IFRS 16 Leases & COVID-19 Related Rent Concessions Amendment


November 04, 2020

From lowering the rates of VAT in certain sectors to nullify stamp duty it wasn’t much of a surprise when rent concessions also have been factored in to consider the Covid-19 pandemic situation. Being a difficult time, the government has understood that everyone’s need to be put on priority and not left out. That is why even on the local lockdown level you have grants for those businesses who are doing the right thing by remaining closed. We might be like sitting ducks to the virus but at least one can ensure that trying times don’t lead to the complete financial meltdown.

The Amendments to the IFRS 16 As Far As Leases Go:

Rent concessions in the current trying times are not unexpected demands. However, previously to enact such a change had a rather rigorous system in place where the same needed to be reflected in the accounts as well. In fact, it was as good as drawing up a new contract if one factored in all the work that was involved. But with the new, much hailed and appreciated amendment, things have changed for the better, at least as far as renting goes.

This has been perceived to be something touched with the practical as we consider the current situation. Since this will be considered in the statements of the current tax year, if rent concessions need to be tackled, they better be taken care of immediately.

What Comes Under Rent Concessions?

Due to the financial strain that has been put on people lessors will find most of their lessees (if not all) applying for some form or the other of a rent concession. This could vary from the traditional one-off rent reductions to perhaps a deferral in the lease payment or even on a broader note, a rent waiver. Reductions in the present rent too are by far the most common approach.

Why Does The Amendment Make Things Easier For Both Parties?

Before the present amendment trying to get any rent concession underway was short for defining a modification in the lease unless one had the forethought of including such scenarios in the original agreement of the lease (not many will be with us on this). That is why when it comes to accounting for the same you are confronted with a complex structure, the more complex the more formidable. 

The Covid-19 Effect on the Lessee Accounts That Are For The Rent Concessions

Due to the practical nature of the amendment, the previous assessment of whether the rent concessions are really in line to lease modifications does not apply as stringently because previously one had to account for them as well. Like for instance if we are talking about a temporary thing like perhaps a one-off rent reduction this will be booked as a variable in the lease payments in the accounts and so can be recognized as either a profit or a loss.

When This Applies?

This revision would only be considered if it is near to or slightly less than what was originally considered. A huge deviation would not be welcome. This reduction would only apply to those payments that would be considered due on or even before June 30th 2021 and that too id the terms that have been agreed formerly when finalizing the lease are not too much altered.

In a time where the business situation is already complex and complicated as it is, finding something that is a lot less demanding is a welcome change. Thus, it is clear both parties will welcome this decision by the government as indeed doing the right thing.