Lease Accounting Update
<Impact of COVID-19>
Due to the impact of the COVID-19 pandemic on business conditions, many lessees have sought rent concessions from lessors. Rent concessions may take the form of a one-off reduction in rent, a deferral of rent or a change in the nature of rent – e.g. fixed payments becoming variable.
Under IFRS 16 Leases, rent concessions often meet the definition of a lease modification and the accounting for lease modifications can be complex. For example, the lessee may be required to recalculate lease liabilities using a revised discount rate and adjust right-of-use assets.
The International Accounting Standards Board (the Board) has issued amendments to IFRS 16 to simplify how lessees account for rent concessions. These amendments introduce a practical expedient (see below) for lessees – i.e. a lessee is not required to assess whether eligible rent concessions that are a direct consequence of the COVID-19 pandemic are lease modifications. Instead, it accounts for them under other applicable guidance. For example, if the rent concession was in the form of a one-off reduction in rent, then it would be accounted for as a variable lease payment and be recognized in profit or loss.
Rent concessions are eligible for the practical expedient if they occur as a direct consequence of the COVID-19 pandemic and if all of the following criteria are met:
the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
any reduction in lease payments affects only payments originally due on or before 30 June 2021;
there is no substantive change to the other terms and conditions of the lease.