Updated on 10 March 2021
A one-year extension to the practical expedient for COVID-19 related rent concessions under IFRS 16 Leases has been proposed* by the International Accounting Standards Board (the Board). COVID-19-Related Rent Concessions beyond 30 June 2021 is a response to the ongoing economic challenges resulting from the COVID-19 coronavirus pandemic. If approved, the extension would be available to be adopted as soon as it is issued, subject to any local endorsement requirements.
The Board’s proposal is a practical response to the ongoing disruption to economic activity being caused by the COVID-19 pandemic. Many lessees will welcome 12 more months of relief, but need to be aware of the potential transition issues relating to previously ineligible rent concessions.
What’s in the proposal?
In May 2020, the Board issued COVID-19-Related Rent Concessions, which amended IFRS 16 Leases. This amendment introduced an optional practical expedient that simplifies how a lessee accounts for rent concessions that are a direct consequence of COVID-19. Under that practical expedient, a lessee is not required to assess whether eligible rent concessions are lease modifications, instead accounting for them in accordance with other applicable guidance.
Use of the 2020 amendment is however time-limited. Currently, the practical expedient only applies to rent concessions for which any reduction in lease payments affects solely payments originally due on or before 30 June 2021.
12-month extension proposed
The economic challenges presented by the COVID-19 pandemic have persisted longer than anticipated. As a result, lessors and lessees are negotiating rent concessions that extend beyond 30 June 2021.
The Board is therefore proposing to extend the practical expedient by 12 months – i.e. permitting lessees to apply it to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022.
Proposed effective date – Transition challenges
The proposed amendment is expected to be finalised by the end of March 2021 and would be effective for annual reporting periods beginning on or after 1 April 2021. Lessees would be permitted to apply it early, including in financial statements not authorised for issue at the date the final amendment is issued. In effect, it would be available to be applied as soon as it is issued, subject to any local endorsement requirements.
The proposed amendment would be applicable retrospectively with the cumulative effect of initially applying it being recognised in opening retained earnings. The disclosure requirements of Paragraph 28(f)1 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors would not apply on initial application of the proposed amendment.
The original version of the practical expedient was, and remains, optional. However, the amendment being proposed is, in effect, not optional. This is because a lessee that chose to apply the practical expedient introduced by the 2020 amendment would have to consistently apply the extension to similar rent concessions.
This means that lessees may need to reverse previous lease modification accounting if a rent concession was ineligible for the original practical expedient under the 2020 amendment but becomes eligible as a result of the extension. The additional effort required to effect this accounting will be mitigated in part by the Board’s proposed modified retrospective transition approach.
Find out more
To find out more about the existing practical expedient for rent concessions, read our Leases – Rent concessions (PDF 1.6 MB) publication. It contains practical guidance and examples illustrating how a company identifies rent concessions that qualify for the practical expedient – and how to account for them. It also discusses how both lessees and lessors account for rent concessions that are treated as lease modifications.
For further information on the financial reporting implications of the COVID-19 pandemic, please go to our COVID 19 | Financial reporting resource centre, which is continually updated as significant accounting and reporting issues arise. We encourage you to bookmark this page and check back frequently for updates.
1 Paragraph 28(f) of IAS 8 requires a company that initially applies a standard or amendment to disclose to the extent practicable, the effect of adopting the standard or amendments on each financial statement line item and on basic and diluted EPS, for the current period and each prior period presented.
* Read our comment letter (PDF 51 KB) to learn more about KPMG’s position.