Under IPSAS 43, a lessee recognizes, at the commencement date of any lease (other than short-term or low-value leases), a "right-of-use asset" and a "lease liability" in its financial statements, replacing the old distinction between operating and finance leases. The Standard applies to annual periods beginning on or after January 1, 2025.

What Is the Objective of IPSAS 43?

The Standard states that "this Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions."

How Does the Standard Define a Lease?

The Standard defines a lease as "a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration." This definition is broad enough to capture any contractual arrangement meeting this condition, regardless of the label the parties give the contract.

What Does a Lessee Recognize at the Commencement Date?

The Standard states clearly that "at the commencement date, a lessee shall recognize a right-of-use asset and a lease liability." This means that, from the lessee's perspective, most leases now appear on the statement of financial position as both an asset and a liability, unlike the old approach that kept operating leases off the statement of financial position.

How Is the Right-of-Use Asset Measured on Initial Recognition?

The Standard states that "at the commencement date, a lessee shall measure the right-of-use asset at cost." It sets out the components of that cost, providing that "the cost of the right-of-use asset shall comprise: (a) The amount of the initial measurement of the lease liability, as described in paragraph 27; (b) Any lease payments made at or before the commencement date, less any lease incentives received; (c) Any initial direct costs incurred by the lessee." The asset's cost is therefore not merely the present value of future lease payments, but also includes amounts paid upfront and direct costs linked to entering into the contract.

Are There Exemptions From Recognizing a Right-of-Use Asset?

Yes; the Standard states that "a lessee may elect not to apply the requirements in paragraphs 18A–18D and 23–52 to: (a) Short-term leases; and (b) Leases for which the underlying asset is of low value." The Standard defines a short-term lease as "a lease that, at the commencement date, has a lease term of 12 months or less," and clarifies that "a lease that contains a purchase option is not a short-term lease." If a lessee elects this exemption, the Standard provides that it "shall recognize the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis," instead of recognizing a separate asset and liability for those contracts.

When Does IPSAS 43 Become Mandatory?

The Standard states that "an entity shall apply this Standard for annual financial statements covering periods beginning on or after January 1, 2025. Earlier application is permitted for entities that apply IPSAS 41, at or before the date of initial application of this Standard."

Legal References

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