IASB provides relief for COVID-19-related rent concessions

18 June 2020: many lessors are providing rent concessions to lessees as a result of the Coronavirus pandemic. In response, the IASB has issued amendments to IFRS 16 Leases to help lessees account for these changes.

Under IFRS 16, rent concessions such as rent holidays or deferrals might, depending on the individual facts and circumstances, be considered a lease modification. In such cases, the guidance in IFRS 16 would require the lessee to remeasure its lease liability using a revised discount rate.

Responding to feedback, the IASB concluded that assessing as to whether a particular rent concession is a lease modification, or not, could be challenging for entities holding a large number of leases. And if considered a lease modification, the resulting accounting treatment could pose practical difficulties in the current circumstances.

For this reason, a practical expedient has been introduced for COVID-19-related rent concessions.

What is the practical expedient?

Under the practical expedient, entities can elect not to assess whether a COVID-19-related rent concession is a lease modification. If making this election, an entity will account for any change in lease payments resulting from the COVID-19-related rent concession as if it were not a lease modification. In very broad terms, this means the benefit of the rent concession will be recognised in many cases as variable lease payments in the period that they are received, instead of spreading over the term of the lease. The latter would be the case if accounted for as a modification.

The practical expedient can only be applied to rent concessions occurring as a direct consequence of COVID-19, and only if all of the following conditions are met:

• the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately before the change;
• any reduction in lease payments affects only payments originally due on or before 30 June 2021; and
• there is no substantive change to other terms and conditions of the lease.

Also, the practical expedient must be applied consistently to all leases with similar characteristics and in similar circumstances.

A lessee that applies the practical expedient must disclose:

• the fact that it has been applied and to which rent concessions it has been applied; and
•  the amount recognised in profit and loss as a result of applying the practical expedient.

When do the changes come into effect?

The practical expedient is effective for annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted, including in financial statements not authorised for issue on 28 May 2020.

EU-endorsement of the amendments has not yet been issued but is expected in due course.

You can find further guidance on the financial reporting implications of Coronavirus on the ICAEW Coronavirus Hub. The Financial Reporting Faculty has also produced a wide range of resources on IFRS 16 including the introductory IFRS 16 Leases Frequently Asked Questions. Financial Reporting Faculty members can also access a short webcast which provides an overview of the amendments to IFRS 16 for COVID-19-related rent concessions.