The Australian government’s mandatory Code of Conduct for Commercial Leases introduces a range of rent concessions for lessees, including rent reductions and rent deferrals.
Depending on those negotiations between landlords and tenants, it may be complex to determine whether a COVID-19-related rent concession represent a change in scope of a lease, a change in lease payments that represents a lease modification, or variable lease payments.
The IASB has finalised amendments to IFRS 16 Leases to provide lessees with an optional short-term exemption from assessing whether a specific COVID-19-related rent concession is treated as a lease modification.
The narrow scope amendment only applies to:
- Those rent concessions linked directly to COVID-19;
- The change in lease payments results in the total consideration payable for the lease being substantially the same as, or less than, the consideration for the lease immediately preceding the change; and
- Any reduction in lease payments affects only payments originally due on or before 30 June 2021. This has been extended from 2020 in the original proposal.
Where the option is applied, a COVID-19-related rent concession would not be treated as a lease modification. Rather, a lessee would treat the rent concession as variable lease payments and recognise any adjustment to the lease liability in profit and loss. Lessees must disclose that they have applied the exemption as well as the financial effects of COVID-19 rent concessions in their financial statements. If taken, the option should be applied consistently to all similar leases with COVID-19 rent concessions.
Importantly, the relief will not apply if the lessee negotiates a rent reduction, part or all of which occurs after 30 June 2021.
The amendment will not affect lessors, who would continue to apply the general requirements of IFRS 16. Lessors are likely to classify most leases as operating leases. IFRS 16 requires that lessors recognise lease income from an operating lease on a straight-line basis over the lease term. Hence, lessors are not expected to face the same difficulties accounting for rent concessions as lessees.
Lessees will need to carefully consider whether negotiated rent concessions will be in scope of the amendments.
Corresponding amendments will be made to AASB 16 and NZ IFRS 16 before 30 June 2020 and can be applied retrospectively.
If you do have any questions, or would like any information on what these proposed changes mean for you, please contact your Nexia Advisor.