Amendment IFRS 16:
COVID-19 Related Rent Concessions

IFRS 16 | 3 min read

AMENDMENT TO IFRS 16: COVID-19-RELATED RENT CONCESSIONS

 

Lessors are providing lessees with rent concessions. These can be in the form of rent holidays or rent reductions for an agreed timeframe (possibly followed by increased rentals in future periods).

IFRS 16 includes clear accounting criteria for adjustments to leases. In the scope of these requirements are rent concessions which change the overall consideration for the lease. Lessees are generally expected to determine whether rent reductions are lease changes and apply clear accounting requirements, if they are. This can be hard, particularly for can lease portfolios with different features and different types of concessions. Entities already have significant pressures upon them as a result of this pandemic and what is set out in IFRS 16 just adds to the burden.

 

Lessor Modifications

Finance Lessors

Similar to lessee accounting, when the scope of a lease increases and the consideration changes commensurately, a separate lease exists.

 

Where this is not the case, the lessor must reassess the accounting for the lease and determine if the lease would have been considered an operating lease if the modification had been known; and, if so:

  • create a new lease from the effective date of the modification; and
  • reclassify the lease receivable balance at the date of modification to property, plant and equipment
  • where the lease remains a finance lease, the lease receivable is remeasured by the application of IFRS 9.

Operating Lessors

IFRS 16 provides only limited guidance on modification of operating leases from a lessor’s perspective

Any modification be considered a new lease and remaining prepayments and accruals are included in the accounting for this new lease.

The expense recognition pattern should ensure the balance is written down to zero at the end of the lease.

Modification

The lease contract is altered such that future cash flows and/or the scope of the lease change

Where an increase in scope occurs, and the payment for this increase in scope is commensurate, a separate lease is accounted for.


Otherwise, the original lease is remeasured by:

o   identifying a revised discount rate appropriate to the revised lease term, underlying asset and the lessee

o   determining the net present value of future cash outflows using that revised discount rate

o   adjusting the remaining right-of-use asset for the increase or decrease in the lease liability. If the adjustment exceeds the carrying value of the right-of-use asset this excess is recognised as a gain in profit or loss.

Impairment

Due to the decrease in estimated future cash flows, impairment indicators may exist such that impairment of the individual assets should be considered.

Lessee Modifications

Lease modification and reassessment of the lease liability are two different concepts with potentially different accounting outcomes.

Reassessment

Changes in lease payments based on contractual clauses included in the original contract – such as changes in CPI, a market price adjustment, a change in any price guarantee arrangement that might appear in the lease contract

Future cash flows are reforecast and present-valued utilising the discount rate set in the initial measurement of the lease

Modification

The lease contract is altered such that future cash flows and/or the scope of the lease change

Where an increase in scope occurs, and the payment for this increase in scope is commensurate, a separate lease is accounted for.


Otherwise, the original lease is remeasured by:

o   identifying a revised discount rate appropriate to the revised lease term, underlying asset and the lessee

o   determining the net present value of future cash outflows using that revised discount rate

o   adjusting the remaining right-of-use asset for the increase or decrease in the lease liability. If the adjustment exceeds the carrying value of the right-of-use asset this excess is recognised as a gain in profit or loss.