What is, and isn’t material? Proposed changes for peppercorn leases, and how to treat leave loading and super.

Updates from the Audit, Assurance & Advisory Team

As auditors, we are often asked questions that apply across various types of organisations and industries. The below information provides an update on a few key changes and sheds some light on a topic that often raises questions – how to treat leave loading in superannuation. 

If you have any questions, please contact one of our team.

The new definition of material

In practice, many entities disclose immaterial information and omit material information from their financial statements. This reduces the decision-usefulness to key stakeholders. As a result, the International Accounting Standards Board (IASB) has undertaken a project to address the issue of materiality, resulting in amendments to the definition of ‘material’.

The new definition states that “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

The IASB amendments highlight that materiality will depend on the nature or magnitude of the information presented, and a inform us that misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.

Although the amendments to the definition of material will not have a significant impact on an entity’s financial statements, the introduction of the term ‘obscuring information’ has increased the importance of how the information is organised. This means that when constructing financial statements, additional consideration may be required from a disclosure perspective as to what and how information is presented for decision making purposes.

Exposure draft for ‘peppercorn leases’

The Australian Accounting Standards Board (AASB) recently issued a new exposure draft that proposes amendments to a number of standards. The proposed amendments will provide a temporary option for not-for-profit entities to measure right-of-use assets for ‘peppercorn leases’ at initial recognition, either at cost or fair value.

The term peppercorn lease includes leases that have nil or nominal lease payments, as well as lease payments that are more than nominal, but significantly below market value, to enable an entity to further its objectives.

Currently, not-for-profit entities are required to measure right-of-use assets at initial recognition at fair value. This however can be difficult for many not-for-profit organisations due to significant restrictions or the specialised nature of the underlying asset. Waiving the requirement to measure assets at fair value may ease the burden for an organisations accounting staff and result in potential cost savings in respect of valuations. As this is an exposure draft there is nothing to change as yet but watch this space!

Leave Loading and Superannuation

Employers are required to pay superannuation on an employee’s ordinary time earnings (OTE). OTE are an employee’s earnings in respect of their ordinary hours of work including payments for commissions, allowances and leave. Whilst an annual leave payment forms part of an employee’s OTE the treatment of the annual leave ‘loading’ can be slightly more complex. This is an issue that has been raised with us a few times, so the following information will provide some clarity. 

The ATO explains that under the Super Guarantee legislation, annual leave loading is not considered OTE if it relates to a notional loss of opportunity to work overtime. If there are sufficient facts to establish that the purpose of the annual leave ‘loading’ is not for overtime related reasons, it can be considered OTE and super may be payable.

We recommend all our clients that pay an annual leave loading, especially as a once off annual payment, consider the application of superannuation to that payment and seek advice to ensure the correct treatment going forward.

Georgie Price
Audit, Assurance & Advisory