COVID-19-Related Rent Concessions for Lessees, published by IASB on May 28, 2020:
As a result of the COVID-19 pandemic, many lessors are providing rent holidays / concessions to lessees.
Rent Concessions can be in the form of rent waivers, lease payment deferrals or one-off rent reductions. Prior to the amendment, such concessions may fall within the ambit of lease modifications.
What is a lease modification?
IFRS 16 defines a lease modification as:
“a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease.” A lease modification results from renegotiations between the lessee and lessor.
Examples of lease modifications include (but are not limited to):
- reducing or extending the contractual lease term;
- hiking or lowering the lease payments; or
- adding or removing the right to use one or more underlying assets.
If a lease modification creates a separate lease, the lessee makes no adjustments to the original lease and accounts for the separate lease the same as any new lease.
Not a separate lease:
For a modification that is not a separate lease, the lessee’s accounting depends on the nature of the modification.
Lease Modifications – Amendment:
The following amendment makes it easier for lessee to account for COVID-19 related rent concessions as “not a lease modification” by exempting him to consider/evaluate the individual lease contracts to determine whether rent concessions are a lease modification or not as a direct rule with a criteria prescribed”.
The accounting for lease modification is seemingly complex. It envisages the recalculation of lease assets and lease liabilities / (payments) using revised discount rates.
In order to simplify the Lessee Accounting for rent concessions, the International Accounting Standards Board (IASB), has proposed some amendments as a practical expedient:
All the following three conditions are required to be met for permitting a lessee to apply the practical expedient:
- As a result of revised consideration, the change in lease payments is substantially the same or less than the original consideration; AND
- the reduction in lease payments affects only payments, originally due on or before June 30, 2021; AND
- there is no substantive change to other terms and conditions of the lease.
- Thus, the proposed practical expedient obviates the need for lessees to carry out an assessment to decide whether a COVID-19 related rent concession received is a lease modification or not.
- The lessee accounts for the rent concession as if the change was not a lease modification. Such rent concessions would generally be accounted for as a variable lease payment.
- In this case, a lessee applies paragraph 38 of IFRS 16 and generally recognises the effect of the rent concession in profit or loss.
- No practical expedient is provided for lessors
- Lessors are required to continue to assess as if the rent concessions are lease modifications and account for them accordingly.
- In case of operating lease, the lessor recognises the effect of the rent concession by recording lower income from leases.
Lessees applying the practical expedient are required to disclose:
- that fact, if they have applied the practical expedient to all eligible rent concessions and, if not, information about the nature of the contracts to which they have applied the practical expedient; and
- the amount recognised in profit or loss for the reporting period arising from application of the practical expedient.
The information disclosed will need to be sufficient to enable users of financial statements to understand the impact of COVID-19-related changes in lease payments on the entity’s financial position and financial performance (paragraph 31 of IAS 1).
The amendments are effective for periods beginning on or after June 01, 2020, with earlier application also permitted in Financial Statements not authorized for issue at May 28, 2020.
A lessee applies the amendments retrospectively and recognises the cumulative effect of initially applying them in the opening retained earnings of the reporting period in which they are first applied.
The disclosure requirements of Paragraph 28(f)1 of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors do not apply in the reporting period in which a lessee first applies COVID-19-Related Rent Concessions.