Introduction

This Clearly IFRS outlines the proposed amendment to IFRS 16 Leases set out in ED/2021/2 Covid-19-Related Rent Concessions beyond June 30th 2021, published by the International Accounting Standards Board (Board) in February 2021.

• In May 2020, the Board amended IFRS 16 to provide lessees with a practical expedient that relieves a lessee from assessing whether a COVID-19-related rent concession is a lease modification.

• Among other conditions, the 2020 amendment permits a lessee to apply the practical expedient only to rent concessions for which any reduction in lease payments affects only payments originally due on or before June 30th, 2021.

  Due to the ongoing nature of the pandemic, the Board now proposes to extend that date to permit a lessee to apply the practical expedient to rent concessions for which any reduction in lease payments affects only payments originally due on or before June 30th, 2022.

• If the amendment is finalised, it would be effective for annual periods beginning on or after April 1st, 2021. A lessee would be permitted to apply the amendment early, including in financial statements not yet authorised for issue at the date the final amendment is issued. The Board proposes that an entity applies the amendment retrospectively in accordance with IAS 8.

• The ED has an expedited comment period of 14 days, ending on February 25, 2021.

Background

In May 2020, the Board amended IFRS 16 to provide lessees with a practical expedient that relieves a lessee from assessing whether a COVID-19-related rent concession is a lease modification. Lessees that apply the practical expedient account for COVID-19-related rent concessions as if they were not lease modifications.

The amendment was effective for annual reporting periods beginning on or after June 1st, 2020 with earlier application permitted.

Please see our Clearly IFRS from May 2020 for the full detail of the amendment.

The practical expedient applies only to rent concessions occurring as a direct consequence of COVID-19 and only if certain conditions are met. One of the conditions is that a reduction in lease payments affects only payments originally due on or before June 30th, 2021.

Stakeholders have pointed out that the ongoing significant and protracted effects of the pandemic were not envisaged at the time the Board developed the practical expedient, as in many jurisdictions the ongoing effects of the pandemic are at least as significant now as they were in May 2020. As a consequence, lessors are granting rent concessions to lessees that reduce lease payments beyond June 30th, 2021. Those rent concessions are otherwise eligible for the practical expedient.

The Board acknowledged the stakeholders’ concerns and decided to propose extending the relief.

The proposed amendment

The Board proposes to amend IFRS 16 to extend the availability of the practical expedient described above so that it applies to rent concessions for which any reduction in lease payments affects only payments originally due on or before June 30th, 2022, provided the other conditions for applying the practical expedient are met.

Observation

One Board member voted against the publication of the ED. In his view, an extension to the period during which the practical expedient is available would impede comparability between lessees that apply the practical expedient and those that do not. He notes that support from users of financial statements for the 2020 amendment was predicated on limiting the practical expedient to the timeframe that was stated in that amendment. This timeframe is now proposed to be extended by a year.

Effective date, transitional provisions and comment period

The Board proposes an effective date of annual reporting periods beginning on or after April 1st, 2021. A lessee would be permitted to apply the amendment early, including in financial statements not yet authorised for issue at the date the final amendment is issued.

Should the amendment be finalised, the Board proposes that an entity applies the amendment retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Lessees would recognise the cumulative effect of initially applying the amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment.

Observation

The Board notes in the Basis for Conclusions to the ED that even though the practical expedient is optional it must be applied consistently to contracts with similar characteristics and in similar circumstances.

The ED proposes to amend only the date within the conditions required to be eligible to apply the practical expedient—it neither introduces a new practical expedient nor a new option to apply (or not apply) the practical expedient. Therefore, a lessee that has already applied the practical expedient must also apply the extended scope of the practical expedient proposed in the ED.

It is possible that a lessee applying the expedient when it was first available had some contracts that met the requirements and others that did not, because some of the concessions affected payments originally due after June 30th, 2021. If the Board finalises the amendment, a lessee would be required to reverse the lease modification accounting for those contracts and apply the expedient.

The proposal in the ED 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.

The comment period for the ED ends on February 25, 2021.

If you have any questions about the ED Covid-19-Related Rent Concessions beyond June 30th, 2021, please speak to your usual Deloitte contact or get in touch with a contact identified in this Clearly IFRS.

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Further information

For more information, please contact with Kerry Danyluk, Diana de Acetis and Alexia Donoghue.