The COVID-19 pandemic is requiring those responsible for the preparation of financial statements to reconsider whether assumptions and assessments previously made are still valid and appropriate which in turn is creating an additional burden on entities all over the world. In particular, IFRS 16 has become an area of focus for entities and the International Accounting Standards Board (IASB).
The IASB has therefore added a practical expedient to provide relief for lessees from lease modification accounting for rent concessions related to COVID-19. We explain the current accounting requirements, the practical expedient and how to apply it.
Lessors are providing lessees with rent concessions. These can be in the form of rent holidays or rent reductions for an agreed timeframe (possibly followed by increased rentals in future periods). In some jurisdictions, governments are making rent concessions a requirement. In others they are merely encouraging them. These concessions will have major impact for some lessees, particularly in the retail and hospitality industries which in many cases have been forced to temporarily close their premises.
IFRS 16 contains specific requirements on accounting for lease modifications. Rent concessions that change the overall consideration for the lease are in the scope of these requirements. Lessees are currently required to assess whether rent concessions are lease modifications and, if they are, apply specific accounting guidance. This can be burdensome, especially for large portfolios of leases with different features and different types of concessions. Entities already have significant pressures upon them as a result of this pandemic and what is set out in IFRS 16 just adds to the burden.
The practical expedient
The practical expedient bypasses the need for lessees to carry out an assessment to determine 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. However, there are no changes for lessors.
The practical expedient is only applicable to rent concessions provided as a direct result of the COVID-19 pandemic. In addition, the relief is only for lessees that are granted these rent concessions. All of the following conditions in relation to permitting a lessee to apply the practical expedient need to be met:
- the rent concession provides relief to payments that overall results in the consideration for the lease contract being substantially the same or less than the original consideration for the lease immediately before the concession was provided.
- the rent concession is for relief for payments that were originally due on or before 30 June 2021. So payments included are those that are reduced or deferred on or before 30 June 2021, but any subsequent rental increases of amounts deferred can go beyond 30 June 2021.
- there are no other substantive changes to the other terms and conditions of the lease.
If applying the practical expedient, the amendments require the entity to disclose:
- that it has applied the practical expedient to all its rent concessions, or if only some of them, a description of the nature of the contract it has applied the practical expedient to
- the amount in profit or loss for the reporting period that reflects the change in lease payments arising from rent concessions (as a result of applying the practical expedient).
The amendment is applicable for reporting periods beginning on or after 1 June 2020. Earlier application will be permitted, including for financial statements not yet authorised for issue at 28 May 2020 (the date the amendment was issued).
Some practical examples of where the practical expedient might be used are where payments:
- are deferred for a period of time, and then increased at a future date
- are forgiven completely for a period of time
- are partly deferred and partly forgiven, and then partly increased at a future date.
A concession that simply defers rentals payments to a later date is not necessarily a modification based on the IASB’s recent education guidance. The changes in the practical expedient are however still useful as they avoid the lessee having to assess whether or not modification accounting applies.
How Grant Thornton can help
Preparers of financial statements will need to be agile and responsive as the situation unfolds. Having access to experts, insights and accurate information as quickly as possible is critical – but your resources may be stretched at this time. We can support you as you navigate through accounting for the impacts of COVID-19 on your business.
Now more than ever the need for businesses, their auditors and any other accounting advisors to work closely together is essential. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm.