22-Mar-2022

What Changes Are Being Made To Ifrs 16 Because Of Covid-19?

I'm, Riley, Donovan, I'm, a partner at KPMG. And today, I want to talk about the ISPs plans to simplify accounting for rent concessions in response to covert 19. So what is a rent concession? Well, it's an agreement between the lessee and a lessor often between a tenant and a landlord to reduce rent or defer rent or to waive, rent altogether we're seeing a lot of that in current market conditions, if you're the lessee of a tenant and rent concession is clearly good news from a cash perspective. So what's.

The accounting issue. Well, under current requirements, a went concession is typically what the standard calls a lease modification. And this means that the lessee won't recognize the benefit of the rent concession in P&L straight away. Instead, the lessee will recalculate its lease liability, adjust its right of use asset. And it will do all that using a revised discount rate.

Now that's straightforward, if you just have one or two, rent concessions, it can be quite tough. If you're dealing with hundreds of. Thousands of them, the IASB wants to make things simpler. The IASB plans to amend the standard so that a lessee could choose not to go through that process. If it's rent concessions meet certain conditions. The first condition is that the rent concession arises directly as a result of boat 19.

And the width section happens purely in 2020. The second condition is that the total amount payable under the lease stays more or less the same or reduces. And the third key condition is that there are no others. Big changes to the lease agreement to take a really simple example, suppose I'm the lessee and I agree that I will pay no rent at all in q2. And there will be no other change to the lease agreement under these plans. I would book a game in q2. So do I think about this proposal.

Well, clearly it's, not very conceptual it's, a practical response to current conditions. So my questions are exclusively practical, is it clear exactly which rent concessions would qualify for this relief? And is the accounting. Clear in real-life cases that could be more complex than my simple example. Now the ISB is pushing ahead with this it's moving as quickly as it possibly can. It wants to change to be effective immediately.

So that companies can take advantage of it in their interim and annual financial statements for 2020. If you have a lot of rent concessions in your business, you need to engage with this right now.