As we addressed here, the IASB issued the exposure draft Covid-19-related rent concessions, with a very short comment period which expired on May 8, 2020.
As the IASB noted, 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…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 IASB received an impressive 109 comment letters on the proposal – perhaps, given the emphasis on finalizing the proposal promptly, it would secretly have been happy with less. Needless to say, I did not look at more than a few of these (hey, I ain’t on the payroll!) But based on that minimal engagement, here a few things I noted.
The proposal applies only to rent concessions that occur as a direct consequence of the covid-19 pandemic and that reduce only lease payments originally due in 2020. Many commentators thought saw no reason to limit the applicability in this way. As the Institute of Chartered Accountants in England and Wales put it:
- We acknowledge the rationale for restricting the time period for any Covid-19 rent concession…However, given the exceptional uncertainty over the expected duration of the Covid-19 pandemic globally, we would be inclined not to put a backstop on the practical expedient. Instead, we suggest that it should be available for the duration of the Covid-19 pandemic with the practical expedient available for rent concessions occurring as a direct consequence of the pandemic, subject to the facts and circumstances of each case. If the IASB considers that a backstop is necessary we suggest that it should, at the very least, be extended to include rent concessions granted in 2021…
The exposure draft proposed that a lessee that applies the practical expedient should disclose that fact, but didn’t expand further. Many respondents thought more than that was necessary. Ernst & Young for example suggested that additional disclosure should include the nature of rent concessions granted, how the practical relief has been applied, the financial statement line items affected and the amounts recognized in the financial statements resulting from covid-19 related rent concessions. (I must admit that seems like potential disclosure overload to me…)
The exposure draft’s proposals only cover lessees – the IASB noted that it doesn’t expect lessors to face the same challenges, given that lessors still apply the old finance vs. operating lease model, and that modifications allowed by lessors under operating leases don’t entail that they remeasure the amounts recognized on their own balance sheets. Many respondents thought this understated the issue. As BDO put it:
- Although IFRS 16 does not require amounts recognized in the statement of financial position to be remeasured, lessors must nonetheless:
- Identify all leases affected by Covid-19 related rent concessions;
- Assess whether each rent concession meets the definition of a lease modification; and
- If the rent concession is a lease modification, account for the modification as a new lease from the effective date of the modification (IFRS 16.87). This will involve recalculating the total amount of lease payments in the new lease while also considering any prepaid or accrued lease payments relating to the original lease, the operating lease income then being recognized over the term of the new lease.
- This may be challenging for many lessors that have hundreds or thousands of leases with many different lessees.
A further broad point made by BDO and others is that “the information provided to users of financial statements (of lessors) would be improved if reductions in lease payments that are a direct consequence of Covid-19 are included in profit or loss within the period to which they relate,” which won’t be achieved by reflecting such revisions in the consideration of an operating lease over the new lease term.
So even if only those three issues had been raised (and of course there were more), the IASB staff would probably have enough to keep them occupied.
As a final note, I commented recently, in the context of another recent proposal, that I tend to be skeptical of the virtue of providing standard-setting deferrals and concessions in challenging times. CFA Institute made a similar point in its comment letter:
- As a matter of principle, we generally do not support changes to accounting standards during stressful moments of the economic cycle. We believe accounting standards are developed with the most useful information to investors as the objective and this does not change during periods of economic stress. On the contrary, it generally becomes even more important. We believe suspensions generally undermine trust and robustness of high-quality accounting standards.
In this case though, the Institute then went on to support the general proposal, on the basis that “the standard is new, the physical and logistical barriers are unique, and the number of rent concessions unprecedented.” Still a good general point though…
The opinions expressed are solely those of the author