Accounting Alert

This Accounting Alert is issued to provide a summary of the current accounting treatment for lease modifications and the proposed practical expedient in view of COVID-19-related rent concessions.

Background

IFRS 16, Leases specifies how lessees should account for changes in lease payments, including concessions. However, applying those requirements to a potentially large volume of COVID-19-related concessions, which could be in the form of rent holidays or rent reductions, can be burdensome for lessees, particularly in the retail and hospitality industries, in light of the many challenges stakeholders face during the pandemic. The IASB has proposed an amendment to IFRS 16 to provide lessees with a practical relief during the COVID-19 pandemic while enabling them to continue providing useful information about their leases to users of financial statements.

Current Accounting Treatment

For lessees, a lease modification arises when the lease contract is altered such that future cash flows and/or the scope of the lease change. Where an increase in scope occurs, and the payment for this increase in scope is commensurate, a separate lease is accounted for. Otherwise, the original lease is remeasured by:

• identifying a revised discount rate appropriate to the revised lease term, underlying asset and the lessee;
• determining the net present value of future cash outflows using the revised discount rate;
• adjusting the remaining right-of-use asset for the increase or decrease in the lease liability. If the adjustment exceeds the carrying value of the right-of-use asset, the excess is recognized as a gain in profit or loss.

Proposed Practical Expedient

The proposed practical expedient bypasses 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 may account for the rent concession as if the change was not a lease modification. However, there are no proposed changes for lessors. The proposed practical expedient is only applicable to rent concessions provided as a direct result of the COVID-19 pandemic and only if ALL of the following criteria are met:

• change in lease payments resulting in revised consideration is substantially the same or lower than the lease consideration immediately preceding the change;
• reduction in lease payments affects only payments originally due in 2020; and,
• there is no substantive change in other terms and conditions of the lease.

Proposed Effectivity

The IASB is planning to complete any amendments resulting from submissions on this exposure draft by the end of May so the proposed practical expedient can be used for annual reporting periods beginning on or after June 1, 2020. Earlier application will be permitted, including for financial statements not yet authorized for issue at the date the amendment is issued. 

See attached Accounting Alert for further details.