Two Distinctly Australian NFP Topics

This closing guide covers two areas where AASB 1058 (together with AASB 16) creates accounting outcomes that are genuinely distinctive to the not-for-profit sector — and both are extremely common in Australian NFP financial statements, since so many charities and community organisations operate out of government- or council-owned premises on nominal-rent arrangements, and rely heavily on volunteer labour.

Peppercorn Leases: The Problem

A “peppercorn lease” is a lease at significantly below market terms — the classic example is a local council leasing a community hall to a charity for $1 per year. Under the general AASB 16 leases model, a lessee measures its right-of-use asset and lease liability based on the present value of the actual lease payments. For a $1-per-year lease, that would produce a right-of-use asset and liability of almost nothing — clearly not reflective of the real economic benefit the charity is receiving from occupying a building that would otherwise cost tens of thousands of dollars a year to rent commercially.

The AASB 1058 Fix

AASB 1058 requires NFP lessees to measure the right-of-use asset for a significantly below-market lease initially at fair value — not at the present value of the token lease payments. The difference between that fair value and the (near-zero) lease liability measured under AASB 16 is recognised as income under AASB 1058 at lease commencement.

Practical Complications

Two issues come up constantly in practice. First, obtaining a defensible fair value estimate for the right to use a community facility is not always straightforward — there may be no directly comparable commercial lease for a heritage-listed hall or a purpose-built community space, requiring a valuer to make judgment calls. Second, because the income hits in a single year at lease commencement (or renewal), it can distort year-on-year comparisons and confuse funders or boards who see a large, one-off income spike that has nothing to do with the organisation’s underlying operating performance — this is worth flagging explicitly in the financial statement notes or a management commentary.

Volunteer Services: The General Rule and Its Narrow Exception

The default position under AASB 1058 is that NFPs do not recognise the value of volunteer services in the financial statements — a soup kitchen’s volunteer roster, a charity’s board of unpaid directors, and ad hoc community fundraising labour all stay off the books, reflecting the practical difficulty of reliably measuring the fair value of such varied, informally-arranged contributions.

There is a narrow exception: an entity may elect (it is not required) to recognise volunteer services as both income and an expense (or an asset, where appropriate) when the fair value of those services can be measured reliably, and the services would otherwise have been purchased if not provided voluntarily.

Because this is an accounting policy election, not a mandatory requirement, NFPs should apply it consistently once adopted, and disclose the policy clearly — a reader comparing two similar charities’ financial statements may otherwise wrongly conclude one delivers far more services than the other, when the real difference is simply whether volunteer services were recognised.

Series Wrap-Up

Across this four-part series we have covered the AASB 1058/15 recognition framework and the sufficiently-specific-obligation test (Part 1), applied it to real grant and membership fee scenarios (Part 2), worked through the special capital grant deferral mechanism for asset construction (Part 3), and closed with two sector-defining topics: peppercorn lease income and the volunteer services election (Part 4). Together these cover the accounting issues that come up in nearly every Australian NFP’s annual financial statements.