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Lessor forgiveness of lease payments (IFRS 9 and IFRS 16)
Key points
In October 2022, the IASB finalised the agenda decision approved by the IFRS Interpretation Committee (IFRS IC) on ‘Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16)’. The agenda decision addresses the accounting from the perspective of the lessor, and in particular:
- how the expected credit loss (‘ECL’) model in IFRS 9 should be applied to the operating lease receivable when the lessor expects to forgive payments due from the lessee under the lease contract before the rent concession is granted; and
- whether to apply the derecognition requirements in IFRS 9 or the lease modification requirements in IFRS 16 when accounting for the rent concession.
What is the issue?
In October 2022, the IFRS IC agenda decision (‘AD’) was finalised in response to a submission on how the lessor in an operating lease accounts for a particular rent concession under IFRS 9 and IFRS 16. The rent concession considered is one where the only change to the lease contract is the lessor’s forgiveness of certain lease payments due from the lessee, some of which have been recognised by the lessor as operating lease receivables (and as lease income) and some of which have not (future lease payments).
The Committee concluded that in reporting periods before the forgiveness of lease payments have been granted, the lessor should measure the ECL on operating lease receivables on a probability-weighted basis, by evaluating a range of possible outcomes, including its expectation of forgiving lease payments that have been recognised as an operating lease receivable. This is on the assumption that there is reasonable and supportable information, that is available without undue cost or effort, and that the expectation of forgiving the lease payments reflects a potential cash shortfall which should be taken into account in the ECL measurement (IFRS 9, paragraph 5.5.17). The Committee did not analyse the lessor’s considerations of its rights to collateral or other credit enhancements in estimating the expected cash shortfalls since the existence of collateral was not part of the fact pattern submitted.
When the lease payments are forgiven, the Committee concluded that the lessor should apply the derecognition requirements in IFRS 9 to the operating lease receivables and apply the lease modification requirements in IFRS 16 to future lease payments, including accrued lease payments, as discussed further below.
In applying the requirements in IFRS 9, the lessor should re-measure the ECL on its operating lease receivables immediately prior to the date the lease payments are forgiven, with any changes being recognised in profit or loss. Once the lease payments are forgiven, the lessor should derecognise the operating lease receivable, including any associated ECL allowance.
PwC observation
IAS 1, paragraph 82 requires separate line items to present:
- gains and losses arising from the derecognition of financial assets measured at amortised cost (paragraph 82(aa)); and
- impairment losses (including reversals of impairment losses or impairment gains) determined in accordance with Section 5.5 of IFRS 9 (paragraph 82(ba)).
Lessors would therefore need to consider that the relevant balances have been appropriately presented in line with the requirements of IAS 1.
In applying the modification requirements in IFRS 16, the lessor accounts for the forgiveness of future lease payments as a new lease in accordance with paragraph 87 of IFRS 16. The revised future lease payments under the new lease, including any prepaid or accrued lease payments relating to the original lease, are subsequently recognised as income either on a straight-line basis or another systematic basis.
What is the impact and for whom?
The fact pattern submitted addressed the scenario in which the only change made to the contractual term was the forgiveness of some lease payments. Where there are additional changes to the contractual terms, alongside the forgiveness of lease payments, there may be additional factors to consider in accounting for such modifications of contractual terms.
Rent forgiveness was prevalent during the COVID-19 pandemic and lessors that forgave material amounts in prior periods may be impacted by this agenda decision. In addition, lessors that continue to forgive material lease payments for any reason may be impacted going forward.
The key areas of impact are as follows:
- Application of IFRS 9 versus IFRS 16: Lessors that previously applied IFRS 16 as an accounting policy choice to forgiveness of amounts contractually due for past rent, as contemplated in ‘FAQ 15.136.1 – How should the lessor account for forgiveness of amounts contractually due for past rent which they voluntarily forgive?’ will be impacted by the AD. Lessors will need to revisit the accounting policy applied and also ensure that the accounting treatment applied is consistent with the nature of the lease payment (that is, whether the definition of an operating lease receivable is met or not).
- Consideration of the forgiveness of lease payments in the measurement of ECL: Lessors should consider whether they had reasonable and supportable information about expectations of the forgiveness of lease payments as at the reporting date(s) prior to the lessor forgiving the lease payments. Where this is the case, the information may be included as a scenario within the ECL measurement.
PwC observation
The AD clarifies that IFRS 9 scopes in the measurement of the operating lease receivable only for derecognition and impairment.
Entities may need to revisit what reasonable and supportable information was available at the reporting date, where amounts were only forgiven sometime after the reporting date, to ensure the information was appropriately captured in the ECL measurement.
In addition, the AD does not provide guidance on the impact of collateral on expectations of a cash shortfall. Prior to the forgiveness of lease payments, a lessor who had received collateral from the lessee would need to consider the appropriate accounting for the collateral within the ECL model.
Application of IFRS 9: Lessors need to ensure that IFRS 9 is only applied to forgiveness of lease payments under an operating lease that meet the definition of a financial instrument. IAS 32, paragraph AG9 states ‘a lessor does not regard an operating lease as a financial instrument, except as regards individual payments currently due and payable by the lessee.’
When does it apply?
The AD’s effective date follows the IASB due process which provides entities with sufficient time to incorporate the new requirements into their accounting systems and so those applying the Standards have sufficient time to prepare for the new requirements. Views of applicable regulators and the legal environment in the jurisdiction should also be considered by companies delaying the application of the requirements, particularly if the impact is material.
ADs are applied retrospectively in accordance with IAS 8 and may result in changes to comparative figures. When management has concluded that a change in an accounting policy is required as a result of an agenda decision but that change has not been made yet, they should consider providing disclosures similar to those provided about forthcoming standards in accordance with paragraphs 30 and 31 of IAS 8. When a change is actually made to the accounting policy, the disclosures applicable for changes in accounting policy in IAS 8 and the potential requirement for an opening balance sheet in IAS 1 should be considered.
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Contact us
David Baur
Partner and Leader Corporate Reporting Services, PwC Switzerland
Tel: +41 58 792 26 54
