IFRS 16 and COVID-19

Date recorded:

Cover paper (Agenda Paper 32)

The objective of this meeting was for the Board to consider the feedback on the proposals in the February 2021 Exposure Draft COVID-19-Related Rent Concessions beyond 30 June 2021 (Proposed Amendment to IFRS 16) (ED). The Board was asked whether it wishes to finalise the proposed amendment to IFRS 16.

Next steps

The staff will begin the balloting process for an amendment to IFRS 16, with a final amendment expected to be issued by the end of March 2021.

Feedback and project redeliberations (Agenda Paper 32A)

This paper summarised feedback on the ED and provided the staff’s analysis and recommendations about whether, and how, the Board should finalise the proposal in the ED.

Staff analysis

50 comment letters were received including from standard-setting bodies, accountancy bodies, accounting firms, preparers and preparer representative groups, primarily from Europe and Asia. Feedback was also received from additional outreach with investors.

Almost all respondents supported the Board’s proposal to extend the availability of the practical expedient and noted that the proposed amendment would provide useful information, allowing lessees to account for similar COVID-19-related rent concessions consistently. Some respondents also highlighted the urgency of the matter, supporting the Board’s accelerated project timetable. Most respondents also agreed with the specific length of the extension proposed in the ED (30 June 2022).

Almost all respondents agreed with the effective date proposed in the ED. Furthermore, many respondents agreed with the proposed transition requirements, although some respondents requested changes and asked the Board to permit optional application of the proposed amendment or alternative transition options, such as retrospective application applying IAS 8 or prospective application, in addition to the cumulative catch-up approach proposed in the ED.

The staff’s analysis considered the feedback received, particularly around the length of the proposed extension, optional application of the proposed extension, alternative transition options and transition content in the Basis for Conclusions on the ED.

The staff assessed that there is not sufficient evidence in the feedback received to support the extension of the practical expedient beyond 30 June 2022. The staff also believe that allowing optional application of the proposed extension during the period of its availability would impair the objective of enabling lessees to continue providing useful information about their leases to investors. Moreover, the staff believed that, on balance, the potential benefits of allowing any of the alternative transition options requested by respondents do not outweigh the cost. Therefore, the staff did not recommend any changes to the ED in relation to these areas.

Conversely, the staff thought that additional clarity around the practical application of the transition requirements could be useful to stakeholders. However, given the urgent nature of the project and the fact that the wording in the cumulative catch-up approach proposed in the ED is identical to other transition paragraphs in IFRS Standards, the staff believed that it might be preferable for an additional explanatory transition paragraph to be added.

Staff recommendation

The staff recommended that the Board finalise the proposal in the ED with an additional explanatory transition paragraph similar to the following:

‘Applying paragraph 2 of this Standard, a lessee shall apply the practical expedient in paragraph 46A consistently to eligible contracts with similar characteristics and in similar circumstances, irrespective of whether the contract became eligible for the practical expedient as a result of the lessee applying Covid-19-Related Rent Concessions (see paragraph C20A) or Covid-19-Related Rent Concessions beyond 30 June 2021 (see paragraph C20BA).’

Board discussion

The staff presented the proposals in the agenda paper, summarised the main points of the feedback received and emphasised the importance of not introducing additional complexities to the proposed amendments in light of the support of respondents to the amendment and its urgent timeframe.

The Vice-Chair also highlighted that it would be important to keep in mind during the Board’s discussion that the current proposal and original amendment in May 2020 are simple in nature as well as the short comment period.

A Board member noted that, whilst he is overall supportive of the amendment, he had a concern around the length of the proposed extension, and would prefer extension to 31 December 2022, as the pandemic has had a different impact on different countries and jurisdictions across the globe and the expected time frames for the related impacts to be resolved may differ.

Another Board member highlighted that providing the relief to lessees should be balanced with financial statements still providing useful information as well as the strong message from users to limit both the application period and degree of optionality in this relief. Furthermore, she noted that they agree that the pandemic is unequal in terms of its magnitude and effect in different parts of the world, however it is important that comparability is achieved through IFRS Standards by setting the period in which this exception from the normal rules is used to be a comparable period around the globe. She also noted there is a difference between the impact of the pandemic on public health and the economy, with the latter expected to continue in the longer term.

Moreover, she mentioned that she thought the additional explanatory transition paragraph would be helpful particularly given the tight time frames of this project and would, hence, support it. A few other Board members expressed their agreement with this view.

Another Board member, who had previously dissented from publishing the ED, noted that, when the May 2020 amendments were issued, the application of the practical expedient was limited to a specific and fixed timeframe and raised the concern that extending this would result in comparability both over time and across different entities being distorted for users. Furthermore, he noted that part of the rationale for providing the relief originally was that IFRS 16 was a new Standard, which is no longer the case, and stressed that a principles-based Standard should be applied and provide useful information in different economic and market conditions. As such, he noted that he would not be able to support the proposed amendment.

One other Board member agreed with this view and noted that he did not see compelling evidence that there is a continued difficulty in implementing IFRS 16 modification accounting for rent concessions, also in light of the fact that the Standard is not new anymore.

Another Board member noted that they support extending the length of the practical expedient to 30 June 2022, but, whilst they understand the staff’s rationale, would not object to the optional application of the amendment, given that the pandemic has evolved since May 2020 and more contracts might now fall under the scope of the practical expedient.

Board decision

The Board supported the staff recommendation, with the Board members voting to finalise the proposal in the ED with an additional explanatory transition paragraph. 10 members voted in favour of the staff recommendation, with 2 against and 1 member being absent.

Due process and permission to ballot (Agenda Paper 32B)

This paper set out the due process steps that the Board has taken in developing the amendment to IFRS 16, asked the Board to confirm that it is satisfied that it has complied with the due process requirements, sought the Board’s permission to begin the balloting process for the amendment to IFRS 16 and asked whether any Board member intended to dissent from the issuance of the amendment to IFRS 16.

Staff recommendation

As the recommendations in Agenda Paper 32A responded to the feedback received on the ED and did not represent fundamental changes on which respondents have not had opportunity to comment, the staff recommended that the Board finalises the amendment to IFRS 16 without re-exposure.

Board decision

The Board supported the staff recommendations, with the Board members voting to:

  1. Finalise the amendment to IFRS 16 without re-exposure. All 12 members present voted in favour of the staff recommendation, with 1 member being absent.
  2. Conclude that the Board has complied with the applicable due process requirements and that it should begin the balloting process for the amendment to IFRS 16. All 12 members present voted in favour of the staff recommendation, with 1 member being absent.

Two Board members noted their intent to dissent.


Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.