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IFRS 16 and COVID-19

Date recorded:

COVID-19-Related Rent Concessions beyond 30 June 2021 (Agenda Paper 32)

Background

On 28 May 2020, the Board issued Covid-19-Related Rent Concessions, which amended IFRS 16 Leases. The 2020 amendment permits lessees, as a practical expedient, not to assess whether particular rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and, instead, to account for those rent concessions as if they were not lease modifications.

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 30 June 2021. Stakeholders have asked the Board to extend the scope of this condition so the practical expedient can be applied, as a minimum, to rent concessions for which any reduction in lease payments affects only payments originally due on or before 31 December 2021.

Therefore, the objective of this paper is to ask the Board whether it would like to undertake standard-setting in response to this request.

Staff analysis

Feedback received on the practical expedient has been positive. However, some stakeholders have raised concerns that the ongoing significance 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. The Board has also been informed that many lessors are granting rent concessions, as a direct consequence of the pandemic, that extend beyond 30 June 2021.

Therefore, the staff’s view is that it is a reasonable request to extend the scope of the practical expedient, so that it can be applied to rent concessions that reduce lease payments beyond 30 June 2021. The staff believe that doing so would:

  • a) provide practical relief to lessees during the height of the pandemic;
  • b) provide useful information to investors by enabling lessees to report the effects of COVID-19-related rent concessions in profit or loss, and account for similar rent concessions in the same way, during the height of the pandemic; and
  • c) be consistent with the Board’s intentions when it originally developed the practical expedient.

The staff have considered two potential dates for the extension of the practical expedient: 31 December 2021 and 30 June 2022. The evidence currently available suggests that the practical expedient would be most needed over the period to 31 December 2021. However, given the significant current effects of the pandemic and ongoing negotiations between lessees and lessors regarding COVID-19-related rent concessions, there is a concern that if the scope of the practical expedient is not extended sufficiently there may be further requests received for extension in the future. As such, on balance, the staff believe that an extension to 30 June 2022 would be more helpful for stakeholders as it would provide a more certain position about the availability of the practical expedient than 31 December 2021. This will also help to avoid potential complexities regarding the transition requirements needed to introduce further scope extensions and would, hence, be reasonable.

The staff also believe that requiring a lessee to apply the recommended amendment retrospectively would ensure consistent application of the practical expedient by lessees to rent concessions that meet the extended scope conditions.

Furthermore, the staff highlighted the need for any amendment to be finalised quickly in order to provide meaningful relief to lessees. The staff have outlined the due process steps in developing a possible amendment to IFRS 16 and aligned their recommended effective date with these.

Staff recommendation

The staff recommended that the Board amend paragraph 46B(b) of IFRS 16 to permit a lessee to apply the practical expedient in paragraph 46A of IFRS 16 to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022.

The staff also recommended that the Board:

  • a) Require a lessee to apply the amendment for annual reporting periods beginning on or after 1 April 2021.
  • b) Permit a lessee to apply the amendment early, including in financial statements not authorised for issue at the date the final amendment is issued.
  • c) Require a lessee to apply the amendment retrospectively, recognising 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.
  • d) Specify that, in the reporting period in which a lessee first applies the amendment, a lessee is not required to disclose the information required by paragraph 28(f) of IAS 8.

The staff asked for permission to ballot and propose a comment period of 14 days, subject to the Trustees approving such a short comment period. They also asked if any Board member intends to dissent from the ED.

Board discussion

The staff presented the proposals in the agenda paper and highlighted that after the agenda paper was published, more stakeholder feedback has been received supporting an extension. The staff also stressed that if the Board decides to amend the expedient, it is important that this is done quickly and they are recommending a 14-day comment period for the Exposure Draft (ED) (in light of the simplicity of the proposal). Furthermore, the staff noted that the Trustees already signalled that they would approve the 14-day comment period if the Board votes in favour of the amendment.

The Vice-Chair noted that she supported the staff recommendations in light of the ongoing severity of the pandemic and letters received from stakeholder groups show that extensions are still being made to rent concessions granted as a direct consequence of the pandemic, which indicates that the same conditions that caused the Board to provide the original relief in May 2020 are still in place in some jurisdictions. She also highlighted the importance of ensuring that any  extension balance the concerns of some investors of the risk of the practical expedient being applied beyond when it is most needed against the risk of the needing an additional extension. She concluded that she supports the 30 June 2022 date but requested that evidence around the extensions being offered is closely examined in the feedback received to confirm the appropriateness of the date chosen.

Another Board member also expressed support for the staff recommendations and accelerated timeline, but asked for further input from users of financial statements to be requested during the comment letter period to the extent possible.

One Board member noted that when the practical expedient was initially offered, its application was limited to a very specific timeframe. They believe that the requests for extension might result in that timeframe being considered to be more flexible and, given the importance of a fixed and limited timeframe to investors and users particularly for comparability purposes, they would find it difficult to support the staff recommendations.

Another Board member agreed with these concerns and noted that, as users generally prefer comparability and consistent application, a broader group of users might oppose the proposed amendment. They also pointed out that they have so far only seen a limited number of disclosures around the practical expedient which might make it harder for stakeholders to have visibility of and assess the impact of the expedient and the proposed amendment in practice.

In response to these concerns, other Board members emphasised the importance of comprehensive disclosures as well as reminding stakeholders about the context and objective of the practical expedient and proposed amendment. The Vice-Chair also reiterated the importance of taking into account the needs of both preparers and investors and clarifying the comparability aspect. She also asked that the staff remind stakeholders in the market about the importance of disclosures around the practical expedient in order to provide the necessary visibility to the investors.

Two Board members raised a question as to whether the application of the practical expedient should be extended to December 2022 instead of June 2022, in order to provide sufficient time regarding currently ongoing renegotiations which are still a direct impact of the pandemic and provide further stability in applying the expedient in practice.

Two other Board members also sought confirmation that the amendment to the length of the application of the practical expedient would be mandatory only for those lessees who opted to apply the expedient in the first place, which the staff and Vice-Chair confirmed. 

Board decision

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

  • 1 Amend paragraph 46B(b) of IFRS 16 to permit a lessee to apply the practical expedient in paragraph 46A of IFRS 16 to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022. (11 votes to 2 in favour)
  • 2a Require a lessee to apply the amendment for annual reporting periods beginning on or after 1 April 2021. (12 votes to 1 in favour)
  • 2b Permit a lessee to apply the amendment early, including in financial statements not authorised for issue at the date the final amendment is issued. (12 votes to 1 in favour)
  • 2c Require a lessee to apply the amendment retrospectively, recognising 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. (11 votes to 2 in favour)
  • 2d Specify that, in the reporting period in which a lessee first applies the amendment, it is not required to disclose the information required by 28(f) of IAS 8. (11 votes to 2 in favour)
  • 3 Expose the proposals for a 14-day comment period (subject to the Trustees approving such a short comment period). (12 votes in favour, with 1 absent)
  • 4 Conclude that the Board has complied with the applicable due process steps and that it should begin the balloting process for the Exposure Draft. (12 votes in favour, with 1 absent)
  • 5 One Board member intends to dissent.

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