The International Public Sector Accounting Standards Board (IPSASB) approved IPSAS 43 on December 2021 and on 31st January 2022 the standard was issued. IPSAS 43 was issued to replace IPSAS 13 Leases.
IPSASB decided to revise IPSAS 13 to take into account changes made in IFRS 16 Leases with some modifications for public sector issues especially the practices of public sector entities to set rental charges below the market rates (concessionary leases).
Therefore, IPSAS 43 is almost the same as IFRS 16 Leases except for the modifications mentioned in the preceding paragraph.
SUMMARY OF THE CHANGES
IPSAS 43 introduces a right-of-use model that replaces the risks and rewards incidental to ownership model for lessee to be applied to all leases (i.e., all leases are treated as finance leases), whilst retaining the same approach for lessors (i.e., finance and operating leases).
Lessees will be recognizing a right-of-use asset and a lease liability on the commencement of a lease.
The asset is initially recognized at the amount of the lease liability plus initial direct costs; it is subsequently measured using the cost model unless the underlying asset is investment property measured at fair value or PPE measured under the revaluation model.
The liability is initially measured at the present value of the lease payments over the lease term, discounted at the rate implicit in the lease or incremental borrowing rate.
On the other hand, Lessors classify leases as either operating or finance leases depending on whether all risks and rewards incidental to ownership of the leased assets have been substantially transferred to lessee.
Further, IPSAS 43 provide exemption to leases with a term of less than 12 months and leases for which the leases asset is of low value. In this case lease payments are recognized as an expense on a straight-line basis, or another systematic basis, over the lease term (i.e., operating lease treatment).
IMPACT OF THE CHANGES
The introduction of IPSAS 43 will lead to an increase in leased assets and lease liabilities on the Statement of Financial Position of the lessee.
Further, the Statement of Financial Performance will also be impacted with increase in depreciation expenses on the right of use and finance charge (interest expenses) on the lease liability.
The effective date of IPSAS 43 is January 1, 2025 with earlier adoption permitted for entities that apply IPSAS 41 Financial Instruments at or before January 1, 2025.