Due to the spread of the coronavirus pandemic, leases are often subject to modifications when lessees are granted rent concessions. These rent concessions include the lessor waiving rental payments, deferral of rental payments, or rent reductions for a specified period of time. The IASB has issued a working paper on the treatment of such rent concessions under IFRS 16 and intends to publish an Exposure Draft on an amendment to IFRS 16 by April 27, 2020.
IFRS 16 defines a lease modification as a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms of the lease contract. Lease modifications therefore differ from remeasurements of the lease liability, which are always based on existing contractual agreements. For example, a change in an index-based lease payment is not a lease modification because the change to that lease payment based on the index was agreed in the original contract.
Amendment to IFRS 16 for rent concessions in the coronavirus pandemic
The working paper notes that it may be difficult to assess whether rent concessions are in actual fact lease modifications within the meaning of IFRS 16. On the one hand, companies have to assess a large number of lease contracts, while on the other hand the legal interpretation itself may turn out to be difficult to assess. Force majeure clauses are provided as an example. It may not be clear whether rent concessions are covered by such clauses due to the impact of the coronavirus pandemic.
Against this backdrop, the IASB intends to include the possibility for optional exemption in the standard. When applying the optional exemption, lessees may not need to consider whether a rent concession constitutes a lease modification. The option to apply this exemption is only possible if the following criteria are cumulatively met:
- The change to the lease payments results in a revised consideration that is either less than or identical to the original consideration before the change;
- the reduction in lease payments only concerns payments originally due in 2020; and
- there have been no other substantive changes made to the contractual terms of the lease.
Corona crisis: Effect of rent concessions on lease liability
The working paper also explains that, where the exemption is applied, rent concessions should in principle be treated as variable lease payments and recognized in profit or loss in the period in which they occur. Parts of the lease liability that are waived through rent concessions are to be derecognized in accordance with IFRS 9. Deferral of lease payments, on the other hand, does not lead to the waiver of these payments and therefore does not lead to the partial derecognition of the lease liability.
The IASB plans to finalize the amendment to IFRS 16 by the end of May after a comment period of only two weeks for the Exposure Draft. The amendment is to take effect immediately upon publication.
Securely mastering IFRS 16 during the corona crisis
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Last updated: May 20, 2020
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