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IFRS 16 and COVID-19

Date recorded:

Cover paper (Agenda Paper 32)

The objective of this meeting was for the Board to redeliberate the proposals in the April 2020 Exposure Draft COVID-19-Related Rent Concessions (Proposed Amendment to IFRS 16) (ED). The Board was asked whether it wishes to finalise the proposed amendment to IFRS 16 Leases.

Next steps

The staff expect issuing a final amendment on or around 28 May 2020.

Feedback and project redeliberations (Agenda Paper 32A)

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

Staff analysis

96 comment letters from different respondents (including preparers, standard-setting bodies, accountancy bodies and accounting firms) and different jurisdictions (primarily Europe and Asia) were received by the comment letter deadline of 8 May 2020.

Almost all feedback expressed support for the project. Many respondents highlighted the urgency of the issue, supporting the Board’s accelerated timetable. Many respondents also asked the Board to provide similar practical relief for lessors, with this, however, being considered as a separate project in order to not delay the finalisation of the practical expedient for lessees. Most respondents agreed with the effective date of annual periods beginning on or after 1 June 2020 (with earlier application permitted) and transition requirements proposed in the ED.

The staff’s analysis has considered the feedback received primarily around the condition regarding payments originally due in 2020 in paragraph 46B(b) of the ED, detailed accounting guidance, application of the practical expedient to similar contracts, mandatory application, disclosure and effective date and whether any amendments are required to the ED on the basis of this feedback.

Staff recommendation

In light of the almost universal support for the project from respondents, the staff recommended that the Board finalise the proposal in the ED with the following changes:

  • a) Extend the condition proposed in paragraph 46B(b) of the ED to capture COVID-19-related rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2021.
  • b) Require a lessee applying the practical expedient to disclose the amount recognised in profit or loss to reflect changes in lease payments that arise from COVID-19-related rent concessions.
  • c) Specify that in the reporting period in which a lessee first applies the amendment, it is not required to disclose the quantitative information required by paragraph 28(f) of IAS 8.

Board discussion and voting

The staff summarised the feedback received on the ED and highlighted that the most prevalent suggestions related to the extension of the condition regarding payments originally due in 2020 to June 2021, which would also capture rent concessions granted now and lasting for 12 months. The staff also noted that their recommendation in relation to the requirement for lessees to disclose the effects of the practical expedient was in direct response to investor feedback. There were 110 comment letters received in total (96 comment letters received by the 8 May and 14 letters received afterwards).

One Board member stressed the importance of having a specific time cut-off for the practical expedient, as the focus is on direct consequences of COVID-19. Another Board member noted that a consistent theme underpinning the feedback received was that the accelerated timeline is the most important aspect and, hence, should take precedence over, for instance, providing illustrative examples and more detailed clarifications. Therefore, they agreed with the staff conclusions.

The Vice-Chair noted that she agrees with all the staff recommendations and that she specifically thought that extending the condition in paragraph 46B(b) of the ED to include rent concessions with reductions in payments up to the end of the first half of 2021 is reasonable in order to ensure that a lot of stakeholders in need of help do not miss the benefit of the amendments being made. She also mentioned that having a specific date cut-off is a good alternative to using the words ‘Direct consequence of COVID-19’, as this would inevitably involve judgement, hence having a specific date to refer to will reduce differences in interpretation that might impact comparability.

The Vice-Chair raised a further point around the importance of being aware of the cash consequences of the rent concessions, as this was flagged by investors. She noted that if these are material, it would be expected that they are included in the new IAS 7 reconciliation. She also questioned whether, taking into account that the quality of reconciliations seen so far is not aligned with expectations, it might be helpful to take into consideration this particular piece of feedback from investors for the next steps.

Another Board member noted that, in addition to the difficulties faced by preparers, the current timing is also unfortunate for users, as the majority learn about a new standard in depth when it first appears in the financial statements. Hence, in this case, they would have to get familiar with the IFRS 16 and the practical expedient concurrently, which might raise a need for them to be re-educated in the future once the practical expedient is no longer applicable. Similarly, investors may need to be further educated around certain areas of the expedient, for instance the understanding of the interaction between the various primary statements in light of the expedient.

They also raised their concern around the fact that the extension of the condition in paragraph 46B(b) of the ED might result in increased series of data that are not comparable and potentially undermine comparability for a longer period. Hence, they suggested adding a further condition to limit the expedient to only rent concessions that were granted in 2020, as they thought this would contain the potential disruption to investors.

The staff responded that they didn’t see a risk of unintended consequences arising from this proposal, if the Board wished to consider it. They did, however, point that it might not apply to a substantial population, as the difference in scope between that and the existing recommendation would only relate to rent concessions granted in 2021 that only affect payments until the end of June 2021, and, hence, might not be practical to pursue.

The Vice-Chair noted that there is a trade-off between the stakeholders being assisted by the expedient and the consequence for investors. The Chairman pointed out that as the proposal would not result in significant difference, it might not be worth making this change.

Another Board member asked whether the transitional paragraph of the ED would allow an entity to apply the amendment at an interim period as early adopter, which the staff confirmed. A different Board member questioned whether the practical expedient is available to a first-time IFRS adopter, which the staff also confirmed.

Another Board member raised their concern as to whether there is confidence that the 30th June 2021 is the right cut-off date for the expedient and that there won’t be requests from stakeholders to further extend this date, particularly in light of a potential second spike of the pandemic in winter 2021. The staff responded that based on current evidence, this date is appropriate as it helps address the lessee’s needs without extending the expedient too far with unintended consequences and the expectation is that stakeholders would be more prepared for a potential second spike, hence diminishing the need for a further extension.

The Chairman also pointed out that in this scenario, lessors and lessees would likely look into more permanent arrangements rather than seeking to extend the expedient further. Another Board member further noted that as stakeholders also become more familiar with the IFRS 16 Standard itself, the need for further assistance with the related accounting should be reducing rather than increasing.  

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

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

This paper sets 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 and seeks the Board’s permission to begin the balloting process for the amendment to IFRS 16.

Staff recommendation

As the recommendations in Agenda Paper 32A respond to the feedback received on the ED and do 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 discussion and voting

Question 1

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

Question 2

No Board members are planning to dissent.

Question 3

14 Board members gave permission to begin the balloting process.

Lessors (Agenda Paper 32C)

This paper analysed feedback from respondents who asked the Board to consider developing practical relief for lessors similar to that proposed in the ED for lessees.

Staff analysis

Many respondents asked the Board to provide practical relief for lessors similar to that proposed for lessees. Of these respondents, most highlighted that lessors also face significant practical challenges when accounting for COVID-19-related rent concessions. Many also noted that applying a practical expedient similar to that proposed for lessees would provide useful information to users of financial statements, with others concerned about the asymmetry between lessor and lessee accounting if the Board does not provide similar practical relief for lessors. Some also said that a practical expedient for lessors would achieve convergence with the accounting treatment permitted by the Financial Accounting Standards Board (FASB).

On the basis of these comments, the staff have considered whether the matters identified justify the Board undertaking standard-setting and developing a practical expedient for lessors. The staff analysis focuses on the issues identified above and the interaction with other Standards (primarily IFRS 15 for operating leases and IFRS 9 for finance leases).

The staff have concluded that there is insufficient justification for the Board to develop a practical expedient for lessors. This is because:

  • a) Such a practical expedient could not effectively address many of the practical challenges identified
  • b) IFRS 16 contains no requirements addressing how a lessor accounts for a change in lease payments that is not a lease modification. Consequently, a practical expedient would necessarily have to include some new recognition and measurement requirements. Those requirements may:
    • i. take time to develop and expose for comment, preventing a practical expedient being provided in time to be useful (i.e. during the COVID-19 pandemic);
    • ii. not meet the expectations of those asking the Board to develop a practical expedient;
    • iii. not be any simpler than the current requirements; and
    • iv. carry a risk of unintended consequences.
  • c) Any practical expedient could adversely affect the interactions between the lessor accounting requirements and related requirements in IFRS 9 and IFRS 15. This could prevent an entity from accounting for similar contracts consistently, thus impairing the quality of financial reporting.

Staff recommendation

In light of their analysis, the staff recommended that the Board take no further action in response to the feedback on lessor accounting.

Board discussion and voting

The staff presented the agenda paper and highlighted that the fact that the Board is providing a practical expedient for lessees does not automatically mean that they would provide a similar relief for lessors, particularly in the timeframe required. One of the main reasons relates to the integration and link between the lessor accounting requirements and other requirements in the Standards, particularly the relationship between the lease modification requirements in IFRS 16 and similar requirements in IFRS 15 (for operating leases) and IFRS 9 (for finance leases). Hence, it would be difficult to develop a practical expedient for lessors without creating inconsistencies between these IFRS standards.

The Vice-Chair noted the importance of the staff performing a similar detailed analysis for lessors as they did for lessees, given the significance attributed to this issue by stakeholders. She further highlighted the complexity of this issue as well as challenges from the preparers’ and investors’ perspectives and acknowledged that lessors are also facing difficulties.

The Vice-Chair also stressed that, whilst for lessees the assumption is that they would get simpler accounting and a clear model, based on requirements that already exist in IFRS 16, for lessors there isn’t an established single accounting method for this scenario. Hence, the introduction of a similar expedient for lessor’s could result in a bigger loss of comparability for investors. This would be exacerbated by the fact that if lessors assumed that there was no lease modification, there would be a much wider range of practices arising.

The Vice-Chair further mentioned that the only viable alternative would be to require lessors to assume that COVID-19 related rent concessions constitute a lease modification. This might remove the burden of going through the particular terms and conditions of the contract, however it would not result in simpler accounting and it would not be possible to action it quickly enough for it to be helpful. As such, the Vice-Chair agreed with the staff’s recommendation.

Another Board member noted that, in response to the argument that lessors should get a practical expedient as the FASB have granted a practical expedient for lessees and lessors, the relevant accounting is not aligned under US GAAP and IFRS and, hence, the reasons for the FASB providing the relief and the related accounting differ.

Another Board member emphasized the importance and need for working further on the messaging as to why a similar practical expedient cannot be provided for lessors. They pointed out that the inextricable link between this area of IFRS 16 and other Standards as well as the timeframe constraints should be made clearer. They also noted that the fact that the relevant scope might actually be smaller for lessors (due to many contracts actually being service contracts etc.) should be stressed. Conversely, they argued that the asymmetry between lessee and lessor accounting might not be a compelling argument in this instance.

Other Board members also reinforced the point around the messaging and highlighted the importance of justifying why a similar provision to the one provided to lessees would not be made available to lessors, acknowledging the challenges lessors are facing. One Board member in particular noted that there may be a greater degree of estimation in relation to uncertainty, which highlights the need for the related disclosures in the lessors’ accounts.

Another Board member mentioned that in response to some lessors arguing that they are forced to recognise lease income on a straight-line basis, even though this might not reflect the economics of the contract, the ED clarifies that an assessment should be made and a different basis of recognition might also be appropriate, which the staff confirmed.

14 Board members voted in favour of staff’s recommendation.

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