28 Apr 2020

The International Accounting Standards Board (IASB) has published an exposure draft, ED/2020/2 Covid-19-Related Rent Concessions: Proposed amendment to IFRS 16 that contains a proposed amendment that would provide lessees with an exemption from assessing whether a COVID-19 related rent concession is a lease modification.  More details about the proposed changes can be found here. The submission deadline for comments is 8 May. 

The amendment to IFRS 16 Leases intends to make it easier for lessees to account for Covid-19-related rent concessions, such as rent holidays and temporary rent reductions. The objective is to give timely relief to lessees when applying IFRS 16 to Covid-19-related rent concessions, while still enabling them to provide useful information about their leases to investors.  The relief is an exemption from assessing whether a Covid-19 related rent concession is a lease modification and allows lessees to account for them as if they were not.  This would save time in reviewing individual agreements to see whether a concession was included at the outset and time-consuming calculation.  If a company persuades the lessor for some of its leases to reduce the 2020 rent (and there is no fully compensating increase later), this would currently almost certainly be accounted for as a modification. The amendment would permit the company to not apply modification accounting. 

  • Modification accounting involves recalculating the PV of the revised lease payments at a new discount rate. Any change in the liability is adjusted against the right of use asset.
  • Not applying modification accounting means that as and when the lower lease payment is made the reduction is credited to profit and loss. No change to the liability or the right of use asset.

The practical consequence is whether the effect of the rent reduction is recognised as a variable lease payment gain in 2020 or gradually over the useful life of the right of use asset as a reduction in depreciation.

Matters to consider:

  • No requirement to disclose the gain in 2020 if modification accounting is not applied. This will introduce a lack of comparability in 2020 and investors may to know what this gain is.
  • Although BC4 mentions consistency and the 'similar characteristics’ requirement of IFRS 16 para 2, this may not stop companies applying the option to some leases and not others.
  • Would it be sensible to not confine the amendment to 2020, when all the scientists are saying this pandemic will carry on for a year or more?
  • Should it be expanded to lessors because some of these will be operating in multiple jurisdictions where the government are mandating alternative reliefs to lessors and hence some will face similar challenges as lessees in applying the requirements?
  • Is more guidance or educational material needed on how to apply the relief? Would it be useful to have an illustrative example or two to illustrate how this ED is applied in practice?
  • Is there a better way to provide relief?

The IA have representation on the ICAEW’s (Institute of Chartered Accountants in England and Wales ) Financial Reporting Committee and they have asked for the views of AREF members on these proposed amendments.

Please could you provide Jacqui Bungay with any comments you have by Tuesday 28 April.


Jacqui Bungay

Jacqui Bungay

AREF Secretariat, AREF

Jacqui provides policy guidance and secretariat services to the AREF Board and AREF Management Committee as well as the following AREF Committees: Corporate Governance, ESG & Impact Investing, Investor, Public Affairs, Research and Information and Retails Funds. In addition, Jacqui monitors members’ compliance with AREF’s Code of Practice. 

Jacqui joined AREF in 2014 after working for over 25 years in fund compliance, client relationships and administration at Natwest Trustee & Depositary Services.