IFRS 16 Rent Concessions Extension
As a result of the ongoing coronavirus (COVID-19) pandemic, rent concessions continue to be granted to lessees. In May 2020, the IASB published an amendment to IFRS 16 that provided an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19, resulting in a reduction in lease payments due on or before 30 June 2021, was a lease modification. On 31 March 2021, the IASB published a further amendment to extend the date of the practical expedient from 30 June 2021 to 30 June 2022.
What is the issue?
In many territories, rent concessions have been, and continue to be, provided to lessees as a result of the ongoing COVID-19 pandemic. Such concessions have taken a variety of forms, including payment holidays and deferral of lease payments for a period of time, sometimes followed by increased rent payments in future periods. IFRS 16 contains requirements that apply to such rent concessions.
In May 2020, the IASB published an amendment to IFRS 16 that provided lessees (but not lessors) with relief in the form of an optional practical expedient from assessing whether a rent concession related to COVID-19 is a lease modification (the ‘May 2020 amendment’). Lessees could elect to account for rent concessions in the same way as if they were not lease modifications. In many cases, the practical expedient resulted in accounting for the concession as a variable lease payment.
The practical expedient in the May 2020 amendment applied only to rent concessions occurring as a direct consequence of the COVID-19 pandemic, and only if all of the following conditions were met:
- the change in lease payments resulted in revised consideration for the lease that was substantially the same as, or less than, the consideration for the lease immediately preceding the change;
- any reduction in lease payments affected only payments due on or before 30 June 2021; and
- there was no substantive change to other terms and conditions of the lease.
On 31 March 2021, in light of the ongoing pandemic, the IASB published an additional amendment to extend the date in (b) from 30 June 2021 to 30 June 2022 (the ‘March 2021 amendment’).
If a lessee already applied the practical expedient in the May 2020 amendment, it is required to continue to apply the practical expedient consistently, to all lease contracts with similar characteristics and in similar circumstances, using the March 2021 amendment. If a lessee did not apply the practical expedient in the May 2020 amendment to eligible lease concessions, it is prohibited from applying the practical expedient in the March 2021 amendment.
The March 2021 amendment is to be applied retrospectively, recognising the cumulative effect of initially applying that amendment as an adjustment to the opening balance of retained earnings at the beginning of the annual reporting period in which the lessee first applies the amendment.
What is the impact and for whom?
Given the pervasiveness of the ongoing pandemic and the measures taken by many governments on social distancing, many lessees were granted rent concessions. These amendments are applicable if a lessee applied the practical expedient in the May 2020 amendment. If a lessee has not yet established an accounting policy on applying (or not) the practical expedient to eligible lease concessions, it can still decide to do so. Neither amendment, however, makes any changes to lessor accounting.
When does it apply?
The March 2021 amendment is effective for annual reporting periods beginning on or after 1 April 2021, with earlier application permitted – including in financial statements not yet authorised for issue at 31 March 2021.
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