Landlords’ real estate leases Landlords’ real estate leases

Landlords found much that was familiar in IFRS 16 Leases. But some things have changed.

More recently, the impact of the COVID-19 coronavirus pandemic has meant that landlords have been dealing with unprecedented levels of defaults, rent concessions and other lease modifications. IFRS 16’s guidance on lease modifications has been vitally important, particularly given the Board’s decision not to extend to landlords the practical expedient that it offered to tenants.

IFRS 16 preserves the basic landlord accounting model but introduces important changes in key areas.

Landlords continue to use the basic accounting model that applied under the old guidance. This means that landlords continue to classify real estate leases as either: operating leases, recognizing the net consideration for the lease, including lease incentives, as income over the lease term, typically on a straight-line basis; or finance leases, presenting the right to receive future rentals as a receivable, and recognizing interest income on that receivable.

As previously, the long useful life and high residual value of non-specialized real estate mean that many real estate leases will be operating leases. Finance lease accounting may be required in certain circumstances, typically for more structured transactions and/or leases of more specialized real estate.

Many of the changes introduced by IFRS 16 are detailed and subtle – but they can be very important.

• Components (see Chapter 4). The combined effect of IFRS 15 Revenue from Contracts with Customers and IFRS 16 is that there is now detailed and prescriptive guidance on separating, measuring and presenting components such as maintenance income.
• Lease term (see Chapter 5). New guidance on lease term could impact the period over which operating lease incentives are recognized in profit or loss, particularly for renewable and cancellable leases.
• Lease modifications (see Chapter 7). IFRS 16 contains specific guidance on accounting for lease modifications, which is relatively simple to apply to a single modification to an operating lease but more challenging to apply to more complex combinations of modifications, or modifications of finance leases.
• Rent concessions (see Chapter 7). There is no practical expedient for landlords in accounting for rent concessions. Instead, they need to assess whether each rent concession is a lease modification.
• Sub-leases (see Chapter 8). New classification guidance means that more sub-leases are finance leases under IFRS 16 than previously, impacting the statement of financial position and the statement of profit or loss and other comprehensive income of intermediate lessors.
• Sale-and-leaseback (see Chapter 9). New guidance on ‘failed sales’ means that some sale-and-leaseback transactions are now accounted for as pure financing transactions by both landlords and tenants.
• Investment property (see Chapter 10). It is now mandatory rather than optional for landlords to apply IAS 40 Investment Property to account for leased investment property, requiring landlords to disclose fair value information for all leased investment property.

Our Real estate leases – The landlord perspective publication covers key areas of IFRS 16 that are particularly relevant to landlords in real estate leases. Each section is illustrated with examples based on real-life terms and conditions.

More in-depth guidance on particularly complex areas of IFRS 16, such as lease modifications, lease term, discount rate and lease components, is available on our IFRS Insights page.