 15 Revenue from Contracts with Customers; and
  • rights held by a lessee under licensing agreements within the scope of AASB 138 Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.

Recognition exemptions are available under paragraph 5 of AASB 16 for short term leases and leases for which the underlying asset is of low value. These exemptions are unlikely to be applicable to most Pastoral Leases.


 

Accounting for the leases

Initial recognition

At the commencement date of the leases the Pastoral Lessee should recognise the right-of-use assets at cost in accordance with the provisions of paragraph 24 of AASB 16 and the associated lease liabilities in accordance with paragraphs 26 and 27 of AASB 16 which require the lease liability to be recognised at the present value of the lease payments that are not paid at the initial date of recognition.

Subsequent measurement of right-of-use assets

In accordance with paragraph 35 of AASB 16 as the Pastoral Leases (right of use assets) relate to a class of property, plant and equipment to which the Pastoral Lessee applies the revaluation model in AASB 116, it is permissible to apply that revaluation model to all of the right-of-use assets that relate to that class of property, plant and equipment.

Subsequent measurement of lease liabilities

Paragraph 36 of AASB 16 requires the following accounting for the lease liabilities after the initial recognition:

  • increase the carrying amount to reflect the interest on the lease liability;
  • reduce the carrying amount to reflect the lease payments made; and
  • remeasure the carrying amount to reflect any reassessment or lease modifications.

Paragraphs 47 through 50 of AASB 16 detail the presentation requirements of the standard and paragraphs 51 through 59 detail the disclosure requirements.

 

Effective date and transition

The standard is applicable for reporting periods beginning on or after 1 January 2019.

The standard should be applied to the leases either:

  • retrospectively to each prior reporting period presented by applying AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors; or
  • retrospectively with the cumulative effect initially applying the standard recognised at the date of initial recognition – that is comparative information should not be restated, rather the cumulative effect of initially applying the standard should be reflected as an adjustment to the opening balance of retained earnings at the date of initial application.

 

In practical terms, what does the above mean for a Pastoral Lessee?

The practical approach, in most cases, would be to apply this standard effective as at 1 July 2019, with the cumulative effect of applying the standard being recognised as an adjustment to the balance of retained earnings at that date.

In the event that the pastoral leases are already recognised on the basis of fair value, this will involve recognising the lease liabilities in accordance with paragraphs 26 and 27 of AASB 16, that is at the present value of the lease payments that are not paid as at 1 July 2019, with an equivalent reduction to the balance of retained earnings at that date.

 

Please also note the following additional application requirements as detailed above:

  • increase the carrying amount to reflect the interest on the lease liability;
  • reduce the carrying amount to reflect the lease payments made; and
  • remeasure the carrying amount to reflect any reassessment or lease modifications.

The interest on the lease liability in each period in the lease term shall be the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability.

It is also important to note that the application of the revaluation model under AAS 116 implies the need to depreciate the assets and subsequently adjust the accumulated depreciation when the assets are revalued.

 

 

Richard Gregson

Director

Audit & Advisory

rgregson@ww-wa.com.au

0437 213 700