IFRS 16 and COVID-19 related rent concessions

On 28 May 2020, the IASB issued amendments to IFRS 16, which provide relief for lessees in accounting for rent concessions granted as a direct consequence of COVID-19.

Normally this type of rent concessions would meet the definition of a lease modification, which requires lessees to remeasure the lease liability based on the revised consideration using a revised discount rate. This could become quite challenging to apply for lessees with potentially hundreds or thousands of leases.

The amendments introduce an optional practical expedient that simplifies the accounting treatment of these rent concessions. In order for a rent concession to qualify for the practical expedient it has to meet the following criteria:

Criterion 1

The rent concession occurs as a direct consequence of the COVID-19 pandemic.

Criterion 2

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.

Criterion 3

The reduction in lease payments affects only payments originally due on or before 30 June 2021. This criterion is assessed for the rent concession as a whole.

Therefore, if a rent concession resulted in reduced lease payments from 31 July 2020 to 31 October 2021, the entire rent concession would fail this criterion and the practical expedient would be unavailable.

Criterion 4

There is no substantive change to other terms and conditions of the lease i.e. extensions to the lease term, the introduction or modification of lessee and/or lessor options, etc.

A lessee that applies the practical expedient is not required to assess whether eligible rent concessions are lease modifications, and accounts for them in accordance with other applicable guidance.

The resulting accounting will depend on the details of the rent concession. For example, if the concession is in the form of a one-off reduction in rent, it will be accounted for as a variable lease payment and be recognized in profit or loss

Example 1

Entity A leases retail space from Entity B. Monthly rent payment is $10.000. Entity B grants Entity A a lease payment reduction (unconditional) for July 2020, amounting to $8.000.

The double entry for this rent concession is:

DR Lease L. $10.000

CR Cash $2.000

CR. P/L $8.000 (discount provided)