We bring two interesting final agenda decisions issued by the IFRS Interpretations Committee in 2022. The first concerns the forgiveness of lease payments by the lessor, the second concerns the question of whether a reseller of software licences is a principle or an agent under IFRS 15.
The IFRS Interpretations Committee (the “Committee”) is an interpretative body of the International Accounting Standards Board (the “IASB”) which works with the Board in supporting the application of IFRS Standards.
Agenda decisions are a way of making a statement about why a change of an IFRS Standard requirement or an interpretation of that requirement is unnecessary. They often include explanatory information that is intended to provide guidance for the consistent application of IFRS Standards. The Board expects entities to implement accounting policy changes in a timely manner if their policies are inconsistent with an agenda decision.
(IFRS 9 Financial Instruments and IFRS 16 Leases)
Published in October 2022
The Committee received a request about a lessor’s application of IFRS 9 and IFRS 16 in accounting for a particular rent concession. The rent concession is one for which the only change to the lease contract is the lessor’s forgiveness of lease payments due from the lessee under that contract.
Fact Pattern
The request described a rent concession agreed by a lessor and a lessee on the date the rent concession is granted. The rent concession changes the original terms and conditions of a lease contract classified by the lessor—applying IFRS 16—as an operating lease. The lessor legally releases the lessee from its obligation to make specifically identified lease payments:
a) some of these lease payments are amounts contractually due but not paid. Paragraph AG9 of IAS 32 states that ‘a lessor does not regard an operating lease as a financial instrument, except as regards individual payments currently due and payable by the lessee’. Therefore, the lessor has recognised these amounts as an operating lease receivable. Applying paragraph 81 of IFRS 16, the lessor has also recognised the amounts as income,
b) some of these lease payments are not yet contractually due.
No other changes are made to the lease contract, nor are there any other negotiations between the lessor and the lessee that might affect the accounting for the rent concession. Before the date the rent concession is granted, the lessor applies the expected credit loss model in IFRS 9 to the operating lease receivable.
The Question
The request asked:
Conclusion of the Committee
ad 1) Before the rent concession is granted, the lessor measures expected credit losses on the operating lease receivable in a way that reflects ‘an unbiased and probability-weighted amount …’, ‘the time value of money’, and ‘reasonable and supportable information …’ (as required by paragraph 5.5.17 of IFRS 9). This measurement of expected credit losses includes the lessor considering its expectations of forgiving lease payments recognised as part of that receivable.
ad 2) The lessor accounts for the rent concession described in the request on the date it is granted by applying: (a) the derecognition requirements in IFRS 9 to the forgiven lease payments that the lessor has recognised as an operating lease receivable; and (b) the lease modification requirements in IFRS 16 to the forgiven lease payments that the lessor has not recognised as an operating lease receivable.
The full text of this Agenda Decision can be found here.
(IFRS 15 Revenue from Contracts with Customers)
Published in May 2022
The Question
In applying IFRS 15, is a reseller of software licences a principal or an agent?
Conclusion of the Committee
The Committee discusses the applicable requirements of IFRS 15 on four pages and observes that the conclusion as to whether the reseller is a principal or an agent depends on the specific facts and circumstances, including the terms and conditions of the relevant contracts. The reseller should apply judgement in making its overall assessment of whether they are a principal or an agent—including a consideration of the relevance of the indicators to the assessment of control and the degree to which they provide evidence of control of the standard software licences before they are transferred to the customer—within the context of the framework and requirements set out in paragraphs B34–B38 of IFRS 15 (chapter Principal versus agent considerations).
The Committee concluded that the principles and requirements in IFRS 15 provide an adequate basis for a reseller to determine whether—in the fact pattern described in the request—it is a principal or agent for the standard software licences provided to a customer. Consequently, the Committee decided not to add a standard-setting project to the work plan.
The full text of this Agenda Decision can be found here.
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