Globally, organizations have been or are expected to be provided with rent concessions for their leases, especially for leases of retail properties. In some countries, rent concessions are also being required by government authorities. Rent concessions have taken the form of rent holidays, rent reductions, and moving rent payments to the end of the rental period. In some instances, payment reductions in the current period are followed by increased payments at a later point in time.
Under International Financial Report Standards (IFRS) 16 Leases, organizations are required to consider changes to lease payments, including rent concessions, as potential lease modifications. A lease modification is a change in scope or consideration that was not part of the original lease terms and conditions. Unless the lease modification can be separated into a separate lease, the lessee is required to remeasure the entire remaining lease liability by discounting the revised future lease payments.
The International Accounting Standards Board (IASB) has continued to monitor the impact of the COVID-19 pandemic on lease arrangements and has determined that applying this standard in the current environment could be extremely difficult to lessees, particularly for organizations with large lease portfolios. The proposed practical expedient relieves lessees from the need to assess whether the rent concessions are lease modifications. The practical expedient is limited to rent concessions specific to a negative impact resulting from the COVID-19 pandemic. For organizations adopting this standard, they would make an accounting election to treat all COVID-19 related concessions the same way they would treat lease revisions that are not lease modifications.
To qualify for the proposed practical expedient, leases meet the following three conditions:
- Changes to the lease payments must be substantially the same as, or less than, before the rent concession.
- Rent reductions only apply to payments originally due in 2020.
- There are no substantial changes to other lease terms and conditions.
Lessors are excluded from the scope of the proposed practical expedient as lessor accounting for lease modifications on operating leases does not require remeasurement. The IASB anticipates that most leases impacted by rent concessions will be operating leases. Lessors with finance leases should continue to follow the reporting requirements under IFRS 9 Financial Instruments to account for lease modifications.
While the proposed practical expedient is designed to provide relief to lessees, organizations are still required to provide useful information on their lease portfolio to their financial statement users in accordance with IFRS 16 and IAS 1 Presentation of Financial Statements. The proposed amendment is expected to be finalized by the end of May 2020, and is expected to be effective June 1, 2020, with earlier application permitted. The proposed practical expedient will be permitted for adoption on any financial statements not yet issued. The standard may be applied retrospectively to beginning equity for the period. Organizations will also need to disclose the election of this practical expedient.
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