IFRS 16 – Accounting for COVID-19 Lease Concessions
Since the arrival of the COVID-19 pandemic here in the UK and the subsequent “lockdown”, HMG has announced several measures to protect both lessees and lessors with regards to the collection of rentals and repossession of properties.
High street shops and other companies under strain will be protected from aggressive rent collection and asked to pay what they can during the coronavirus pandemic. Landlords and investors have been asked to work collaboratively with high street businesses unable to pay their bills during this period and statutory demands and winding up petitions issued to commercial tenants are to be temporarily voided and changes are to be made to the use of Commercial Rent Arrears Recovery which builds on measures already introduced in the Coronavirus Act.
Business Secretary, Alok Sharma, said on 23rd April:
"In this exceptional time for the UK, it is vital that we ensure businesses are kept afloat so that they can continue to provide the jobs our economy needs beyond the coronavirus pandemic."
Chief Executive of the British Retail Consortium, Helen Dickinson OBE, said:
"Rents are a huge burden for retailers that must be paid even where shops are closed. We have raised this problem with government and today's announcement protects firms who - during these extraordinary times - are unable to meet their rent obligations.
We thank Alok Sharma for his swift action, which will give retailers some vital relief and help safeguard millions of jobs all across the country. We look forward to the finer details, however, it is clear government is listening and willing to act."
Lessors and lessees will be looking to maintain their relationship in the face of a need by the lessee to forego rents while they are not trading. A simple solution, of course, is to “virtually suspend” the lease during this “no rent period” and keep the same number of payments by “extending” it for the same period – an extra 3 or 6 months. Unfortunately varying the length of the lease term deems it to have been surrendered and a replacement lease being granted in its place. The parties could try a reversionary lease mirroring the original lease terms and conditions but taking effect at the end of this one with a deed of variation linking the two but fixing the legalese and making both parties whole is one thing and there are enough issues here alone, but the parties would ordinarily need to account for any lease payment or lease term changes in accordance to existing IFRS 16 guidelines.
Like the cavalry, the IASB seems to be on its way to rescue the accountants of the world by proposing an amendment to IFRS 16 to provide lessees with practical relief during the COVID-19 pandemic while enabling them to continue providing useful information about their leases to users of financial statements.
The proposed amendment aims to address issues affecting the application of IFRS 16 requirements to large volumes of rent concessions granted as a direct consequence of the COVID-19 pandemic during 2020. The proposed amendment:
- Explains the difficulties lessees face at this time. In particular, lessees have identified potential difficulties in the current environment in assessing whether COVID-19 related rent concessions are lease modifications and, for those that are, applying the required accounting.
- Takes into account that many lessees are currently preparing their first annual financial statements applying IFRS 16. Any complexity arising as a result of the COVID-19 pandemic, therefore, adds to the work being undertaken in implementing the new lessee accounting model in IFRS 16.
- Permits lessees, as a practical expedient, not to assess whether particular COVID-19 related rent concessions are lease modifications. Instead, lessees that apply the practical expedient would account for those rent concessions as if they were not lease modifications.
- Requires lessees that apply the practical expedient to disclose that fact.
The Board intends to issue the amendment on the 28th May and to this end, the objective is to provide lessees with practical relief during the COVID-19 pandemic while enabling them to continue providing useful information about their leases to users of financial statements – their shareholders, lenders, investors, lessors and of course employees. According to the board it “has tentatively decided to finalise the proposal in the Exposure Draft with the following changes”:
- Extend the condition proposed in paragraph 46B(b) to capture COVID-19-related rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2021;
- Require a lessee applying the practical expedient to disclose the amount recognised in profit or loss to reflect changes in lease payments that arise from COVID-19-related rent concessions; and
- Specify that in the reporting period in which a lessee first applies the amendment, the lessee is not required to disclose the information required by paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
In response to feedback, there is no further action with regards to lessor accounting.
Innervision has been closely following the recent IFRS 16 Exposure Draft COVID-19 discussions and our development team have been preparing for the anticipated adjustments to the system that will accommodate the concessions proposed by the IASB.
These changes will accommodate the rent forgiveness, deferral and partial rent forgiveness and/or partial deferral concessions currently proposed. This new functionality is being built as we speak and is set to go live shortly after the concessions have been officially confirmed by the IASB towards the end of May.
To find out how Innervision's lease accounting solution can help you implement the newly proposed COVID-19 lease concessions as well as helping you automate IFRS 16 or ASC 842 financial reporting, request a free demo by clicking the link below.