June 18, 2020
The decisions by governments in many countries to curtail the spread of the Coronavirus, otherwise known as COVID-19, has had far reaching effects on the global economy. Many businesses have had to stop operations or adopt the approach of virtual working. As a result, business activities and resulting cash flows have been significantly interrupted which is already resulting in some major economic downturn.
To respond to this situation, many governments have offered certain reliefs to businesses. In addition, parties to contracts are beginning to renegotiate contract terms for reliefs and concessions. One of such reliefs or concessions is providing some relief regarding rent holidays and temporary rent reductions.
The grant of reliefs and concessions has therefore triggered some accounting issues to which the International Accounting Standard Board (IASB) has provided certain responses. In May 2020, the IASB issued amendments to IFRS 16 on Leases to address the accounting and reporting issues arising from the rent concessions provided to lessees as a response to the COVID-19 Pandemic.
The amendments to IFRS 16 – COVID-19 Related Rent Concessions are as follows:
The amendment requires that the application of the changes is practical expedient and voluntary. The requirement for “practical expedient” clause applies only to rent concessions occurring as a direct consequence of the COVID-19 Pandemic and only if all of the following conditions are met:
Hence, a lessee may elect not to assess whether a rent concession that meets the above conditions is a lease modification.
The amendment stipulates that if a lessee applies the “practical expedient” above, the lessee shall disclose:
Transition and Effective Date
The response of IASB on how to account and report rent concessions is timely. The amendment will assist entities dealing with similar reliefs and concessions in the course of their financial reporting activities.
The relief applies to lessees only. Lessors are required to apply the existing requirements of IFRS 16. It should be noted that the application of the amendment is only for the relief provided as a result of the COVID-19 Pandemic, not to all concessions. The key focus of this amendment is that lessees do not have to account for the rent concession as lease modification.
In our view, lessees may need to perform impairment test on their right-of-use assets resulting from the leases. This is because the declining business revenue and various economic measures adopted by the governments are indicators of impairment.