The Ministry of Corporate Affairs on 24 July 2020, notified the Companies (Indian Accounting Standards) Amendment Rules, 2020 which includes revisions Ind AS 116: Leases. The amendment includes a practical expedient that provides lessees with a choice not to assess a rent concession occurring as a result of the direct consequence of the Covid-19 pandemic as a lease modification.
The Ministry of Corporate Affairs ('MCA') on 24 July 2020, notified the Companies (Indian Accounting Standards) Amendment Rules, 2020[1] ('the amendment') which includes revisions to certain Ind AS like Ind AS 103- Business Combinations, Ind AS 109: Financial Instruments, Ind AS 116: Leases. Ind AS 1: Presentation of Financial Statements, Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors and Ind AS 37: Provisions, Contingent Liabilities, and Contingent Assets. In this article, we analyze the key aspects of the changes brought about by the MCA.
Similar relaxations have also been provided by the International Accounting Standards Board in IFRS 16: Leases[2].
In both instances, i.e. amendments in Ind AS 116 as well as IFRS 16, the amendments are directed towards lessees and the accounting for lessors remains unchanged
A rent concession would meet the definition of a lease modification unless it was included in the original lease agreement. Accounting for lease modifications is complex it could require the lessee to recalculate lease assets and liabilities using a revised discount rate.
Given the current economic environment on account of Covid-19, there could be many instances wherein lease rentals may be renegotiated. The amendment includes a practical expedient that provides lessees with a choice not to assess a rent concession occurring as a result of the direct consequence of the Covid-19 pandemic as a lease modification.
For instance, in case a company negotiates a rent concession for the refurbishment of its office premises rather than a lockdown introduced by the government, this amendment would not apply. This could make the assessment more judgmental and subjective.
The important aspect of the amendment is the satisfaction of all the below conditions by an entity:
- 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 the 30 June 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before the 30th June 2021 and increased lease payments that extend beyond the 30 June 2021); and
- there is no substantive change to other terms and conditions of the lease.
The assessment of whether the revised lease payments result in substantially the same or less than the consideration for the lease before the change is generally determined by computing the time value of money of the revised lease payments. Importantly, payment shortfalls on account of any factors that are not contractually agreed would not make the practical expedient available to the lessee. This would be the case even if the shortfall is directly a result of the pandemic, for example, cash flow circumstances or impact of Covid-19 on the entity's business.
The condition related to payments originally due on or before 30 June 2021has been primarily included so as to have a time limit to the expedient and not limit the potentially broader application.
Although the term 'substantive' has not been defined in the amendment, it would not be expected to result in significant diversity in practice especially since the other two criteria are also required to be met for the rent concession to meet the eligibility criteria for the practical expedient.
Disclosure requirements
In addition to the standard's existing disclosure requirements, the amendments require a lessee applying the practical expedient to disclose:
- that it has applied the practical expedient to all rent concessions that meet the conditions; or
- information about the nature of the leases and/or concessions to which it has applied the practical expedient if it has not applied the practical expedient to all rent concessions that meet the conditions.
The lessee also discloses the amounts recognized in profit or loss for the reporting period to reflect changes in lease payments arising from rent concessions that meet the conditions of the practical expedient.
It is pertinent to note that the impact of reduced or no cash outflows for leases during the period of the rent concession will affect the disclosure of cash flows in a company's statement of cash flows. A lessee discloses any adjustment of the carrying amount of the lease liability as a non-cash change in lease liabilities when disclosing changes in liabilities arising from financing activities under Ind AS 7.
In summary, the amendment to Ind AS 116 is a welcome relief from the application of the complex guidance on lease modifications. The immediate applicability of the guidance, including in some cases for FY2019 is also an important benefit available to companies given the urgency of the situation at hand. Companies should also carefully consider the potential impact of the MAT in making the final conclusion
The author of this article is a member of the Institute of Chartered Accountants of India and is also an alumnus of the Indian Institute of Management Bangalore (IIMB) having more than a decade of experience in financial reporting advisory and audit. The author is also a co-founder of World of financial reporting- a firm focussing on financial reporting consulting and training. The author can be reached at prateekmankad@worldoffinrep.com
[1] The full text of the amendment can be accessed at http://www.mca.gov.in/Ministry/pdf/Rule_24072020.pdf
[2] The text of the amendment can be accessed at https://www.ifrs.org/news-and-events/2020/05/iasb-issues-amendment-to-ifrs-standard-on-leases/
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