In May 2020 the International Accounting Standards Board (IASB) issued an amendment to the IFRS 16 standard, which aim is to provide tenants with an exemption in assessing rent relief arising as a direct result of the Covid-19 pandemic. A tenant therefore does not consider the rent adjustments as leasing modification. On the other hand, no changes are made in the landlord's accounting as this simplification does not apply to them.
When proceeding according to the IFRS 16 standard one has to identify whether some rent adjustments are not a leasing modification. A leasing modification is considered to be, for example, an extension or shortening of the leasing duration, an increase or decrease in the scope of the agreement or changing the amount of the lease payment. If a leasing modification is identified the reviewed or new interest rate is used at the leasing obligation conversion. A contractual arrangement to change the amount of a leasing payment can be set as an example - future installments are converted at the current interest rate and the resulting difference between the amount of the original liability and the modified liability also represents an adjustment to the right of use valuation.
Practical simplification for tenants
A great number of landlords have decided to provide their tenants with certain kinds of relief due to the Covid-19 pandemic. They might have a form of postponing or waiving rental payments, which would be due under normal circumstances. This relief may arise as a result of a mutual agreement between parties or on a basis of the government requirements.
According to the practical simplification, a tenant may decide not to assess whether the change in rent associated with the Covid-19 pandemic constitutes a leasing modification. In this case the tenant records the change of leasing payments in such a way they would act according to IFRS 16 if this is not a leasing modification.
The practical simplification can only be applied if the rent relief is directly caused by the Covid-19 pandemic and at the same time the following conditions have been complied with:
- The summary amount of leasing payments following the granted relief is the same or lower than the consideration for leasing at time immediately preceding the change.
- Leasing payment reduction only applies to payments originally payable till 30 June 2021 and earlier (this condition also is met if leasing payments due till 30 June 2021 are reduced and on the other hand leasing payments after 30 June 2021 are increased).
- No fundamental changes in other leasing conditions occur.
A tenant, who will take use of this practical simplification, will in their bookkeeping record following changes:
- The tenant will record the relief of leasing payments as variable leasing payments, which would have a direct impact on the business results thus deducting a part of the leasing obligation, which ceases to exist due to the payments relief.
- In case of decrease in payments in one period and the same increase in payments in another period (the leasing consideration does not change, only a different timing is applied), the tenant continues to record interest on the liability and reduces the liability by payments remitted to the landlord.
- If payments decrease in one period and increase in another period by a lower amount (the consideration for leasing is lower), the change in payments includes both above points, both waiving and deferral of leasing payments. This again impacts on the business results and interests recording continues.
- In general, we can conclude that the leasing liability recorded by the tenant corresponds to the current value of future leasing payments due to the landlord.
This simplification for practical purposes is not required from tenants; tenants may use the existing IFRS 16 requirements and not to apply this practical simplification at all. Nevertheless, if a tenant decides to apply this practical simplification it should affect all leasing agreement with similar properties and circumstances.
Impact on the landlord´s bookkeeping
The practical simplification of IFRS 16 issued by IASB has no impact on the landlord´s bookkeeping. For IFRS 16 does not specify how the landlord records changes of leasing payments, which do not represent any leasing modification. In addition, there is certain link in requirements to the leasing modification between the standards IFRS 16, IFRS 15 Revenues from agreements with customers and IFRS 9 Financial instruments, which would significantly complicate the practical introduction for a landlord without any inconsistencies between these individual standards. In addition, the new leasing related accounting model only has been implemented for tenants, but not for landlords.
Temporary provisions and date of coming in effect
The tenant has the option to use this regulation for the accounting period starting on 1 June 2020 and later. Earlier application is also permitted provided the final accounts prepared for the period beginning prior to 1 June 2020 has not been approved as of 28 May.
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