Exposure Draft on Covid-19-Related Rent Concessions (Proposed amendment to Ind AS 116, Leases)
The first five months of this year have slipped under the shadows of COVID-19 and the rising numbers globally indicate that it is still a considerable way from being over. As countries worldwide battle this health crisis, striving to keep their economies afloat through infusions of stimulus packages. There are many business entities had to close its operational activities and therefore many has resorted to renegotiate their lease arrangement and thereby modified the lease payment, terms of the contract.
Background: –
Ind ASs are derived from IFRS Standards issued by the International Accounting Standards Board (IASB). IFRS Standards are globally acceptable high-quality financial reporting standards with a dynamic framework that undergoes reforms over a period to keep pace/development with the evolving business and economic environment. In order to remain converged, and to meet the pace of changing business environment, there is a need for us to actively participate in the IASB’s standard-setting activities.
IASB has issued an amendment on Covid-19-Related Rent Concessions (Proposed amendment to IFRS 16, Leases).
As a result of the deadly Covid-19 pandemic, there would be many instances of lessors giving rent concessions to lessees as a result of the pandemic. The lessees could find it challenging to assess whether a potentially large volume of covid-19-related rent concessions are lease modifications and, for those that are, to apply the required accounting in IFRS 16, especially in the light of the many challenge’s lessees face during the pandemic. The amendments to IFRS 16 provides the practical expedient to provide relief to lessees, while enabling lessees to continue providing useful information about their leases to users of financial statements
This is only reason where in lessee can get some relief while enabling him to continue providing useful information about their leases to user of financial statement.
Changes: –
The amendment to IFRS 16 as issued by International Accounting Standard Board (IASB) which are as follows:
It allows lessees, as a practical expedient, not to assess whether Covid-19-related rent concessions are lease modifications. Instead, lessees that apply the practical expedient would account for those rent concessions as if they were not lease modifications.
It requires a lessee applying the practical expedient to disclose the amount recognised in profit or loss to reflect changes in lease payments that arise from covid-19-related rent concessions.
The lessee requires to specify that in the reporting period in which a lessee first applies the amendment,
The corresponding proposed changes in IND As 116 which are as follow;
46 A:- As a practical expedient, a lessee may elect not to assess whether a rent concession that meets the conditions in paragraph 46B is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the rent concession the same way it would account for the change applying this Standard if the change were not a lease modification
46 B:- The practical expedient in paragraph 46A applies only to rent concessions occurring as a direct consequence of the covid-19 pandemic and only if all of the following conditions are met
(a) 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;
(b) any reduction in lease payments affects only payments originally due on or before 30 June 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before 30 June 2021 and increased lease payments that extend beyond 30 June 2021); and
(c) there is no substantive change to other terms and conditions of the lease
Applicability: –
Rent Concessions under COVID-19, A lessee shall apply that amendment for annual reporting periods beginning on or after April 1, 2020. The company may go for earlier application provided financial statement is not published before the issuance of this amendments.
Transition: –
A lessee shall apply Covid-19-Related Rent Concessions (see paragraph C1A) retrospectively, recognising the cumulative effect as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual accounting period in which the lessee first applies the amendment.
In the reporting period in which a lessee first applies Covid-19-Related Rent Concessions, a lessee is not required to disclose the information required by paragraph 28(f) of Ind AS 8.
Disclosure: –
60A If a lessee applies the practical expedient in paragraph 46A, the lessee shall disclose:
(a) that it has applied the practical expedient to all rent concessions that meet the conditions in paragraph 46B or, if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient (see paragraph 2); and
(b) the amount recognised in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient in paragraph 46A
Options available before the Company: –
Author of this Article would like give challenges lies ahead.
Option One –The Company need to satisfy the three condition in order to apply practical expedient as a rent concession is occurring as direct consequence of COVID-19 pandemic only if following condition are satisfied.
The change in lease rent payment result in substantive reduction in payment or less than the consideration for the lease immediately before the change.
Any reduction in lease rent payment affect the payment originally due on or before June 30, 2021.
There is no substantive change in other terms and conditions of the lease.
Option Two- If company do not select to go for rent concession that meets the above three condition, then it would apply the changes applying this standard as it is a lease modification.
Accounting required by Lessee if he opt for exemption of COVID-19
Assumed that there is waiver in lease rent payment from March 2020 to June 2020 of Rs. 1 lakhs for each month, therefore total waiver is Rs. 4 lakhs. The lease liability as on March 2020 is Rs. 10 lakhs. Interest accrued per month of Rs. 10,000. The ROU as on March 2020 is Rs. 10 lakhs and the depreciation is 12000 per month. The Company require test for impairment of ROU as well. Assumed impairment of ROU is Rs. 360,000.
| Particulars | Dr/Cr | Amounts | Amounts | |
| Lease Liability | Dr | (100000*4) | 4,00,000 | |
| P&L a/c | Cr | (100000*3) | 3,00,000 | |
| Retain Earning | Cr | (100000*1) | 1,00,000 | |
(Being reduction of lease rent for 4 months)
| Particulars | Dr/Cr | Amounts | Amounts | |
| Finance Expense | Dr | (10000*3) | 30,000 | |
| Retain Earning | Dr | (10000*1) | 10,000 | |
| Lease Liability | Cr | (10000*4) | 40,000 | |
(Being finance expense for four months is accounted for)
| Particulars | Dr/Cr | Amounts | Amounts | |
| Depreciation | Dr | (12000*3) | 36,000 | |
| ROU | Cr | 36,000 | ||
(Being Depreciation on ROU is accounted for)
| Particulars | Dr/Cr | Amounts | Amounts | |
| Impairment of ROU | Dr | (90000*3) | 2,70,000 | |
| Retain Earning | Dr | (90000*1) | 90,000 | |
| ROU | Cr | (90000*4) | 3,60,000 | |
The ROU as on June 30, 2020 is Rs. 1,000,000-36,000-360,000= 604,000
The lease Liability as on June 30, 2020 is Rs. 1,000,000- 400,000+40,000=560,000.
Net Impact on the Profit and Loss statement: –
| Particulars | Amount Dr | Particulars | Amount Cr |
| Depreciation | 36,000 | Lease Rent waiver | 3,00,000 |
| Finance Cost | 30,000 | ||
| Impairment cost | 2,70,000 | ||
| Total | 3,36,000 | Total | 3,00,000 |
| Net impact Dr | 36,000 |
Challenges Ahead: –
In case of option one, it will have following impact in profit and loss statement and balance sheet.
Firstly, it will have normal charge in the form of depreciation and finance cost and second it needs to give credit to the retain earning to the extent of saving in lease rent pertaining to earlier period and balance credit to profit and loss statement by debiting to the lease liability account. Therefore, the company will be able to take the credit benefits to the profit and loss account due to concession in rent payment. The account treatment given above is self-explanatory to understand the accounting impact.
In case, Company wanted to go for option two in that case it needs to enter into a new agreement for such change in terms of the payment. It requires to square off the exiting ROU and Lease liability for such lease agreement and take the charge in profit and loss statement in the period when such changes are made. After entering into a new agreement for such change, it will have to create new ROU and Lease liability in the financial statement considering the new discounting rate.
The depreciation and finance cost will be charged to profit, and loss statement based on the new ROU and lease liability.
It will be challenging situation for the company if they opt for second option as it requires to identify the list of contracts for which there is change in lease rent payment as the company who has major lease agreements require entered into fresh arrangement/agreement with lessor thereby require in depts analysis as the change in standard is applicable from April 1, 2020 hence the listed entity require to start its work on war foot mode.
In case lease rent concession leads to lease modification, a lessee requires to remeasure lease liability considering new discounting rate to understand the revised lease payment using revised discount rate.
The before selection of this second option i.e. lease modification, it need to understand that whether it is falling in the definition of lease modification or not. Summarised below the condition of lease modification to fall in.
There is changes in terms of the contract.
There is changes in rights of use of assets as compare to the condition specified in original contract. If change in contract occurring due to existing condition in original contract, then it will not be treated as change in contract.
Once opt for the option two and company has identified the various contract which will have lease modification impact then it will require to apply the same impact across all the contract. It means the company has no choice to apply option one for certain contract and option two for rest of the contract. As per para 2 of IND As 116, An entity shall apply this standard consistently to the contracts with similar characteristics and in similar circumstances. The company has no choice to pick and choose the two approaches/options.
Similarly, if company adopted one approach i.e. option one or option two for one company in its group company then it will require to apply same approach for its other company/associate within a group.
The practical difficulty is that the decision to go for option one or two it ultimately depends on the impacts in profit and loss statement under both the method.
In most of the big size company, it uses the Lease tool to calculate the ROU and Lease liability, Depreciation and finance cost. Once the option is selected the company need to consult the expert before entering the data in lease tool.
The benefit of COVID- 19 exemption is not available to lesser. It needs to be evaluated as per IND As 116, whether reduction in rent due to COVID-19 concession is greater than the increase in rent in subsequent period then what treatment need to be given in financial statement as the standard is silent on this.
It may be noted that it is option of the company to apply 46A or not.
If the change in lease payment go beyond the June 30, 2021 then it this case, the lessee can not avail the benefits of exemption given under COVID lease rent concession.
If payment of lease rent gets deferred to subsequent period considering the total payment for the year do not change on annual basis, in that case the company need to remeasure the finance cost for the period of waiver and provide the impact in profit and loss statement accordingly.
The company need to evaluate whether all lease agreements cover under IFRS 16 has “Force Majeure” Clause or any similar in the agreement? If yes it can use this clause to reduce the lease rent payment.
It requires to understand that rent concessions/ renegotiations done have impact on payments temporarily or permanently? i.e. Will the concession given now by the lessor have to be repaid in future or this concession will be benefit to organization and has never to be repaid? It is very important to understand whether subsequent payments will be adjusted or not as the accounting will change accordingly. The purpose is to identify concessions that result in the total payments required by the modified contract being substantially the same or less than total payments required by the original contract.
Note:-
The article is based on the Exposure draft issued by ICAI on Covid- 19- Related Rent concessions (proposed amendment to IND As 116, leases accounting) corresponding to Amendments in IFRS 16.
This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by Author (Suryakant R. Mardhekar currently working in Mahindra Holidays and Resorts India Ltd) to be reliable but does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of Author at this time and are subject to change without notice. Readers of this Article are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. Author of this Article neither accepts nor assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decision’s readers may take or decide not to or fail to take. Having said that you might find this Article useful in enriching your understanding related to IND As 116 and we welcome any suggestions or concrete feedback that you would like to provide. Please send your feedback to my email ID i.e. srmardhekar@rediffmail.com.
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