With so many businesses experiencing cash flow challenges as a result of Covid-19, many lessors have offered temporary rent reductions to ensure the financial health of tenants upon their return.
For IFRS reporters, this can create an accounting challenge. Most leases now fall under the recent leasing standard, IFRS 16, which brings leases on to the Balance Sheet for both lessees and lessors.
IFRS 16 requires the reporter to consider the original contractual or legal lease terms to determine if the rent concession is already covered. In such a case, the rent concession is accounted for as a ‘variable lease payment’ which effectively allows a reduced rent to be recorded in the profit and loss account, with no re-measurement of the lease asset or liability.
If the rent concession is not part of the original contractual terms it must be assessed as to whether it would meet the definition of a lease modification (ie a change in the scope or consideration for a lease). This process of assessment can be complex and time consuming, especially when a large number of leases are involved. If the change is determined to be a modification, this means reassessing the lease asset and liability in brand new calculations, using a revised discount rate. Given that many businesses have only recently completed transition to IFRS 16 this is not a welcome prospect for stakeholders.
The IASB are seeking to make an amendment which would allow reporters not to assess Covid-19 related concessions and account for any changes as though they are not lease modifications. This will remove the need to analyse leases and offer the easier option of reducing rent expense in the profit and loss account in all cases. The amendment will be available for adoption as soon as it is issued, expected in the next few months.
Many property leases are accounted for as operating leases, whereby the lessor spreads rental income over the term. Where rent concessions are offered, the same judgement will need to be applied as to whether a lease modification has occurred as for lessees. If it has, the effect of the reduced rents will need to be spread over the lease term. The IFRS 16 amendment is not currently expected to apply to lessors.
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