On 28 May 2020, the International Accounting Standards Board (IASB) published 'Covid-19-Related Rent Concessions (Amendment to IFRS 16)' amending the standard to provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification.
The COVID-19 pandemic has led to many lessors providing relief to lessees by deferring or relieving them of amounts that would otherwise be payable. In some cases this is through negotiation between the parties but can also be a consequence of a government encouraging or requiring that the relief be provided.
IFRS 16 requires lessees to assess whether changes to lease contracts are lease modifications as this term is defined in the Standard and, if so, the lessee must re-measure the lease liability using a revised discount rate. The IASB has been advised that lessees would face significant practical challenges in identifying which COVID-19-related lease concessions meet the definition of lease modifications and, for those that are, in applying the required accounting.
To provide practical relief to lessees in accounting for rent concessions arising as a result of COVID-19 the IASB proposed an amendment to IFRS 16 in April 2020, which has now been finalised.
The IASB amends IFRS 16 by adding the following practical expedient:
A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. A lessee that makes this choice shall account for any change in lease payments resulting from the COVID-19-related rent concession consistently with how it would account for the change applying IFRS 16 if the change were not a lease modification.
The practical expedient would apply only to rent concessions occurring as a direct consequence of the COVID-19 pandemic and only if all of the following conditions are met:
- The change in lease payments results in revised consideration for the lease that is the same as, or less than, the consideration for the lease immediately preceding the change;
- Any reduction in lease payments affects only payments originally on or before 30 June 2021 (a rent concession would meet this condition if it results in reduced lease payments on or before 30 June 2021 and increased lease payments beyond 30 June 2021); and
- There is no substantive change to other terms and conditions of the lease.
If a lessee chooses to apply the practical expedient, it would apply the practical expedient consistently to all lease contracts with similar characteristics and in similar circumstances.
Lessees that apply the exemption would be required to disclose that they have applied the practical expedient to all rent concessions that meet the conditions, or, if not applied to all such rent concessions, information about the nature of the contracts to which they have applied the practical expedient. Lessees would also have to disclose the amount recognised in profit or loss to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient.
A lessee that applies the practical expedient would generally account for:
- The forgiveness or waiver of lease payments as a variable lease payment. The lessee would also derecognise that part of the lease liability that has been extinguished by the forgiveness of lease payments.
- A change in lease payments that reduces payments in one period but proportionally increases payments in another (such that there is no change to the overall consideration for the lease and only the timing of individual payments changes), by continuing to recognise interest on the liability and reducing that liability for payments made to the lessor.
If the lease payments are reduced in one period but increased by a lower amount in a later period (hence the total consideration is lower) the change in lease payments incorporates both a forgiveness of payments and deferred lease payments.
The lease liability recognised by a lessee applying the practical expedient would represent the present value of future lease payments owing to the lessor.
Transitional provisions and effective date
Lessees are required to apply the amendment retrospectively, recognising any difference arising on initial application of the amendment in the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which a lessee first applies the amendment.
In the reporting period in which a lessee first applies the amendment, a lessee is not required to disclose the information required by paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, i.e. the amount of the adjustment for each line item affected or its effect on earnings per share.
A lessee shall apply the amendment for annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted, including in financial statements not yet authorised for issue at 28 May 2020.
Despite the wording “annual reporting periods”, the amendment is also available for interim financial reports.
Final endorsement of this amendment to IFRS 16 for use in the EU is currently not expected before “Q3/Q4 2020”.
Source: www.iasplus.com, IFRS in Focus