IFRS 16, Leases, effective for annual periods beginning on or after 1 January 2019, was amended in response to the COVID-19 coronavirus pandemic by International Accounting Standards Board to provide optional relief to lessees from applying IFRS 16’s guidance on lease modification accounting for rent concessions arising as a direct consequence of the COVID-19 pandemic.
As a result of Covid-19 impact, rent concessions have been provided to the lessees, as the entities across different industries are facing significant challenging circumstances. Such concessions comes in different forms lease concessions which may include rent waivers, payment deferrals, and cash rebates and key assumptions made by lessee on lease period, impairment considerations etc.
The key matter which needs to be focused in the list of various changes is lease concessions, which could arise because of:
- Terms in the lease arrangement or
- Government initiatives or
- Voluntary support extended by Lessor or
- Mutual arrangement between the lessee and the lessor
These situations are to be carefully evaluated to ensure appropriate accounting treatment. Key factor that needs to be considered in these situations are whether these result in “lease modifications or not” and how lessor and lessee needs to consider these in the accounting.
A lease modification is defined by IFRS 16 as:
A change in the scope of a lease, or
The consideration of a lease, that was not a part of the original terms and conditions of the lease.
Accounting for lease modification:
There could be several challenges and complications that can arise in each stage.
The following situations will not result in lease modification and will be accounted in the Profit or Loss:
- If the modifications are part of the actual lease arrangement.
- Modifications due to government regulations, resulting into rent concessions which can also fall under force majeure in the agreement.
- Rent Deferrals, without change to overall consideration.
- Entity may need to consider necessary legal interpretation of certain rental arrangement, if needed.
When rent concessions results in lease modifications:
If it is neither covered in the lease agreement nor due to government action and not proportional deferrals, then entity needs to adjust the “Right of Use and liabilities” by considering the revised discount rate, the revised lease payments and the lease period and make necessary accounting in the books of accounts.
Also, entities need to make necessary disclosures in the financial statements in relation to such modifications.
In May 2020 IASB issued amendment to the standard to give optional exemption to lessee, to consider the rent concession as non-lease modification to address the operation challenges with few terms and conditions.This amendment is effective from June 1, 2020.
Earlier application is permitted, including the financial statements not authorized for issue at 28 May 2020. This brings greater reliefs to lessees and avoids operational challenges in evaluating the rental concessions as lease modifications or not, subject to the fulfillment of certain terms and conditions laid out in the amendments to the standard. There are certain specific disclosure to be made in accordance with Para 60A of the amendment to the Standard.
Entities need to carefully evaluate the situation, consider whether to elect the optional exemption choice as per amendment of IFRS 16 standard or not and its related necessary accounting and disclosure in the financial statements.
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