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There is no specific guidance under Dutch GAAP how to account for changes in leases. From the general guidance it can be derived that if there is no change in lease classification the existing lease (accounting) will be continued. In our view, any modified cash flows would be accounted for as a change in accounting estimate and therefore recognised prospectively.

What’s the issue?

COVID-19 is affecting the financial situations of companies. Many companies are looking for ways to manage their liquidity and may ask for a reduction and/or deferral of lease payments. We have seen leasing companies offering help in providing solutions to bridge the (short-term) cash flow problems faced by its customers. In this article we will discuss how a lessee accounts for renegotiated lease terms under Dutch GAAP.

Getting into more detail

The rent concessions provided by the lessor due to COVID-19 is a short-term temporary measure taken to support the operations of the lessee. In this article we assume that the revised lease would not have changed the risk and rewards incidental to ownership of a lease substantially and thus not affect the lease classification. See below the guidance on potential change in lease classification.

There is no specific guidance under Dutch GAAP how to account for changes to leases. It can be derived that if there is no change in lease classification the existing lease (accounting) will be continued. In our view, any modified cash flows will be accounted for as a change in accounting estimate and therefore recognised prospectively.

Example

In providing relief to the lessee the leasing company grants a rent holiday for the three months April to June, with normally a monthly rent payable of 1,000.

Operating lease

Operational leases are normally recognised on a straight-line basis. The rent holiday of 3,000 in total is recognised as a reduction of the rental expense over the remaining lease term.

Finance lease

The lease accounting standard has its own recognition and measurement principles for finance lease liabilities. As mentioned there is no specific guidance how to account for the revised lease. One acceptable approach could be to remeasure the lease liability based on the modified cash flow over the remaining lease term, using the original discount rate. Any resulting change in the carrying amount of the liability will then be reflected in the carrying amount of the related asset. The asset will be depreciated further over the remaining useful life.

Potential change in lease classification

If the lessor and lessee agree to change certain conditions of the original lease to such extent that these changed conditions could have been agreed at the date of entering into the lease, this would result in a different lease classification. The changed lease contract will be accounted for as a new agreement for the remaining lease period, using the new lease classification.

Changes to estimates or circumstances, however, do not result in a reclassification of the lease. Examples are:

  • changes in the economic life or residual value of the lease asset;
  • the lessee becoming unable to pay;
  • changes in estimates as to whether a lessee will or will not make use of a purchase or renewal option.

Partner Department of Professional Practice

KPMG Nederland

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