In response to calls from stakeholders and the ongoing effects of the pandemic, the International Accounting Standards Board (IASB) has approved a one-year extension to the practical expedient for COVID-19-related rent concessions allowed under IFRS 16 Leases.
In May 2020, the IASB amended IFRS 16 (the international equivalent to AASB 16) to introduce an optional practical expedient to simplify how a lessee accounts for rent concessions arising as a direct consequence of the pandemic. Applying the practical expedient means lessees are not required to assess whether eligible rent concessions are lease modifications. Rather, such rent concessions are effectively treated as variable lease payments in the period in which the event or condition that triggers those payments occurs.
Under the May 2020 amendment, application of the practical expedient is conditional on COVID-19-related rent concessions meeting all of the following requirements:
- The revised consideration for the lease is substantially the same as, or less than, the original consideration;
- The reduction in lease payments relates to payments originally due on or before 30 June 2021; and
- There are no other substantive changes to the terms and conditions of the lease.
At a supplementary meeting in February 2021, the IASB deliberated changing the date in the second bullet point above to 30 June 2022, thereby extending the relief available to lessees by 12 months at a time when the pandemic is at its peak. The proposal was then tentatively approved at another supplementary meeting on 10 March 2021.
At the time of writing, the amending standard is expected to be finalised by the end of March and would be effective for annual reporting periods beginning on or after 1 April 2021. Lessees would be able to apply the amendment early, including in financial statements not yet authorised for issue at the date the amendment is issued. In Australia, once the Australian Accounting Standards Board (AASB) has endorsed the amendment, it would be available for immediate use by local entities.
While the May 2020 amendment that introduced the practical expedient was (and still is) optional, the new amendment that purely extends the scope of the practical expedient is, in effect, not optional. This is because of the requirement to apply the expedient consistently to all lease contracts with similar characteristics and in similar circumstances. Accordingly, a lessee that has already applied the practical expedient must also apply the extended scope of the practical expedient. Similarly, the latest amendment does not allow a lessee to elect to apply the practical expedient if the lessee has previously elected not to apply it to eligible rent concessions. This is to preserve comparability of reported information, reduce complexity and avoid unintended consequences.
A potential consequence of the preceding paragraph is that some lessees may need to reverse previous lease modification accounting if a rent concession did not qualify for the original practical expedient but becomes eligible as a result of the scope extension.
The amendment to IFRS 16 would be applied on a retrospective basis with the cumulative effect of initial application being recognised in opening retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the amendment is first applied. This modified retrospective transition approach would alleviate some of the effort required to undo previous lease modification accounting if the scenario in the preceding paragraph were to apply.