The economic challenges presented by the COVID-19 pandemic have persisted longer than originally anticipated. In response to that, the International Accounting Standards Board (the Board) agreed at its meeting on 10th March 2021 to amend IFRS 16 Leases to allow a one-year extension to the practical expedient available to lessees when accounting for COVID-19-related rent concessions. As a reminder, under that practical expedient, a lessee can opt not to assess whether eligible rent concessions are lease modifications and instead recognise the effects in P&L in the period to which the concession relates. The original practical expedient only applies to rent concessions occurring as a direct consequence of the COVID-19 pandemic and only if all of the following conditions are met:
- the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
- any reduction in lease payments affects only payments originally due on or before 30 June 2021; and
- there is no substantive change to other terms and conditions of the lease.
In March 2021, the Board agreed to extend the relief to rent concessions that affect lease payments originally due on or before 30 June 2022 rather than 30 June 2021, as set out in the original amendment.
The change extends the availability of the practical expedient so that it applies to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022, provided the other conditions in the standard are met. This amends only the date for which the practical expedient is available - it neither introduces a new practical expedient nor a new option to apply (or not apply) the practical expedient.
The amendments to IFRS 16 have been published in March 2021 and will be effective for annual reporting periods beginning on or after 1 April 2021, with earlier application permitted. The UK Endorsement Board adopted the amendment on 12 May 2021 and it can be applied by UK companies.
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Who will be affected by the amendments?
The amendment will affect lessees that elect to apply the practical expedient and are granted rent concessions that: (a) affect lease payments originally due after 30 June 2021, but not beyond 30 June 2022; and (b) meet the other conditions for applying the practical expedient.
The amendment will not affect lessees that have already established an accounting policy of not applying the practical expedient to eligible rent concessions.
The original version of the practical expedient was, and remains, optional. However, the amendment made is, in effect, not optional. Lessees that have already applied the practical expedient will be required to apply the extended scope of the practical expedient. Similarly, the current amendment does not allow a lessee to elect to apply the practical expedient if the lessee has previously elected not to apply the amendment to eligible rent concessions. Some lessees may not yet have established an accounting policy on applying (or not applying) the practical expedient to eligible rent concessions or may find that the concessions they obtained now fall within the scope. If such a lessee decides to apply the practical expedient, the lessee would be required to do so retrospectively and to apply it consistently to contracts with similar characteristics and in similar circumstances.
For the amendments to IFRS 16 please refer here.
If you would like to find out more about the existing practical expedient and its amendment please refer to our guide here.