❓ Mr. Johnston inquires about the interest rate implicit in the lease for the new Perth Stadium as detailed in the State Finances Annual Report. The Treasurer provides a detailed explanation of the implicit interest rate and its calculation according to accounting standards.
AnsweredQoN 4593Legislative Assembly
QuestionView source ↗
I refer to Note 3 (r) Leases on page 81 of the Annual Report of State Finances where it states (in part) "Minimum lease payments are apportioned ... according to the interst rate implicit in the lease.", and I ask, what is the "interest rate implicit in the lease" for the new Major Stadium?
AnswerView source ↗
Answered
17 November 2015
Response time
35 days
The design, build, finance and maintain (DBFM) contract for the Perth Stadium has been accounted for in accordance with accounting standards AASB 117 and AASB 13 as a finance lease, because it is a public private partnership procurement model. For the Perth Stadium DBFM contract the implied interest rate in the lease is 7.77%.
The finance lease asset and lease liability have been recorded in the State's financial statements at the fair value of the leased asset. While the leased asset and liability are measured on initial recognition at the fair value of the asset, it is still necessary to determine the implicit rate in the lease so that allocation of the principal and interest components can be determined for accounting purposes as the lease payments are made.
AASB 117 paragraph 4 defines the implicit rate as being the discount rate that, at the inception of the lease, causes the present value of the minimum lease payments to be equal to the fair value of the leased asset.
The interest rate implicit in the lease (required by the accounting standards) is not the same as the interest rate applicable to the contractor's (WESTADIUM's) cost of capital. The monthly service payments made by the State are based on WESTADIUM's cost of capital, not the implied interest rate in the lease, which - as outlined above - is derived from an accounting standard methodology.
The finance lease asset and lease liability have been recorded in the State's financial statements at the fair value of the leased asset. While the leased asset and liability are measured on initial recognition at the fair value of the asset, it is still necessary to determine the implicit rate in the lease so that allocation of the principal and interest components can be determined for accounting purposes as the lease payments are made.
AASB 117 paragraph 4 defines the implicit rate as being the discount rate that, at the inception of the lease, causes the present value of the minimum lease payments to be equal to the fair value of the leased asset.
The interest rate implicit in the lease (required by the accounting standards) is not the same as the interest rate applicable to the contractor's (WESTADIUM's) cost of capital. The monthly service payments made by the State are based on WESTADIUM's cost of capital, not the implied interest rate in the lease, which - as outlined above - is derived from an accounting standard methodology.
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