Lease Concessions & COVID-19

Accounting for Lease Concessions triggered by COVID-19

The International Accounting Standards Board (IASB) has issued amendments to IFRS 16 to not account for rent concessions as a lease modification if they’re a result of COVID-19 and meeting certain conditions.

What’s happening?

The current economic climate has resulted in many lessees to pursue rent concessions from lessors. A rent concession could come in many forms and will reduce the lessee lease payments. For example, retailers wanting a reduction in rent due to the impact of social distancing on bricks and mortar retail. 

Unless these concessions were captured in the original lease agreement, more likely than not, it meets the definition of a lease modification under IFRS 16. 

IASB has given relief in relation to lease accounting

What are the amendments? 

The amendment offers an optional practical expedient to simplify who to account for rent concessions that are a direct result of COVID-19. 

A lessee can avoid modification accounting if there is no change in either the scope of the lease or the consideration for the lease, then there is no lease modification.

The IASB has released some practical examples here

How does it help?

If anything trying to apply this concession will complicate your accounting. For example, let’s say the Lessor waives several lease payments. Regardless if you want to apply modification accounting or not, the lessee is going to have to true-up the lease liability. This is needed as the current liability incorporates those future lease payments that are no longer required to be paid. 

Modification accounting under IFRS 16 has a simple solution, remeasure your lease liability based on the new contractual lease payments. While applying the temporary practical expedient the IASB states 

If a change in lease payments results in the extinguishment of a part of a lessee’s obligation specified in the contract (for example, a lessee is legally released from its obligation to make specifically identified payments), the lessee would consider whether the requirements for derecognition of a part of the lease liability are met applying paragraph 3.3.1 of IFRS 9 Financial Instruments.

This sounds like a lot more work as you’re now off to another standard to apply those principles. 

Conclusion

It’s great that the IASB acknowledges the current economic situation for companies that need to apply to IFRS 16. Unfortunately, a change to reporting requirements can increase the cost of compliance as the time it takes to learn the new guidelines outweighs the benefit. Especially if you already can navigate modification accounting, and these changes are only temporary. If you are set on applying the rent concession KPMG has an in-depth guide here

Of course, I can’t go past the sales pitch, but accounting for a modification in Cradle is incredibly easy and can be done with a couple of clicks. Giving you peace of mind, your financial reporting is accurate, and you can focus on more important things like cash flow management to keep your company’s head above water.