We’ve already looked at the IASB’s 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 (NB the IASB is currently proposing to extend this to June 30, 2022).
- 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.
CPA Canada’s IFRS Discussion Group recently considered a few issues relevant to applying this exemption, including a fact pattern in which a lessee has stopped making payments to its lessor in April and May 2020 because it had to temporarily close its business due to covid-19, but has reached no written agreement to obtain a rent concession from the lessor. The group agreed that the new exemption can’t be applied in this situation – in the absence of a new agreement between the parties, there’s no change to the lessee’s contractual obligation. However, group members did note among other things that at the time of preparing financial statements, a lessee may be in the process of negotiating a concession, perhaps having reached a final stage pending formal sign-off, or an oral agreement with the lessor regarding rent concessions. As contracts can be oral, or implied by an entity’s customary business practices, the circumstances may sometimes be sufficient to identify an agreement even where it hasn’t been formally executed.
The group considered the following:
- A retailer was required to close its store in early April 2020 due to government-imposed restrictions. The retailer was supposed to pay $100 per month in rent for May, June and July 2020.
- On April 30, 2020, the landlord agreed in writing to forgive those months’ rents. The forgiveness is enforceable even if the government restrictions are lifted before the end of the three-month period.
The group agreed that the benefit resulting from the forgiveness of lease payments should be recognized when the agreement is reached, that is on April 30, 2020. They also considered a related fact pattern in which the forgiveness of rent is conditional on a future event, and expires when the government allows the lessee’s business to reopen. In this case the group concluded that it seems appropriate to recognize the benefit resulting from the forgiveness of lease payments with each passing month that the government restriction remains in effect. The group also considered a key issue relating to the right of use asset, with reference to that same notion of a store forcibly closed in early April 2020 and fulfilling no online or phone orders. The usual accounting policy is to depreciate the right-of-use asset relating to the leased store on a straight-line basis over the lease term. The group reached the following conclusion:
- Paragraphs 31 and 32 of IFRS 16 reinforce the concept that the right to use a property under a lease is a time-based right that diminishes over time. In addition, paragraph 55 of IAS 16 indicates that depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. Therefore, the lessee should continue to depreciate the right-of-use asset on a straight-line basis during the period it is unable to use the store.
One way of rationalizing that would be that as long as the lessee hasn’t been evicted, it’s obtaining the benefit of storing its goods on the premises if nothing else. The group also considered whether such a scenario might cause an entity to reconsider its depreciation method, but generally thought it would be rare to make such a change solely because of covid-19 (particularly perhaps for an asset such as a store, in which the benefit embodied in the lease is being used up at the same rate, even if the lessee’s ability to realize those benefits has been impeded). The lessee should also consider whether the inability to use the leased asset is an impairment indicator. If so, it should be tested for impairment in accordance with IAS 36.
Among other things, the practical expedient is only available when “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.” Some group members noted that the standard is silent on whether this should be assessed based on discounted or on undiscounted lease payments. Therefore, entities will need to apply judgment and that judgment should be applied consistently from transaction to transaction.
The opinions expressed are solely those of the author