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IFRS 16 & COVID-19: ACCOUNTING FOR RENT CONCESSIONS

May 1, 2020

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Update (11/06/20):

Taking feedback on board, the IASB has now issued a much-welcomed amendment to IFRS 16 Leases to make it easier for lessees to account for COVID-19-related rent concessions.

Where a lessee has received rent concessions as a direct consequence of the COVID-19 pandemic, such as temporary rent reductions or payment holidays, the amendment allows lessees to account for them as if they were not lease modifications – which is a much simpler process.  This exemption saves lessees from having to consider individual lease contracts to determine whether it’s a modification or not.

The amendment takes immediate effect, and applies to lease payments due before 30 June 2021.

What happens if you follow UK Accounting Standards rather than International ones? Click here to find out how you will be affected.

If you have any questions around accounting for rent concessions, get in touch with Cat Kelly, our Head of Retail, at catherinek@cooperparry.com

IFRS 16 & COVID-19: Accounting for rent concessions

COVID-19 has meant many lessees have been unable to fully utilise their leased assets. They’re facing financial difficulties. And as a result, we’re expecting a number of rent concessions – such as reduced rentals or payment holidays – to be provided to them.

Applying existing IFRS 16 provisions to a large volume of COVID-19 related rent concessions could be tricky for lessees – particularly if they’re preparing their first set of financial statements under IFRS 16, as many will be. And of course, they’ve got all the other challenges the pandemic has thrown at us to contend with, too.

But there’s good news. The International Accounting Standards Board (IASB) know this. And they’re pushing on with a proposed amendment to simplify the accounting for rent concessions resulting from COVID-19 – a change that will bring significant benefits to anyone applying IFRS 16 to large, complex portfolios.

What does the current guidance say?

Current accounting guidance for COVID-19 related rent is to assess whether material rent holidays or concessions form part of the original lease contract. Are they due to COVID-19 concessions, or could they arise from changes in indices, base rates, or performance measures embedded in the contract from the outset?

Some contracts will have already included a mechanism – such as a force majeure clause at the outset – to adjust rents if certain events occur.

But many more rent concessions will be defined as a ‘lease modification’ – a change in scope or consideration that wasn’t part of the original terms and conditions of the lease. And as a result, the assets and liabilities arising from the lease should be remeasured in accordance with IFRS 16.

Where this is not the case, the rent concession will represent a variable lease payment and be accounted for in the period they arise through the profit and loss account – which is a much simpler process.

What do the IASB want to change?

The IASB is seeking feedback on the Exposure Draft COVID-19-related Rent Concessions.

It proposes giving lessees the ability to not have to assess whether adjustments to rent arrangements as a result of COVID-19 are a lease modification or not. And instead, the IASB is proposing you can assume they’re not lease modifications and account for them accordingly.

This would be an election and could only be applied to those rent concessions occurring as a direct consequence of COVID-19; affecting only payments originally due in 2020, and not substantially changing any other terms and conditions of the lease.

It’s proposed to be applicable for annual reporting periods beginning on or after 1 June 2020, but earlier application is permitted. And the amendment would be applied retrospectively as an adjustment to retained earnings at the beginning of the reporting period where the lessee first applies it.

The Exposure Draft was published on 27 April, with comments due by 8 May. So, watch this space.

What else is there to consider?

Lease liability

The nature of the rent concession will need to be considered.  Some may be a deferral of all or part of the rental payments – in which case, the rent will either be due at a later point, or future rent payments will be increased to catch up.

If a change in lease payments results in the extinguishment of a part of a lessee’s obligation specified in the contract (for example, a lessee is legally released from an obligation to make specifically identified payments), the lessee would consider whether the requirements for derecognition of a part of the lease liability are met, applying IFRS 9 Financial Instruments.

Assumptions

The effects of COVID-19 may change previous judgements around lease terms and the exercise of break clauses or extension options.  This could lead to remeasurements of lease liabilities and right-of-use assets.

Impairment

The circumstances that give rise to rent concessions as a result of COVID-19 are also likely to indicate that assets may be impaired.

Disclosure

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 performance. If the lessee uses the proposed practical reliefs outlined above, this fact should also be disclosed.

Government assistance

If the government provides further support to lessees around rent, companies should consider the guidance in IAS 20.

Sure, lease accounting can get complex

But that’s why we love it. So, if you have any questions or would like some more detail, speak to Cat Kelly, our Head of Retail, at catherinek@cooperparry.com

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