The International Accounting and Standards Board (IASB) have issued an Exposure Draft ED/2020/2 COVID-19 relating to Rent Concessions. Many lessees around the world are seeking rent concessions in the form of one-off rent reductions, rent waivers or deferral of rent payments during this economic downturn.
Under IFRS 16, rent concessions often meet the definition of lease modifications and accounting for these lease modifications can be complex. For example, lessees could be required to re-calculate their right of use for assets using a revised discount rate.
The objective of the Exposure Draft is to provide relief during the COVID-19 pandemic from treating rental concessions as lease modifications.
The resulting accounting application would depend on the details of the rent concession. For example, if the lessee has received a one-off concession in the form of a rental reduction, it would be treated as a variable lease payment and is recognised in the profit or loss statement. The lessee will continue to reduce the lease liability and amortise the right of use asset with rent concessions recognised in the profit and loss as other income. It should also be noted that lessees must disclose that they have applied the exemption in their financial statements.
The exemption will only apply if the following conditions are met:
- The revised consideration is substantially the same terms or less than the original consideration;
- The reduction in lease payments relates to payments due in the year 2020; and
- No other substantive changes have been made to the terms of the lease.
There are no exemptions proposed for lessors and they are required to continue to assess if the rent concessions are lease modifications and account for them accordingly.
The Exposure Draft is expected to be finalised by the end of May 2020 at which point the AASB will amend the Australian standard. This would be effective for periods beginning on or after 1 June 2020, with earlier application permitted.
The application of AASB 16 Leases can be complex – if you need assistance please contact your ESV Engagement Partner on 9283 1666 and they can provide advice based on your circumstances.