IFRS in the age of COVID-19 – all changed, nothing changed

In this space I’ve sometimes mentioned alternative uses of “IFRS” as an acronym, from the In-Furness Railway Series to Individual Forest Rights. Recent events add a grim new instance to the list – Individual Fatality Rates. Such that Twitter now generates a regular stream of this kind of thing:

  • Lockdown on the hope that a vaccine is developed over the next 6-18 months vs allowing herd immunity to develop (esp given IFRs seem to be lower than initially thought)?
  • I don’t even get the point of this document proposal – based on plausible IFRs we can estimate >6% having had COVID is extremely unlikely, which doesn’t seem nearly high enough to make documents an effective policy.
  • Oh. That’s already a more productive line of reasoning. What is the cost, how it can be offset, and so on. That’s basically my point: stop juggling IFRs that are wrong and ones that don’t determine hospital burden.
  • Seems the hard part about getting a ‘genuine’ IFR is that coronavirus overwhelms health systems, and you could reasonably have a range of IFRs depending on how overwhelmed health systems become and the availability of medical interventions.

As you can see, this usage applies a lower case final letter, but still, no accountant will be able to come across such references without momentarily thinking they’re talking about our beloved standards. And, in some cases, it may seem grimly plausible that they could be – for instance the reference to IFRS that don’t determine hospital burden. Sure, you may fleetingly think, you have some standards which affect the hospitals, and others which don’t…

Anyway, in other news, the IASB has issued a document “responding to questions regarding the application of IFRS 16 Leases to rent concessions granted as a result of the covid-19 pandemic.” As it comments:

  • IFRS 16 Leases contemplates that changes may occur in lease payments over the term of a lease. The required accounting for such changes (if material) involves the application of judgement and depends on a number of factors, including importantly whether those changes were part of the original terms and conditions of the lease. Changes could arise directly from amendments to the lease contract itself or indirectly—for example, from actions of government in response to the covid-19 pandemic. When accounting for changes in lease payments, an entity considers together the lease contract and any applicable law or regulation. In other words, in applying IFRS 16 an entity treats a change in lease payments in the same way, regardless of whether the change results from a change in the contract itself or, for example, from a change in applicable law or regulation.

The document succinctly reviews the main principles in determining whether a change in lease payments constitutes a modification – that is whether because of a change in scope of the lease, or in the consideration paid under it, noting for example on the latter point: “For example, if a lessee does not make lease payments for a three-month period, the lease payments for periods thereafter may be increased proportionally in a way that means that the consideration for the lease is unchanged.” Where such a change occurs, the entity considers whether it was part of the lease’s original terms and conditions. “For example, lease contracts or applicable law or regulation may contain clauses that result in changes to payments if particular events occur or circumstances arise. Government action (for example, requiring the closure of retail stores for a period of time because of covid-19) might be relevant to the legal interpretation of clauses, such as force majeure, that were in the original contract or in applicable law or regulation.” If that’s the case, and the change in lease payments doesn’t result from a lease modification, it’s generally accounted for as a variable lease payment.

The document also observes: “The circumstances that give rise to rent concessions as a result of the covid-19 pandemic are likely to indicate that assets may be impaired. For example, loss of earnings during the period covered by a rent concession may be an indicator of impairment of the related right-of-use asset. Similarly, longer-term effects of the covid-19 pandemic could affect the expected ongoing economic performance of right-of-use assets. “ And of course it emphasizes disclosure requirements, under IFRS 16 and more generally under IAS 1, earmarking this as a case where complying with specific disclosure requirements alone may be insufficient to enable users to understand the impact of covid-19 on financial position and performance.

The main point is that IFRS 16 applies and functions just as it always did, just as we’ve already been assured is the case with IFRS 9. It’s a bit unusual, of course, for standard-setters to keep reassuring that nothing has changed – or it would be, if that damn virus hadn’t so thoroughly undermined our confidence in everything we thought we knew (right down to the connotations of our favourite acronym). As if to prove that point, the IASB changed course a week later and decided that the pandemic should affect the application of IFRS 16, to provide an optional exemption from assessing whether a covid-19-related concession is a lease modification. More on that to come in the future. Wacky times, no?

The opinions expressed are solely those of the author

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