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Government agencies that lease office space and other assets could depict their contract arrangements more precisely by adopting new financial-reporting requirements as part of a proposed voluntary international standard.
The International Public Sector Accounting Standards Board (IPSASB) Jan. 31 proposals set new financial-reporting measures for leases in the public sector.
The New York-based IPSASB—which is partially funded by the Asian Development Bank and the Canadian and New Zealand governments—aims to bolster government financial management by setting voluntary accounting standards and guidance for the public sector worldwide.
The board’s 150-page Exposure Draft (ED) 64 would put into practice a single standard for public-sector lease accounting.
It also proposes new accounting requirements specific to the public sector for both lessors and lessees covering leases at terms below those typical in the market, known as concessionary leases.
The directive would exempt leases to explore for, or use, such non-renewable resources as oil, natural gas, and minerals, as well as short-term leases running less than 12 months and those involving assets deemed to have low value.
IPSASB’s proposal resembles, but isn’t identical to, International Financial Reporting Standard 16: Leases for the private sector and borrows from IFRS 16 a framework known as the right-to-use model.
The board is proposing that both lessors and lessees use the right-of-use model, which is based on the principle that leases involve financing for the right to make use of an underlying asset over the term of a lease.
In contrast, IFRS 16, which the International Accounting Standards Board issued in January 2016, sets different financial-reporting models for lessors and lessees.
The proposal would bring IPSASB’s lease-accounting requirements into line with IFRS 16 for lessees. It would create for lessors a right-of-use accounting model tailored specifically for financial reporting in the public sector.
The IPSASB proposals are designed to address common public-sector lease contracts where a lessor and a lessee are part of the same economic entity, the organization said.
IPSASB’s policy for convergence projects is to follow an IASB standard unless there’s a reason for treating the public sector differently, according to a Feb. 2 email from IPSASB to Bloomberg Tax.
“In this case, the IPSASB decided that because lessors and lessees are quite often both within the public sector economic entity, the accounting should be consistent,” the organization said.
Leases offer an important financing tool for the public sector and for international organizations, IPSASB Chairman Ian Carruthers said in a Jan. 31 statement.
“The proposals in ED 64 will provide better information on the financial impacts of leases and therefore enhance both the accountability of an entity for its management of resources and improve the quality of information for decision-making,” he said.
Implementing the right-of-use model would involve costs for public agencies, but these expenses wouldn’t exceed the benefits the proposals would produce, the proposal said.
“The right-of-use model prevents arbitrage, gaming and information asymmetry, and improves comparability between public sector entities that lease assets and public sector entities that purchase assets,” the proposal said.
IPSASB wants comments on the proposals submitted by June 30, 2018.
“Technical Advisors and Staff will participate in several outreach events around the world to discuss ED 64,” IPSASB said.
IPSASB will consider the topics raised in comments before determining the next steps in the project.
The lease proposal is at http://src.bna.com/v86
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