Amendments to IFRS 16

The International Accounting and Standards Board (IASB) had previously issued an Exposure Draft ED/2020/2 COVID-19 related Rent Concessions. The objective of the Exposure Draft was to provide relief during the COVID-19 pandemic from treating rental concessions as a lease modification.

On 28 May 2020, the IASB issued an amendment to IFRS 16 that exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications.

It applies to COVID-19 related rent concessions that reduce lease payments due on or before 30 June 2021.

 

The Practical Expedient

The practical expedient does not require lessees to carry out an assessment to decide whether a COVID-19 related rent concession is a lease modification or not. The concession is treated as if it was not a lease modification. There is no relief for lessors.

The practical expedient only applies if all the following conditions are met:

 

1. 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 preceding the change;
2. any reduction in lease payments affects only payments originally due on or before 30 June 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before 30 June 2021 and increased lease payments that extend beyond 30 June 2021); and
3. there is no substantive change to other terms and conditions of the lease.

 

Examples of where the practical expedient may be used

Accounting for forgiven lease payment

Scenario

A lessee is paying a lease payment of $2,000 per month. The lessor has agreed to forgive 6 months of payments in 2020 with no adjustment to future rentals. Assume interest accrues at $100 per month. Monthly depreciation is $150.

 

During the period of deferral of payment – monthly journals
Dr Lease liability Cr Profit or Loss (other income) Represents rent payments forgiven	$2,000 $2,000
Dr Interest expense Cr Lease Liability Monthly interest charge	$100 $100
Dr Depreciation expense Cr Right of use asset Monthly depreciation charge	$150 $150

 

Accounting for payments deferred and then increased at a future date

Scenario

A lessee is paying a lease payment of $2,000 per month. The lessor has agreed to defer the rental payments for a period of 6 months as a result of COVID-19. Assume interest accrues at $100 per month. Monthly depreciation is $150. The lessor increases the lease payments to $4,000 after the concession period is over.

During the period of deferral of payment – monthly journals
Dr Lease liability Cr Cash Represents monthly cash payments made	$0 $0
Dr Interest expense Cr Lease Liability Monthly interest charge	$100 $100
Dr Depreciation expense Cr Right of use asset Monthly depreciation charge	$150 $150

 

 

During the period of increased payment – monthly journals
Dr Lease liability Cr Cash Represents monthly cash payments made	$4,000 $4,000
Dr Interest expense Cr Lease Liability Monthly interest charge	$100 $100
Dr Depreciation expense Cr Right of use asset Monthly depreciation charge	$150 $150

The lease liability at the end of the period where payments were increased would be the same as if the payments had not been altered at all.

 

Accounting for Rent Abatement

Scenario

Entity A leases retail space from entity B. As at 31 May 2020, Entity B grants Entity A one month rent abatement, where rent of $100 that would otherwise be due on 1 June 2020 is unconstitutionally waived. This rent abatement was not part of the original terms and conditions of the lease. The rent abatement is being granted because Entity A had to close its retail space due to COVID-19. The rent concession satisfies the criteria of the practical expedient as follows:

 

1. It results in revised consideration that is less that the consideration for the lease immediately preceding the change;
2. It reduces lease payments originally due on or before 30 June 2021; and
3. There is no substantive change to other terms and conditions of the lease.

 

	Practical expedient not applied	Practical expedient applied
Effect on lease liability	Reduced to reflect the revised consideration	Reduced to reflect the revised consideration
Effect on discount rate	The remaining revised consideration is remeasured using an updated discount rate as at the effective date of the lease modification.	No change
Effect on right of use asset	The offsetting adjustment is recorded against the carrying value of the right of use asset	No effect
Effect on profit or loss	None as at the time of modification. However a modified interest and depreciation expense would be recorded in subsequent periods.	The offsetting adjustment is recorded through profit or loss

 

Disclosures

An entity that applies the practical expedient must disclose:

 

1. That it has applied the practical expedient to all rent concessions that meet the criteria, or if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient; and
2. The amount recognised in profit or loss to reflect changes in lease payments that arise from COVID-19-related rent concessions. Therefore, rent concessions accounted for as negative variable lease payments in profit or loss must be disclosed separately from the effect of other variable lease payments included in profit or loss (e.g. rent payable based on sales occurring at a retail location).

 

Effective date and Transition

The amendments are effective for annual reporting periods beginning on or after 1 June 2020, with earlier application permitted. Unlike most amendments to IFRS, application is also permitted in financial statements of earlier periods not yet authorised for issue at 28 May 2020.

For example, as at 31 May 2020, if an entity applies IFRS as issued by the IASB and was still preparing its financial statements for the period ended 31 March 2020, it could apply the amendments and utilise the practical expedient for rent concessions that occurred as at 31 March 2020 or earlier, assuming they satisfied the criteria. Therefore, the amendments are effective on a retrospective basis, if an entity wishes to do so, but they are not mandatory until 1 June 2020.

ESV’s advisors work from a solid understanding of the complexities of AASB 16 Leases; if you are in need of a personalised assistance plan, please don’t hesitate to get in touch with us on (02) 9283-1666.