Accounting relief for COVID-19-related rent concessions approved by the IASB

Last month we summarised the IASB’s proposed practical expedient to simplify the accounting for COVID-19 rent concessions by lessees in our article, IASB provides accounting relief for lessees who receive rent concessions. The amendments have now been approved and are summarised in our International Financial Reporting Bulletin 2020 08 – IASB issues amendments to IFRS 16: COVID-19 related rent concessions.

Differences in accounting for modifications vs applying the practical expedient

The table below demonstrates how the accounting for rent concessions by lessees using the practical expedient will be much simpler than accounting for a lease modification. We therefore expect most lessees to apply the practical expedient to COVID-19 rent concessions.

Example 1 – Waiver of rental payments

Tourism Co is a tourism operator and entered into a three-year lease for office premises on 1 January 2019. Lease payments are $100 per month paid in arrears. Lessee A’s incremental borrowing rate is 5% or 0.42% per month.

Tourism Co’s business experienced a significant downturn towards the end of March 2020 when the Australian Government imposed a ‘Do not travel’ ban on all incoming tourism from overseas.

Tourism Co meets the criteria and wishes to apply the practical expedient in accounting for this rent concession in its 30 June 2020 financial statements.

From the table below, the present value of the future remaining lease payments on 1 April 2020, based on the original terms of the lease, is $2,007.

Step one: Recalculate lease liability on 1 April 2020

Although the rent concession will be received over six months (i.e. partially in the 30 June 2020 financial year, and partially in the subsequent year), applying the practical expedient means that the benefit of the concession is accounted for when it is agreed between the lessee and lessor. The lease liability is therefore remeasured on 1 April 2020 (net present value is $1,415).
The amortisation table for the lease liability based on the revised lease terms (rounded to the nearest dollar) on 1 April 2020 is as follows:

Step two: Recognise difference in profit or loss 

The difference between the carrying amount of the original lease liability on 1 April 2020, and the revised lease liability (after taking into account revised lease payments from the concession) is recognised in profit or loss.

Tourism Co therefore recognises the following journal entry in profit or loss on 1 April 2020:

Dr  Lease liability                                    $592
Cr  Profit or loss                                                 $592

Example 2 – Deferral of rental payments

Tourism Co is a tourism operator and entered into a three-year lease for office premises on 1 January 2019. Lease payments are $100 per month paid in arrears. Lessee A’s incremental borrowing rate is 5% or 0.42% per month.

Tourism Co’s business experienced a significant downturn towards the end of March 2020 when the Australian Government imposed a ‘Do not travel’ ban on all incoming tourism from overseas.

Tourism Co meets the criteria and wishes to apply the practical expedient in accounting for this rent concession in its 30 June 2020 financial statements.

As in Example 1 above, the present value of the future remaining lease payments on 1 April 2020, based on the original terms of the lease, is $2,007.

Step one: Recalculate lease liability on 1 April 2020

As noted in Example 1 above, the benefit of the concession is accounted for when it is agreed between the lessee and lessor. The lease liability is therefore remeasured on 1 April 2020 (net present value is $1,982).

The amortisation table for the lease liability based on the revised lease terms (rounded to the nearest dollar) on 1 April 2020 is as follows:

Step two: Recognise difference in profit or loss 

The difference between the carrying amount of the original lease liability on 1 April 2020, and the revised lease liability (after taking into account revised lease payments from the concession) is recognised in profit or loss.

Tourism Co therefore recognises the following journal entry in profit or loss on 1 April 2020:

Dr  Lease liability                                    $25
Cr  Profit or loss                                                 $25

Example 3 – Lessee chooses to pay half rental during COVID-19 period, with waiver only being formally agreed to by the lessor at a later date

Examples 1 and 2 above illustrate a fact pattern where the lessor agrees to a rent concession at the start of the pandemic.

Tourism Co is a tourism operator and entered into a three-year lease for office premises on 1 January 2019. Lease payments are $100 per month paid in arrears. Lessee A’s incremental borrowing rate is 5% or 0.42% per month. There are no penalties or additional interest charges for late lease payments.

Tourism Co’s business experienced a significant downturn towards the end of March 2020 when the Australian Government imposed a ‘Do not travel’ ban on all incoming tourism from overseas.

From the table below, the present value of the future remaining lease payments on 1 April 2020, based on the original terms of the lease, is $2,007 (i.e. same as examples above) .

Note: Cumulative interest expense for April to September 2020 is $44.

The remainder of this example demonstrates one possible practical way of accounting for the reduced lease payments.

Step one: Recognise $50 cash payment made and related interest and principal repayments

The journal entries to recognise the effect of the reduced lease payments from April to September on a cumulative basis are as follows:

Dr Interest expense                               $44
Dr  Lease liability                                    $256
Cr  Cash                                                             $300

Recognising cumulative interest expense from April to September of $44 and related principal reduction on lease liability

The actual cash payments of $50 each month reduce the lease liability by the principal portion (i.e. $50 less interest for the relevant month).

Step two: Reassign short payments to creditors/accrual account

Because there has been no formal agreement of rent waivers, there is no remeasurement of the lease liability on 1 April 2020. Instead, each month when Tourism Co chooses to pay $50 instead of $100, the amount of the ‘short payment’ also reduces the lease liability balance, and is transferred to a separate creditors/accruals account as the obligation cannot be derecognised until agreed with lessor.

The cumulative journal entries to reflect this are as follows:

Dr  Lease liability                                    $300
Cr  Creditors/accruals                                         $300

To transfer the unpaid lease payments to creditors/accruals 

Step three: Recognise the rent waiver on 30 September 2020

When the rent waiver is eventually agreed with the lessor on 30 September 2020, the $300 benefit of the rent concession is recognised in profit or loss. The journal entry is as follows:

Dr  Creditors/accruals                             $300
Cr  Profit or loss                                                 $300

Step four: Remeasure lease liability on date rent concession is agreed (30 September 2020)

There is no need to remeasure the lease liability on the date that the rent concession is agreed to by the lessor (30 September 2020) because the amortisation table has not changed (unpaid rentals being transferred to a creditors/accruals account).