For those companies which had to go through the long and painful process of accessing which contracts did and did not contain a lease, the thought of having to process the lease amendments which have arisen as part of COVID-19 filled you with dread. There is however some good news.
The IASB have released an amendment to IFRS 16 which states that any rent reductions received as part of the COVID-19 crisis are not deemed to be an amendment and are simply accounted for in the period that they occur. This will save so much time and effort for accountants but will also give a true and fair view of the statutory accounts.
What does this mean in practical terms?
The rent concession can be in a variety of forms, payment holidays, reduced rent payments or deferral of rental payments for a period of time. Under IFRS 16 these would all qualify as lease modifications and the modification guidance would need to be applied. With this new amendment these can all be treated as variable lease payments which simplifies the accounting and allows the discount to be recognised in the period it is received.
In order to qualify a number of conditions must be met;
- 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;
- any reduction in lease payments affects only payments due on or before 30 June 2021; and
- there is no substantive change to other terms and conditions of the lease.
If the above three conditions are met then the practical expedient can be applied. A lessee that applies the practical expedient is required to disclose that it has been applied and whether it has applied it to all rent concessions that meet the conditions of the amendment.
If a lessee has not applied the practical expedient to all such rent concessions, it should disclose information about the nature of the contracts to which it has applied it. Lessees are also required to disclose the amount recognised in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which they have applied the practical expedient.
So what next?
If you have received any rent deferrals or payment holidays for your leases begin the assessment now to ensure that the practical expedient can be applied. if the conditions can easily be met then no further assessment is required. If however it is more complex and doesn’t fit neatly into the conditions additional work and consideration will need to be performed.
For more information, or if you have any questions, please contact Lauren McIlroy, Virtual Finance Function Director.