COVID-19-related rent concessions, or: an IFRS 16 sacrifice for tough times

Someone went on Twitter and posed the plainly unbalanced question: “If Covid could end by sacrificing one IFRS standard, which would you pick and why IFRS-9?”

Based on my unscientific review of the responses, IFRS 9 was indeed the favourite to be jettisoned, although IFRS 15 and 17 also got a good sprinkling of votes. One person said: “I picked IFRS 36, no more impairment of assets, so that no more lengthy 3 hours discussion to argue w management about how do they think they can make profit for the next 5 years after incurred loss for the past 10 years..”

And then there’s the person who asked: “Are we really going to ignore IFRS 16???” Well, far from ignoring it, much less sacrificing it (at least not all of it), the IASB is actively working on it and proposing an amendment, contained in the exposure draft COVID-19-related rent concessions, with a very short comment period expiring on May 8, 2020. Here’s how the IASB sums that up:

  • The objective of the amendment is to give timely relief to lessees when applying IFRS 16 to covid-19-related rent concessions while still enabling them to provide useful information about their leases to investors.
  • IFRS 16 specifies how lessees should account for changes in lease payments, including concessions. However, applying those requirements to a potentially large volume of covid-19-related rent concessions could be practically difficult, especially in the light of the many challenges stakeholders face during the pandemic. The Standard requires lessees to assess individual lease contracts to determine whether the concessions are to be considered lease modifications and, if that is the case, the lessee must remeasure the lease liability using a revised discount rate.
  • The proposed amendment would exempt lessees from having to consider whether particular covid-19-related rent concessions are lease modifications, allowing them to account for these changes as if they were not lease modifications. The amendment would apply to covid-19-related rent concessions that reduce lease payments due in 2020.

The proposals only cover lessees – the IASB doesn’t expect lessors to face the same challenges (for one thing, lessors still apply the old finance vs. operating lease model, and modifications allowed by lessors under operating leases don’t entail that they remeasure the amounts recognized on their own balance sheets). Here’s more detail on the scope of the practical expedient. It applies only to rent concessions that occur as a direct consequence of the covid-19 pandemic and:

  • (a) result in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change. The Board is of the view that a change that results in more than an insubstantial increase in total payments for the lease could not result solely from a covid-19-related rent concession (as described in this Exposure Draft), except to the extent the increase reflects the time value of money.
  • (b) reduce only lease payments originally due in 2020. A related increase in lease payments that extends beyond 2020 would not prevent a rent concession from meeting this condition. In contrast, if reductions in lease payments extend beyond 2020, the rent concession would not be within the scope of the practical expedient. In developing this condition, the Board observed that the economic effects of the covid-19 pandemic could continue for some time. If the practical expedient is not limited to a particular timeframe, a lessee could conclude that many future changes to lease payments are a result of the covid-19 pandemic. Limiting the practical expedient to reductions in lease payments originally due in 2020 provides relief to lessees when they are expected to need it most, while avoiding lessees applying the exemption beyond when it is needed.
  • (c) there is no substantive change to other terms and conditions of the lease. This condition reflects the Board’s view that lessees should not apply the practical expedient to lease modifications that are unrelated to the covid-19 pandemic but are negotiated at the same time as a covid-19-related rent concession (although, for example, a three-month rent holiday in 2020 followed by three additional months of substantially equivalent payments at the end of the lease would not prevent a rent concession from being within the scope of the practical expedient).

As we noted previously, this is a bit of a change of approach, in that it’s only a couple of weeks ago that the IASB issued a document to clarify that IFRS 16 would apply to COVID-19-related changes just as it applies to everything else. Of course, it’s good to be flexible, and yet the question inevitably arises: if the proposed practical expedient makes so much sense now, at a time when the importance of making the right capital allocation decisions is certainly no less than at any other time, then why wouldn’t it always make sense to allow more flexibility along the same lines with regard to short-term rent concessions, whatever the reasons behind them. The exposure draft notes that its proposals could affect comparability between lessees that apply the practical expedient and those that don’t, and therefore requires disclosure in situations when it’s applied, but if that’s an adequate trade-off now, then why isn’t it always…?

The opinions expressed are solely those of the author

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