The IASB has extended the application period, to 30 June 2022 of the practical expedient in IFRS 16 to help lessees accounting for Covid-19-related rent concessions and the FRC has followed suit in FRS 102 and FRS 105.
The amendments to IFRS 16 and UK GAAP extend the original exemption by one year to cover rent concessions that reduce lease payments due on or before 30 June 2022 and is effective for annual reporting periods beginning on or after:
- 1 April 2021, with earlier adoption permitted for the amendment to IFRS 16; and
- 1 January 2021 with earlier adoption permitted for the amendments to UK GAAP.
Reminder of the amendments to IFRS 16
The original amendment to IFRS 16 was issued in May 2020, effective 1 June 2020 and applied retrospectively. It made it easier for lessees to account for Covid-19-related rent concessions, such as rent holidays and temporary rent reductions, while continuing to provide useful information about their leases to investors by allowing lessees to choose not to consider lease modification accounting.
The extension of the application period of the practical expedient only applies to rent concessions occurring as a direct consequence of the coronavirus pandemic and only if all the following conditions are met:
- the revised lease consideration is substantially the same or less than the lease consideration prior to the rent concession;
- lease reductions only affect lease payments originally due on or before 30 June 2022; and
- there is no substantive change (qualitatively or quantitatively) to other terms and conditions of the lease.
The practical expedient is only available to lessees and, whilst optional, must be applied consistently to leases with similar characteristics and in similar circumstances.
Entities are required to disclose:
- that the practical expedient has been applied to all qualifying rent concessions; or
- the nature of contracts it has been applied to; and
- the resultant amount recognised in profit or loss to reflect changes in lease payments.
This disclosure is important to address the impact of using the practical expedient when comparing lessees. Disclosure of the nature and cash flow effects of rent concessions are relevant whether or not the practical expedient is applied.
The UK Endorsement Board endorsed the amendment to IFRS 16 in May 2021.
At the date of this article, the amendment to IFRS 16 has not been endorsed by the EU. Those applying EU-adopted IFRS may adopt the amendment, on the basis that it does not conflict with existing EU-adopted IFRSs, provided use of the amendment as issued by the IASB is disclosed in the notes to the financial statements.