Agenda Paper 32B

The COVID-19 pandemic has led to some lessors providing relief to lessees by deferring or relieving them of amounts that would otherwise be payable.  In some cases this is through negotiation between the parties, but can be as a consequence of a government encouraging or requiring that the relief be provided. Such relief is taking place in many jurisdictions in which entities that apply IFRS Standards operate.

When there is a change in lease payments, the accounting consequences will depend on whether that change meets the definition of a lease modification, which IFRS 16 defines as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term)”.

The IASB staff state that the prevalence of rent concessions during the COVID-19 pandemic makes this assessment difficult because of the large volume of contracts that might be affected and because it might be difficult to assess. For example, force majeure clauses were developed without contemplating the COVID-19 pandemic and it might be difficult to determine whether rent concessions offered—or mandated by government—are captured by the operation of such clauses.

The staff state that stakeholders have informed them that assessing whether rent concessions are lease modifications and applying the required accounting for rent concessions that are lease modifications could be complex, particularly given the potentially large volume of COVID-19-related rent concessions. Stakeholders are also facing additional challenges during the pandemic. 

Proposed practical expedient

The staff propose that IFRS 16 be amended, by adding a practical expedient along the following lines:

A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the COVID-19-related rent concession consistently with how it would account for the change applying IFRS 16 if the change were not a lease modification.

The practical expedient would apply only to rent concessions occurring as a direct consequence of the COVID-19 pandemic and only if all of the following conditions are met:

• a) the change in lease payments results in revised consideration for the lease that is the same as, or less than, the consideration for the lease immediately preceding the change;
• b) any reduction in lease payments affects only payments originally due in 2020 (a rent concession would meet this condition if it results in reduced lease payments only in 2020 and increased lease payments in 2020 or periods thereafter); and
• c) there is no substantive change to other terms and conditions of the lease.

Accounting for changes in lease payments applying the exemption

The staff paper also sets out how an entity would account for changes in lease payments if it applies the exemption. If a reduction in lease payments (such as forgiving some payments) does not result from a lease modification, a lessee would generally account for that change in payments as a negative variable lease payment and IFRS 16:38 applies (generally recognising the variable payment in profit or loss in the period in which the event or condition occurs).  The lessee would also derecognise that part of the lease liability that has been extinguished by the forgiveness of lease payments (this is consistent with IFRS 9:3.3.1, which requires an entity to remove a part of a financial liability from its balance sheet when, and only when, it is extinguished).

A change in lease payments that reduces payments in one period but proportionally increases payments in another does not change the consideration for the lease, only the timing of individual payments. A lessee would apply IFRS 16:36(b) and continue to reduce the lease liability for payments made to the lessor.

If the lease payments are reduced in one period but increased by a lower amount in a later period (hence the total consideration is lower) the change in lease payments incorporates both a forgiveness of payments and deferred lease payments.

Staff recommendation

The staff recommended that the Board:

• a). Amend IFRS 16 to:
  • i. provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification;
  • ii. require lessees that apply the exemption to account for COVID-19-related rent concessions as if they were not lease modifications;
  • iii. require lessees that apply the exemption to disclose that fact; and
  • iv. require lessees to apply the exemption retrospectively in accordance with IAS 8, but not require them to restate prior period figures. Instead, a lessee would recognise any difference arising on initial application of the amendment in opening retained earnings (or other component of equity, as appropriate) in the annual reporting period that includes the date of initial application.
    
    The exemption should be effective immediately, when the final amendment is issued.
• b) Ask the Trustees to approve a 14-day comment period for an Exposure Draft of an amendment to IFRS 16.
• c) Begin the balloting process for the Exposure Draft.

Next steps

The staff think it would be possible to finalise an amendment to IFRS 16 by the end of May 2020, if the Trustees approve a 14-day comment period.

Board discussion and voting

Recommendation a)

The staff presented the proposals in the agenda paper, emphasising that the unusual nature of the proposals is due to the exceptional set of circumstances currently faced by stakeholders.  They also emphasised that in order for the practical expedient to be useful it needs to be delivered and made available quickly. 

The staff said that feedback received since they posted the papers indicated concerns that in cases where the effects of time value of money on a lease holiday provided could result in small increases to total lease payments, this should not prevent a lessee from applying the practical expedient. Accordingly, the staff propose that “the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change.”

Furthermore, the staff’s recommendations, do not supersede the educational material recently published on the same topic, but rather the two complement each other.

The Vice-Chair noted that she supports the staff recommendation subject to the aforementioned drafting change. She stressed the extra layer of operational relief provided for lessees, which is important under the current circumstances, as many stakeholders are already facing the challenges of applying IFRS 16 for the first time and concurrently dealing with the COVID-19 implications.

She also highlighted that she would not view the current situation as equally challenging for lessors, as most have operating leases and even if they have lease modifications, the required accounting is not as complicated.

Moreover, she noted that due to the simple nature and narrow scope of the amendment and the fact that it is only directing lessees to apply a different area of the existing Standard requirements, she considers the short comment period of 14 days feasible.

A Board member questioned whether situations where rent concessions are provided after the pandemic might still meet the practical expedient’s criteria. The staff responded that owing to the fact that it is uncertain how long the pandemic will last for and the ongoing economic effects may last for a longer period, constraining the expedient to payments originally due in 2020, where the most significant effects of the pandemic are expected, aims to reduce the difficult judgements entities will have to make as to the extent to which certain events relate to the pandemic.  The Board member also asked whether the deferred lease payment would include the deferred extension of lease terms. The staff clarified that the scenario where an entity only moves the lease payments to the end of the contract would also be within the scope of the recommendation.

Another Board member asked whether a lessee could elect to apply the expedient to only certain of the contracts they hold, with the staff clarifying that the IFRS 16 requirements for groups of contracts with similar characteristics apply.

A different Board member raised a concern around the fact that judgement will be required as to whether rent concessions related to COVID-19 or pre-existing conditions, particularly for entities in industries facing structural pressures. They also stressed that clear disclosure of the expedient being applied and monetary impact of the exemption will be essential, particularly in the lease payments forgiveness scenario. The staff highlighted that this impact would be captured by existing IFRS 16 disclosure requirements and that both IFRS 16 and IAS 1 require entities to disclose any unusual information that users will need to understand the financial statements.

Another Board member noted that feedback from Australia suggests that lessors might be facing challenges and require education too, with a different Board member agreeing that the lessor feedback is likely to indicate that the current situation presents difficulties for them too. The staff reiterated the Vice Chair’s point and also noted that the educational material is available and helpful for lessors also. Another Board member also added that there should be a clear message communicated about the expedient not applying to lessor accounting.

The Vice-Chair requested a clarification as to whether for lessees in transition to IFRS 16 who are applying it retrospectively, the amendment would in essence remove the catch up effect and the need to reassess the discount rate, which the staff confirmed.

Another Board member noted that entities with year-ends spanning 2020 and 2021, should be allowed to apply the expedient consistently for the full length of the same fiscal year.

A different Board member asked whether there is comparability between US entities and entities applying IFRS in this instance. It was confirmed that in substance similar practical relief will be provided to lessees.

14 Board members voted in favour of the staff’s recommendations.

Recommendation b) & c)

14 Board members voted in favour of the staff’s recommendations, subject to obtaining approval from the Trustees for the 14-day comment period.

Dissent

No Board members are planning to dissent.