The pandemics of coronavirus, or COVID-19 has been here for a while and after the first shock of its quick spread and effect on people's health, we are all seeing its economic consequences. In order to stop the spread, governments in many countries ordered complete lockdown. Many businesses had to stop their operations and thus many Companies have re-negotiated their lease agreements and modified the lease payments, original tenure, variable consideration etc.
According to Ind AS 116, lease modification is a change in either scope or payments for the lease that was not part of the original conditions. It requires recalculation and adjustment of the lease liability. As majority of the Companies would have just finished preparing the 1st set of accounts under IND AS 116, to again reassess the lease conditions and accounting will not be an easy task.
If a rent concession results from a lease modification, a lessee determines a new discount rate, and remeasures the lease liability to reflect the revised lease payments using that revised discount rate. This accounting is not unduly onerous for an individual lease modification. However, the volume of rent concessions arising from the covid-19 pandemic may mean this accounting would occupy resources at a time when lessees are likely to have other, more significant, concerns to deal with arising from the pandemic.
Considering the above situation ICAI has come up with an exposure draft on Covid-19-Related Rent Concessions (Proposed amendment to Ind AS 116, Leases) corresponding to Amendments in IFRS 16 issued by the International Accounting Standards Board (IASB).
The proposed amendments to Ind AS 116 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. The proposed amendment aims to address issues affecting the application of Ind AS 116 requirements to large volumes of rent concessions granted as a direct consequence of the covid-19 pandemic during 2020. The proposed amendments to Ind AS 116 are as follows.
46A: 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.
46B: 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:
- 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;
- 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
- there is no substantive change to other terms and conditions of the lease.
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 of Ind AS 116); 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.
C1A: Covid-19-Related Rent Concessions, added paragraphs 46A, 46B, 60A, C20A and C20B. A lessee shall apply that amendment for annual reporting periods beginning on or after April 1, 2020. Earlier application is permitted, including the financial statements not authorised for issue before the issuance of this amendments.
C20A A lessee shall apply Covid-19-Related Rent Concessions (see paragraph C1A) retrospectively, recognising the cumulative effect of initially applying that amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment.
C20B 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.
(paragraph 28 : When initial application of an Ind AS has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose:
Paragraph 28(f): for the current period and each prior period presented, to the extent practicable, the amount of the adjustment: (i) for each financial statement line item affected; and (ii) if Ind AS 33, Earnings per Share, applies to the entity, for basic and diluted earnings per share;)
Accounting for changes to lease payments applying the exemption
At 31 March 2020 a lessee has a lease liability of 2,000,000. The contract requires monthly lease payments of 100,000.
For simplicity, it is assumed in all scenarios that (i) interest accrues at 20,000 per month; and (ii) a reduction of 100,000 in one month. The analysis below sets out the accounting for the lease liability where there is waiver/reduction in lease payments. Accounting for the right-of-use asset is not included.
Waiver of lease payments: - April- June 2020 – No lease payments
In 3-month period, April – June 2020
Dr Lease liability (100,000*3) 300,000
Cr P &L 300,000
(Being waiver of lease rent accounted)
Dr Finance Cost (P&L) 60,000
Cr Lease liability 60,000
(Being Finance cost accounted)
Lease liability as at 30 June, 2020: 1,760,000
Few Questions which may arise:
1. Is the Practical expedient as per paragraph 46A mandatory to apply?
No. It is at the option of the Company to apply 46A or not.
2. What if there is change in the lease tenure?
The change in lease tenure will not be meet the qualification criteria of Covid rent concession, hence the same will be considered as a lease modification and accounting to be done accordingly.
3. What if there is reduction in the lease payments for 2 years?
The change in lease payment beyond 30.06.2021 will not meet the qualification criteria of Covid rent concession hence the same will be considered as a lease modification and accounting to be done accordingly.
4. What if there are Deferred Lease Payments?
The effect of time value of lease payments being differed is to be ignored, hence as per the above example you will account for Finance cost as 60 only and lease payment will be made in the later month as per the agreed terms.
5. Is there an option to apply Covid rent concession for few leases and for balance lease apply lease modification criteria with same characteristics?
No, as per paragraph 2 of Ind AS 116 “An entity shall apply this Standard consistently to contracts with similar characteristics and in similar circumstances.” You cannot pick and choose. Also the same needs to be applied at group level in case of subsidiaries and associates.
6. Is any benefit available to Lessor?
7. What will be the impact in cash flow statement on account of waiver of lease liability?
The waiver of lease liability will be a non cash item for Cash flow purposes.
This article is based on the Exposure draft issued by ICAI on Covid-19-Related Rent Concessions (Proposed amendment to Ind AS 116, Leases) corresponding to Amendments in IFRS 16 issued by the International Accounting Standards Board (IASB) and guidance available in the amendments in IFRS 16.
This article and the information contained herein prepared by Hardik Bauva, Partner at Bauva & Co Chartered accountants is intended to provide general information on the subject and is not an exhaustive treatment. This information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your business, you should consult a qualified professional adviser.
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