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Lease accounting standard to provide for COVID-19 rent reductions & waivers via amendment

The IFRS 16 standard on leases requires lessees to assess individual lease contracts to figure out whether the concessions come under the head modifications. In case, the concessions are considered as substantial modifications, then the lessee must calculate the lease liability using an updated discount rate.

In order to accommodate rent holidays and temporary rent reductions due to novel coronavirus, or COVID-19, pandemic, the International Accounting Standards Board has proposed to amend accounting standards for leases, IFRS 16. In a bid to fast-track this relief, it has sought comments from its members till May 8 and hopes to implement the final amendment in May itself.

“The objective of the amendment is to give timely relief to lessees when applying IFRS 16 to COVID-19-related rent concessions while still enabling them to provide useful information about their leases to investors,” a release by the International Financial Reporting Standards (IFRS) Foundation said.

The IFRS 16 standard on leases specifies the accounting treatment of lease agreements and any modifications in them. Typically, the standard requires lessees to assess individual lease contracts to figure out whether the concessions come under the head  modifications. In case, the concessions are considered as substantial modifications, then the lessee must calculate the lease liability using an updated discount rate.

However, given the unusual circumstances and exigencies of the pandemic, it would be practically difficult to apply this relatively new standard to the large number of bulk COVID-19-related rent concessions.

Hence, the proposed amendment to IFRS 16 allows lessees, as a practical expedient, not to assess whether particular COVID-19-related rent concessions are lease modifications. Instead, the lessees that apply the practical expedient would account for those rent concessions as if they were not lease modifications. And of course, those availing this practical expedient must disclose it. The Exposure Draft proposes no change for lessors.

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This amendment is applicable only for COVID-19 related rent concessions. And it is to be effective for a limited period of time, i.e. for annual reporting periods beginning on or after June 1.The IASB’s Indian counterpart, the Indian Institute of Chartered Accountants (ICAI) has also sought its members’ opinions on whether such changes should be introduced in the corresponding Indian accounting standard for leases, Ind AS 116. “Any complexity arising as a result of the COVID-19 pandemic adds to the work being undertaken in implementing the new lessee accounting model in IFRS 16,” it said in a note on its website.

ICAI members are expected to feed in their views till May 5, in a bid to retain congruence with global standards and funnel the Indian viewpoint to the global discussion. “Many lessors around the world have provided, or are expected to provide, rent concessions to lessees, as a relief. Such rent concessions are particularly prevalent for leases of retail property and, in some cases, are encouraged or required by governments or jurisdictional authorities,” the ICAI note said.

In India, there have been news items of large retailers seeking either deferral or waiver of rent till the consumption scenario improves.

 
Shalini Dagar
first published: Apr 27, 2020 05:26 pm

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