IFRS 16 Amendment for COVID-19-Related Rent Concessions
Last week, the International Accounting Standards Board (IASB) published an amendment to IFRS 16 for COVID-19 pandemic-related rent concessions. This amendment was issued in anticipation of the rent concessions that many lessors are likely to offer their lessees as a result of economic pressures created by the pandemic. The practical expedient is expected to reduce the administrative burden on lessees who would typically have to account for rent concessions with lease modifications under IFRS 16. Here is what you should know about the amendment:
- Lessees may choose a practical expedient for rent concessions that do not substantially change, or that substantially reduce, lease payments resulting from the COVID-19 pandemic.
- If the practical expedient is chosen, lessees may treat the accounting for COVID-19-related rent concessions as variable lease payments rather than as modifications to the leases as described in Paragraph 36(c) of IFRS 16. In most cases, this means recording the impact of the concessions directly to the income statement in the months incurred rather than remeasuring the right-of-use assets and lease liabilities as described in Paragraph 38(b) of IFRS 16.
- The practical expedient only applies to rent concessions that affect payments on or before June 30, 2021. Any concessions that impact payments after this date are presumed to be unrelated to COVID-19 and must be accounted for under the standard IFRS 16 requirements. This date was extended following the most recent exposure draft.
- There is no practical expedient for lessors; all lessors must continue to account for their leases under IFRS 16.
As lessees work through the accounting for these lease concessions, they should also consider the following details included within the amendment:
- The practical expedient must be applied retrospectively by recognizing the net cumulative impact as an adjustment to retained earnings (or other appropriate equity/net assets account).
- If elected, the practical expedient must be applied to all lease contracts with similar characteristics and circumstances.
- In order for the practical expedient to apply, there must be no other substantive changes to the terms and conditions of the lease. For example, a change in the leased space of an office lease would disqualify the lease from the practical expedient.
- Lessees should begin applying the practical expedient for annual reporting periods beginning on or after June 1, 2020 but are permitted to apply it earlier.
Lessees must disclose that they have applied the practical expedient to all qualifying leases, and, if not applied to all, the nature of the leases to which the practical expedient was applied. They must also disclose the cumulative impact on the income statement in the current period resulting from the application of the practical expedient.
This amendment is likely to have minimal impact on lessor accounting but will result in a reduction of lease modifications for lessees equating to a lower administrative burden. Lessees should still be aware of the resulting disclosure requirements in their financial statements, should they choose to adopt the amendment.