As a result of the financial difficulties caused by the Covid-19 pandemic, many lessees have been given rent concessions by their lessors. These concessions include the deferral of rent payments to a later period or even rent holidays where certain payments have been waived.
In accordance with IFRS 16, changes to the terms and conditions of a lease would usually require an assessment of whether this is a lease modification. Many lessees could find this very challenging in the current environment, especially where there are a large number of leases involved.
As a result, the IASB has issued Covid-19-Related Rent Concessions which has amended IFRS 16 by the introduction of a voluntary new practical expedient which will provide relief to lessees from the requirement of having to assess whether certain rent concessions associated with Covid-19 should be accounted for as a lease modification. For the avoidance of doubt, this new practical expedient only applies to rent concessions which are as a direct consequence of Covid-19.
A new practical expedient
A lessee is able to elect not to assess whether a rent concession is a lease modification in accordance with IFRS 16. Instead, a lessee will account for any changes to their lease payments as if the change were not a lease modification.
In order to apply the practical expedient all of the following criteria must be met:
- The revised consideration for the lease is substantially the same as, or less than the original consideration immediately preceding the change. Rent concessions which increase the total consideration, but only for the time value of money, will be able to apply the practical expedient;
- Any reduction in payments only affects payments originally due on or before 30 June 2021. This would include a situation where there are reduced payments before 30 June 2021 followed by increased payments that extend beyond 30 June 2021; and
- There are no substantive changes to other terms and conditions of the lease. This assessment would consider both qualitative and quantitative factors. It has been specifically noted by the IASB that a three-month rent holiday before 30 June 2021 followed by three additional months of substantially equivalent payments at the end of the lease would not constitute a substantive change to the lease.
The practical expedient will be applied consistently to all lease contracts with similar characteristics and in similar circumstances.
What is the impact of the practical expedient?
The impact on the financial statements will depend on the nature of the rent concession and the change to the lease payments and the lease liability:
- Where there has been a waiver of lease payments, the reduction in the lease liability will be accounted for as a variable lease payment and recognised within profit or loss in the period in which the event or condition that triggers the change occurs.
- If there has been a deferral of lease payments, this will only change the timing of cashflows rather than extinguishing the lease liability. A lessee will continue to recognise interest on the lease liability and reduce the liability when lease payments have been made.
This exemption is to be applied retrospectively, recognising the cumulative effect of initially applying the amendment as an adjustment to opening reserves at the beginning of the annual reporting period in which the lessee first applies this amendment. Therefore a restatement of comparatives is not required.
Are there any new disclosures to include?
The existing disclosure requirements in paragraphs 51 and 59 of IFRS 16 will result in an entity disclosing the nature and effect of any material rent concessions, including the impact on cashflows, regardless of whether a lessee has applied the practical expedient or not. Users of the financial statements must be able to understand the impact on profit or loss and cashflows for the period and allow comparability with entities that do not apply the amendment.
In addition, the following is required to be disclosed when an entity applies this practical expedient:
- The fact that the practical expedient has been applied and whether this has been applied to all rent concessions meeting the above criteria or the nature of the contracts to which it has applied this exemption; and
- The amount recognised in profit or loss for the reporting period to reflect changes in lease payments arising from the application of this exemption.
Have there been any changes for lessors?
No - There have been no changes to the measurement and recognition criteria for lessor accounting as a result of the Covid-19 pandemic.
When is this amendment effective?
A lessee can apply this amendment to IFRS 16 for accounting periods beginning on or after 1 June 2020. Earlier application is permitted which ensures that this can be applied immediately in any financial statements which were not authorised for issue at the date the amendment was issued (28 May 2020). However, please note that the amendments will require EU endorsement before being applied by a company adopting EU IFRS.
On 31 March 2021, the IASB issued further amendments to IFRS 16, extending the relief for lessees in accounting for rent concessions granted as a direct consequence of COVID-19. This was endorsed for use in the UK in May 2021.
This amendment extends the time limit for one of the criteria that must be met in order for a lessee to apply the practical expedient to a rent concession to end on 30 June 2022 (previously 30 June 2021). BDO has published an IFR Bulletin 2021/08 to address practical questions arising as a consequence of the extension.
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