The global news around Covid-19 is mixed. In some places, crowds are back in sports stadiums, masks are off and life is returning to normal. In other areas – and unfortunately these tend to be the countries least equipped to deal with the virus – things are worse than ever.
What does this have to do with accounting, and particularly with IFRS 16 – Leases?
The Background To Rent Concessions Under IFRS 16
What’s common across the world is the financial toll exacted by the Coronavirus. It’s estimated to be in the region of $16 trillion, but even this could be on the low side, as long-term damage to the economy is still being assessed.
Due to the massive losses and complete shutdowns for many industries and individual businesses, many organizations were granted some kind of rent relief – either by individual landlords, or as part of a government program. These concessions had to be accounted for, as they had a direct impact on leases – yet many businesses were struggling just to stay afloat, and having to take COVID-19-related lease concessions into account according to IFRS 16 was a regulatory burden that many would be unable to meet at that time.
The International Accounting Standards Board (IASB) therefore released “Covid-19-Related Rent Concessions (Amendment to IFRS 16)” in May of 2020. This amendment deals with the changes to a lease as a result of concessions granted by a landlord or other entity. As a quick reminder, IFRS 16 addresses a change to a lease with the following language: “A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term).” Clearly, many Covid-19-related rent concessions fall within this framework.
As summarized by Deloitte’s IASPlus, the concessions include the following:
- Provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification
- Require lessees that apply the exemption to account for COVID-19-related rent concessions as if they were not lease modifications
- Require lessees that apply the exemption to disclose that fact
- Require lessees to apply the exemption retrospectively in accordance with IAS 8, but not require them to restate prior period figures
A critical element to note is that these concessions are not going to be granted forever – and therefore companies should already be thinking about how they will account for changes to their leases now and in the future.
IFRS 16 Covid-Related Rent Concessions Extended
The economic turmoil resulting from Covid-19 lasted longer than expected. As noted at the beginning of this article, many countries and industries are in the midst of some of the worst effects of the pandemic – both health-wise and financially – since it started.
The IASB therefore resolved to extend the relief provided by the amendment by a further year. In essence the IASB are allowing lessees to apply the relief to reductions/renegotiations in lease payments for payments originally due on or before 30 June 2022.
Rent Concessions and Staying Ahead of Leasing Headaches
While a welcome relief, there are important factors for companies to bear in mind when applying this amendment. These include the impact of such changes on the income statement – particularly around comparability with prior periods – and additional disclosures required.
Leases in general are an increasingly complex subject. Ensuring compliance with the relevant standards, particularly IFRS 16, is an ongoing challenge. For organizations with a number of leases, it’s worth considering lease accounting software. There are a number of significant benefits to adopting lease accounting software, including: minimizing risk, managing all contracts in one place, optimizing contracts, easily making changes to leases, reducing tech drag, and generating a clear audit trail.
In summation, these concessions from the IASB are certainly welcome, but be aware of the impact that rent concessions under IFRS 16 may have on your company, as well as effective dates that have already been changed once before. By implementing the right lease accounting software, you can stay ahead of leasing headaches, and focus on key areas of your business.