IPSAS 43 Leases,” is designed to enhance transparency and consistency in lease accounting by setting out principles for recognizing, measuring, presenting, and disclosing leases. This standard aims to provide relevant information that faithfully represents lease transactions for both lessees and lessors.
Objective
The objective of IPSAS 43 is to ensure that lessees and lessors provide relevant information in a manner that accurately represents their lease transactions. This includes recognizing lease-related assets and liabilities, and providing detailed disclosures that give users of financial statements a clear understanding of the effects of leases on the entity’s financial position and performance.
Scope
IPSAS 43 applies to all leases, including subleases, except for leases of biological assets, exploration for or use of minerals, oil, natural gas, and similar non-regenerative resources, and licenses of intellectual property granted by a lessor. The standard also excludes lease agreements within the scope of IPSAS 13, “Leases.”
Key Definitions
- Lease: A contract that conveys the right to control the use of an identified asset for a period in exchange for consideration.
- Lessee: The entity that obtains the right to use the asset.
- Lessor: The entity that provides the right to use the asset.
- Right-of-Use Asset: An asset representing the lessee’s right to use a leased asset.
- Lease Liability: The lessee’s obligation to make lease payments.
Lessee Accounting
At the commencement date of the lease, the lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is initially measured at cost, which includes the amount of the initial measurement of the lease liability, lease payments made at or before the commencement date, initial direct costs, and an estimate of dismantling and restoration costs. The lease liability is measured at the present value of the lease payments to be made over the lease term, discounted at the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate.
Lessor Accounting
Lessors classify leases as either finance leases or operating leases:
- Finance Leases: The lessor derecognizes the underlying asset and recognizes a receivable equal to the net investment in the lease. The net investment is measured as the present value of lease payments receivable and any unguaranteed residual value, discounted at the interest rate implicit in the lease.
- Operating Leases: The lessor continues to recognize the underlying asset and recognizes lease income on a straight-line basis or another systematic basis over the lease term.
Identifying a Lease
A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration. This determination is based on whether the customer has the right to obtain substantially all the economic benefits from using the asset and the right to direct the use of the asset.
Lease Payments
Lease payments include fixed payments, variable payments that depend on an index or a rate, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, payments for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease, and amounts expected to be payable by the lessee under residual value guarantees.
Lease Term
The lease term is the non-cancellable period for which the lessee has the right to use the underlying asset, including periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
Initial Measurement
- Right-of-Use Asset: The right-of-use asset is measured at cost, which includes the initial measurement of the lease liability, lease payments made at or before the commencement date, initial direct costs, and an estimate of costs to dismantle and remove the underlying asset or restore the asset or the site on which it is located.
- Lease Liability: The lease liability is measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate.
Subsequent Measurement
- Right-of-Use Asset: After the commencement date, a lessee measures the right-of-use asset using a cost model, unless it applies the revaluation model in IPSAS 17, “Property, Plant, and Equipment.” The cost model requires the right-of-use asset to be depreciated on a straight-line basis over the lease term.
- Lease Liability: The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect the lease payments made.
Modifications
Lease modifications are changes to the scope of the lease or the consideration for a lease that was not part of the original terms and conditions. A lease modification is accounted for as a separate lease if it grants the lessee an additional right-of-use not included in the original lease. If not accounted for as a separate lease, the lessee remeasures the lease liability using a discount rate determined at the effective date of the modification.
Lease Examples
Examples include different scenarios to illustrate the application of the standard. For instance, a coffee company leasing space in an airport may not constitute a lease if the airport operator can change the location of the space. In contrast, leasing specified fibers within a cable, where the lessee has control, constitutes a lease.
Practical Expedients
To simplify the application of IPSAS 43, practical expedients are provided. For example, lessees may elect not to separate non-lease components from lease components and instead account for each lease component and any associated non-lease components as a single lease component.
Conclusion
IPSAS 43 significantly impacts how lessees and lessors account for leases, emphasizing the recognition of right-of-use assets and lease liabilities. By ensuring that leases are reported transparently and consistently, IPSAS 43 enhances the comparability and clarity of financial statements across public sector entities. This standard helps users of financial statements better understand the financial position, performance, and cash flows related to lease transactions.
