Covid-19-related rent concessions – ready to apply!

The IASB has issued Covid-19-related rent concessions, amendments to IFRS 16, effective for annual reporting periods beginning on or after June 1, 2020, with earlier application permitted.

This is how the accompanying news release summed it up:

  • The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the 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 June 30, 2021.
  • 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. This optional exemption gives timely relief to lessees and enables them to continue providing information about their leases that is useful to investors.

A few articles back, we looked at some of the 109 comment letters received on the proposal and noted some issues arising. Let’s see how those are reflected in the final version.

The original proposal applied 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, but many commentators saw no reason to limit the applicability in such a way, given the total lack of visibility over the pandemic’s duration. The final version budges a bit, limiting the applicability to situations where “any reduction in lease payments affects only payments originally due on or before June 30, 2021.” The IASB notes: “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 were not limited to a particular time frame, a lessee could conclude that many future changes in lease payments would be a consequence of the covid-19 pandemic. Limiting the practical expedient to rent concessions that reduce only lease payments originally due on or before June 30, 2021 provides relief to lessees when they are expected to need it most, while being responsive to concerns from users of financial statements about comparability if lessees were to apply the practical expedient beyond when it is needed.” Plainly this is a balancing act, as it would have had to be.

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, and the final version requires a little more of such a lessee, namely:

  • that it has applied the practical expedient to all rent concessions that meet the (specified) conditions…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
  • the amount recognized in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient….

The second item will supposedly provide useful information to some users who were worried about comparability, although I’m skeptical that you’ll ever find a user for whom it changes (or even slightly shades) an investment decision. The IASB also provided the following commentary on cash flow:

  • Users of financial statements also highlighted the importance of cash flow information about covid-19-related rent concessions. The main effect on cash flows would be the reduction or absence of cash outflows for leases during the period of the rent concession. For a concession that adjusts the carrying amount of the lease liability, a lessee would disclose this effect as a non-cash change in lease liabilities applying paragraph 44A of IAS 7 Statement of Cash Flows. The Board noted that cash flow effects, and other information about, for example, the nature of rent concessions, would be relevant regardless of whether a lessee applies the practical expedient. The Board expected paragraphs 51 and 59 of IFRS 16 to require a lessee to disclose such information, if material.

The other big issue we noted was the absence of any concession for accounting by lessors: many thought that the IASB had downplayed the practical challenges of covid-19 for such accounting. The Board acknowledged this but noted “that, unlike lessees, lessors have not recently implemented a new accounting model for their leases.” Further, any amendment focused on lessors “would have to include new recognition and measurement requirements (which) might not effectively address all of the practical challenges identified by lessors, and might have unintended consequences. Such requirements would also take time to develop, preventing a practical expedient from being provided in time to be useful.” In other words, lessors, you’ll just have to make it work.

So there it is, proposed, exposed and finalized in record time. No doubt the IASB will be energized by this achievement, such that no future project will ever take more than, say, six months. Which, in the time of covid-19, may actually be an eternity…

The opinions expressed are solely those of the author

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