In response to the COVID-19 coronavirus pandemic, the International Accounting Standards Board (the Board) has issued amendments to IFRS 16 Leases to allow lessees not to account for rent concessions as lease modifications if they are a direct consequence of COVID-19 and meet certain conditions.

This is a practical response to current conditions. Lessees can take advantage of this new practical expedient in their 2020 financial statements. If you have a lot of rent concessions in your business, you need to engage with this right now.

Brian O'Donovan
KPMG International Standards Group

What’s the issue?

Many lessees are seeking rent concessions from lessors. The rent concessions could be in various forms and may include one-off rent reductions, rent waivers or deferrals of lease payments. For example, a number of retailers are seeking reductions in real estate rents, and similar issues may arise in other leases.

Previously under IFRS 16, rent concessions often met the definition of a lease modification, unless they were envisaged in the original lease agreement. The accounting for lease modifications can be complex. For example, the lessee may be required to recalculate lease assets and liabilities using a revised discount rate.

What is the relief provided by the amendments?

The amendments introduce an optional practical expedient that simplifies how a lessee accounts for rent concessions that are a direct consequence of COVID-19. A lessee that applies the practical expedient is not required to assess whether eligible rent concessions are lease modifications, and accounts for them in accordance with other applicable guidance. The resulting accounting will depend on the details of the rent concession. For example, if the concession is in the form of a one-off reduction in rent, it will be accounted for as a variable lease payment and be recognised in profit or loss. 

The practical expedient will only apply if:

  • the revised consideration is substantially the same or less than the original consideration;
  • the reduction in lease payments relates to payments due on or before 30 June 2021; and
  • no other substantive changes have been made to the terms of the lease.

Lessees applying the practical expedient are required to disclose: 

  • that fact, if they have applied the practical expedient to all eligible rent concessions and, if not, the nature of the contracts to which they have applied the practical expedient; and 
  • the amount recognised in profit or loss for the reporting period arising from application of the practical expedient.

No practical expedient is provided for lessors. Lessors are required to continue to assess if the rent concessions are lease modifications and account for them accordingly. 

The Board recently issued educational material on accounting for rent concessions under COVID-19 and believes this remains relevant for: 

  • lessees who do not apply the practical expedient;
  • lessees after expiry of the practical expedient; and
  • lessors.

Effective date and transition

The amendments are effective for periods beginning on or after 1 June 2020, with earlier application permitted. A lessee applies the amendments retrospectively and recognises the cumulative effect of initially applying them in the opening retained earnings of the reporting period in which they are first applied.

The disclosure requirements of Paragraph 28(f)1 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors do not apply on initial application of these amendments.

Next steps

To find out more about the amendments, read our Leases – Rent concessions (PDF 1.6 MB) publication. It contains practical guidance and examples illustrating how a company identifies rent concessions that qualify for the practical expedient – and how to account for them. It also discusses how both lessees and lessors account for rent concessions that are treated as lease modifications.

For further information on the financial reporting implications of the COVID-19 pandemic, please go to our COVID 19 | Financial reporting resource centre, which is continually updated as significant accounting and reporting issues arise. We encourage you to bookmark this page and check back frequently for updates.

1 Paragraph 28(f) of IAS 8 requires an entity that initially appies a standard or amendment to disclose, to the extent practicable, the effect of adopting the standard or amendments on each financial statement line item and on basic and diluted EPS, for the current period and each prior period presented.

© 2023 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.