IFRS 16 Leases – Amendment to extend the relief period for lessees accounting for Covid-19-related rent concessions

Wed 28 Apr 2021

The International Accounting Standards Board (“IASB”) has published an amendment to IFRS 16 Leases Covid-19-Related Rent Concessions beyond 30 June 2021 that extends by one year the application period of the amendment to IFRS 16 Leases issued last year (May 2020 amendment) to support lessees account for Covid-19-related rent concessions. Because the pandemic is still at its height, this amendment is to extend the relief to cover rent concessions that reduce lease payments due on or before 30 June 2022 (previously due on or before 30 June 2021). Rent concessions include rent holidays or rent reductions for a period of time, possibly followed by increased rent payments in future periods.

What the amendment means in practice?

The amendment provides an extension to the current beneficial relief permitted (i.e. the relief is optional) to be applied by an entity that has been subject to Covid-19-related rent concessions. The relief provides a practical expedient, as set out in paragraph 46A of IFRS 16, which permits an entity to account for a change in the lease payments resulting from Covid-19-related rent concessions as if the change was not a lease modification. The impact of the rent concession, therefore, would be recognised in profit or loss for the period, and not over the residual term of the lease.

Original amendment (May 2020 amendment)

As a reminder, the original IFRS 16 amendment provides an optional relief to lessees when accounting for Covid-19-related rent concessions, such as rent holidays or rent reductions for a period of time, possibly followed by increased rent payments in future periods.

The relief allows for a change in lease payments resulting from Covid-19-related rent concessions (subject to certain conditions) to be accounted for as if the change was not a lease modification. This results in the impact of the rent concession being recognised in profit or loss for the period with no impact on the right-of-use asset.

Alternatively, if a change were to be accounted for as a lease modification, this would: (a) involve a complex assessment of whether the changes amend the contractual terms of the lease; and (b) result in the impact of the rent concession being accounted for over the remainder of the lease term by adjusting the lease liability, taking account of the revised lease payments discounted at an appropriate rate at the contract revision date, with a corresponding adjustment to the right-of-use asset.

For the practical expedient to apply, only rent concessions occurring as a direct consequence of the Covid-19 pandemic apply, and only if all of the following conditions are met (which are set out in paragraph 46B of IFRS 16):

a. 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;

b. any reduction in lease payments affects only payments originally due on or before 30 June 2021 (the 2021 amendment extends this date to 30 June 2022), for example, a rent concession would meet this condition if it results in reduced lease payments on or before 30 June 2021 and increased lease payments that extend beyond 30 June 2021; and

c. there is no substantive change to other terms and conditions of the lease.

The relief only applies to lessees, not lessors, thus lessors are still required to assess whether each rent concession granted to a lessee is a lease modification.

New amendment (March 2021 amendment)

The new amendment (March 2021 amendment) purely extends the period allowed for rent concessions from 30 June 2021 to 30 June 2022 (i.e. within condition (b) of paragraph 46B), for example a rent concession will meet the condition if it results in reduced lease payments on or before 30 June 2022 and increased lease payments that extend beyond 30 June 2022.

The practical expedient must be applied retrospectively and must be applied consistently to all eligible lease contracts with similar characteristics and in similar circumstances, regardless of whether the contract became eligible as a result of the original May 2020 amendment or the March 2021 amendment.

In practice, this means:

• An entity that already applies the practical expedient (as from the May 2020 amendment) must continue to apply the extended scope of the practical expedient to eligible contracts with similar characteristics and in similar circumstances, for example if the relief was applied to a contract for rent concessions up until 30 June 2021, it must continue to apply the relief to the rent concessions up until 30 June 2022 (if the contract otherwise meets all the other conditions).
• An entity is not allowed to elect to apply the practical expedient in relation to the March 2021 amendment only to certain contracts and certain rent concession dates. If an entity chooses to apply the March 2021 amendment (and has not previously applied the May 2020 amendment), then it may do so, but application must be on a retrospective basis, and it must be applied to all contracts with similar characteristics and in similar circumstances.
• Rent concessions that were initially excluded from the scope of the May 2020 amendment because they related to lease payments due after 30 June 2021, may now fall within the scope of the new March 2021 amendment (subject to the contract meeting all the other conditions) and would therefore need to be restated on retrospective basis.

What are the disclosure requirements in the first year of application?

Paragraph 28 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires an entity to disclose information about the effect of initial application of a new amendment on the current, and prior, period.

However, the new amendment specifically states that the disclosures required under in paragraph 28(f) of IAS 8 are not required to be provided. These disclosures, which therefore do not need to be provided, state:

“For the current period and each prior period presented, to the extent practicable, the amount of the adjustment: (i) for each financial statement line item affected; and (ii) if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share”.

What are the first-time application requirements?

The amendments are to be applied for the first-time to accounting beginning on or after 1 April 2021 retrospectively, recognising the cumulative effect of initially applying that amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment. This means that the amendment must be applied without restatement of the comparative figures. Early application is permitted, subject to EU-endorsement or adoption for use within the UK, as applicable.