In May 2020, the IASB issued Covid-19-Related Rent Concessions as an amendment to IFRS 16 Leases, effective for annual reporting periods beginning on or after 1 June 2020 with early adoption permitted (paragraph 46A).
The amendment provided lessees with an exemption from assessing whether a Covid-19-related rent concession is a lease modification, allowing lessees to choose not to account for a reduction of lease payments as a modification and instead to recognise the benefit of the reduced rentals in profit or loss in the period to which they relate. Refer to our May 2021 Mazars Messenger for a detailed discussion on the application thereof. The practical expedient was limited to rent concessions for which the reduction affects only lease payments originally due on or before 30 June 2021.
On 31 March 2021, the IASB published an amendment to the above practical expedient to extend the application period to 30 June 2022. The amendment responds to the economic reality that Covid-19-related rental concessions is expected to extend beyond the initial cut-off date of 30 June 2021. This extension will allow lessees to apply similar accounting principles to such rental reductions to achieve consistency and improve comparability of financial statements from one period to the next. The March 2021 amendment is effective for annual reporting periods beginning on or after 1 April 2021.
Company A, a September year-end company, leases an office building. The government applied a hard lockdown due to Covid-19 that caused disruption to Company A’s business. Company A was unable to fully utilise their office building as from the date of the lockdown and implemented “work at home” measures in response. In June 2020, Company A negotiated a lease reduction due to Covid-19 that was not included in the terms and conditions of the original lease agreement. The lease reduction took the form of a R10,000 rent reduction per month that the office is not fully utilised, up to and including 31 December 2021.
Several technical issues may arise in applying the March 2021 amendment, two of these are highlighted below. The following example is provided to illustrate how these issues arise.
What are the consequences for lessees who have previously applied the practical expedient?
Lessees that already applied the IFRS 16.46A practical expedient must also apply the extended scope that the March 2021 amendment brought into force. The mandatory effective date of the May 2020 amendment is annual reporting periods beginning on or after 1 June 2020. Many preparers who have already applied the practical expedient have done so by early adopting the May 2020 amendment, or by adopting it in their interim financial statements. These preparers cannot elect not to apply the extended period provided for by the March 2021 amendment as this would contradict the requirements of IAS 8; that an entity selects and applies its accounting policies consistently for similar transactions, unless an IFRS specifically requires or permits categorisation of items for which different policies may be appropriate.
Assuming Company A early adopted the practical expedient for Covid-19-related rent concessions in its September 2020 financial year.
The rental concession on this lease extends beyond June 2021, therefore, the practical expedient introduced by the May 2020 amendment, with a cut-off date of 30 June 2021, could not be applied.
On application of the extended cut-off date, the lease concession outlined above now falls within the scope of the practical expedient and Company A must apply it.
Where a preparer that previously applied the practical expedient received rental reductions extending beyond 30 June 2021, these reductions fell outside the scope of the May 2020 amendment in their entirety. In many cases, the rental reductions would have had to be accounted for as lease modifications in accordance with IFRS 16. On application of the revised cut-off date the accounting for these lease reductions will have to be revisited as they may now fall within the practical expedient’s extended application period. Any resulting adjustments shall be applied retrospectively, recognising the cumulative effect of the extended practical expedient as an adjustment to opening 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 [IFRS 16.C20BA]. Comparatives are not restated.
Company A will therefore adjust its opening statement of financial position for the cumulative effect of the rent concessions received up to 30 September 2020 and include those received during the 2021 financial year in profit or loss.
May a lessee that had not previously applied the practical expedient still choose to apply it in preparing their next financial statements?
As noted above, many prepares who already applied the practical expedient have done so by early adopting it. Entities who have not yet applied the May 2020 amendment in advance of its mandatory effective date are not considered to have elected an accounting policy on whether they will apply the amendment. They may still choose to do so in their next set of financial statements.
IAS 8.30 requires a preparer to disclose reasonable and estimable information relevant to assessing the impact of a new IFRS standard that has been issued but is not yet effective. Some preparers may have disclosed an expectation of being unaffected by the May 2020 amendment because they did not apply the practical expedient, or their concessions extended beyond the 30 June 2021 limit. Such a disclosure does not restrict those prepares from applying the practical expedient in their next financial statements beginning on or after 1 June 2020. Where this is the case, the preparer can apply it retrospectively in accordance with IFRS 16.C20BA.
Assuming Company A did not early adopt the practical expedient for Covid-19-related rent concessions in its September 2020 financial year as its rent reductions did not meet the cut-off requirements.
Company A can elect to apply it retrospectively in the current year, the company will therefore adjust its opening statement of financial position for the cumulative effect of the rent concessions received up to 30 September 2020 and include those received during the 2021 financial year in profit or loss.