In a world of constant change due to COVID-19, the IASB released an update on 10 April 2020 on how to consider changes that business may face with regards to leases. In particular they have focused on payment holidays/concessions that business may receive as a result of the impact from COVID-19. The article focuses on the following main considerations:
Assessing whether a change in payment is a lease modification. A modification requires both a change in the scope and overall consideration of a lease contract. A change in scope could include cancellation clauses or shortening the contractual lease team. In assessing if there is a change in consideration, the overall impact of payments should be considered. If a three-month rent-free period is provided, but the remaining rentals increased to reflect the same total consideration, then there is no change in the consideration of the lease. Changes in lease payments as a result from clauses that are in the original contract, even if not previously contemplated, would not result in a modification under IFRS 16.
Changes in rental that do not result from a lease modification are generally treated as variable payments which is recognised in the profit and loss.
If lease payments changes result in the reduction of the lessee’s liability the lessee would need to consider derecognition of part of the lease liability in terms of IFRS 9.
- Impairment of assets is governed by IAS 36. Circumstances that are likely to give rise to rental concessions could be indicators that underlying assets may be impaired and should be reviewed.
- During this time there may be increased requirements on disclosure to allow users to understand the impacts of COVID-19 on the financial results.
For a full view of the article published by the IASB, please follow this link.
Beyond just the accounting of IFRS 16, those approaching year end and interim reporting requirements will have several wider issues that need to be considered. There have been many different publications from the accounting firms on this, covering a range of issues from going concern principles through to the obvious issues around impairments and modifications.
Of increasing importance would be matters around estimates and judgements related to fair value and impairments, the impact of changes in interest rates changing incremental borrowing rates as well as increased disclosures.
For more detail please find two articles we found useful: