Due to the impact of the COVID-19 coronavirus outbreak on trading conditions, many lessees are seeking rent concessions from lessors. Rent concessions may take the form of a one-off reduction in rent, a reduction for a defined period of time or a change in the nature of rent – e.g. fixed rent payments becoming variable. For example, a number of retailers are seeking reductions in real estate rents – though similar issues may arise in other leases.
The accounting implications of an agreed change to rents can be very different depending on whether the change was envisaged in the original lease agreement:
Other considerations may apply if the lessee defaults on the lease or governments intervene to provide relief to lessors or lessees.
Significant judgement may be required to determine how to account for rent concessions in real estate and other leases.
Determining the nature of a rent concession
To account for a rent concession under IFRS 16 Leases, companies first need to determine the nature of the rent concession.
Many rent concessions will meet the definition of a lease modification – i.e. a change in scope or consideration that was not part of the original terms and conditions of the lease. When this is the case, companies apply the detailed guidance in IFRS 16 on accounting for lease modifications (see below).
In other cases, the original terms and conditions of the lease may include a mechanism to adjust rents if certain events occur. When this is the case, the rent concession will often represent a variable lease payment. Companies generally account for variable lease payments as income or expense in the period in which they arise.
Accounting for a rent concession that is a lease modification
To take a simple example, suppose a retailer leases a store from a landlord for a fixed term. The landlord classifies the lease as an operating lease. The retailer and landlord negotiate a change in the terms and conditions of the lease, so that the fixed rent is reduced by 50% for the next 12 months. There are no other changes to the lease.
The retailer and landlord account for this rent concession as follows.
Accounting for lease modifications can be complex. Further guidance is available in our publication Lease modifications.
In some cases, the government may intervene to provide support to lessees or lessors. When this is the case, companies should consider the guidance in IFRS® Standards on government assistance.
In addition, lessors should consider whether:
Companies are required to disclose information about the effect that leases have on their financial position, financial performance and cash flows – including information about variable lease payments recognised as income/expense in the period. [IFRS 16.51, 89]
The International Accounting Standards Board has published educational material on rent concessions in the context of COVID-19. It is also proposing relief to lessees on rent concessions directly related to COVID-19. Read our web article.