COVID-19 related rent concessions
Many lessees are seeking rent concessions, such as rent-free periods or rent reduction, from lessors due to the impact of COVID-19 on their businesses. These concessions usually meet the definition of a lease modification under AASB 16.
The accounting required for lease modifications can be onerous, placing an additional reporting and administrative burden on lessees during an already challenging time.
The draft amendment
The AASB has issued draft amendment to this accounting standard – Exposure Draft (ED) 300 COVID-19-Related Rent Concessions. This proposes giving lessees an optional practical expedient not to apply lease modification accounting to rent concessions negotiated as a result of COVID-19.
The draft amendments will reduce the volume of calculations which would otherwise be required allowing the lessee to account for the concessions as follows:
- Rent waiver: treat as a variable lease payment by derecognising the part of the lease liability that has been reduced by the waiver
- Lease payment deferrals: continue to reduce the lease liability for payments made to the lessor
- Rental concession contains both a waiver and a deferral: accounting will incorporate a combination of the above.
Lessees can avail of the practical expedient where the rental concession arises as a direct consequence of COVID-19. In addition the following conditions must be met:
- The revised lease payment is substantially the same or less than the original lease amount
- The reduction in lease payments relates to payments due in the year 2020
- No other substantive changes have been made to the terms of the lease.
The ED does not propose a change to lessor accounting. Lessors are required to continue to assess if the rent concessions are lease modifications and account for them accordingly.
The proposed amendments are expected to be finalised by the end of May 2020 and would be effective for periods beginning on or after 1 June 2020, with earlier application permitted.
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We will continue to update you on developments in this regard as they arise.