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The International Accounting Standards Board (hereinafter referred to as the “Council”) issued the “New Crown Virus Outbreak-Related Rent Relief (Consultation Draft)” on April 24, 2020 (hereinafter referred to as the “Consultation Draft”). It is proposed to revise IFRS 16-Leases, and the deadline for soliciting comments is May 8, 2020. The draft for comments is briefly introduced as follows:
1. Background
Affected by the new coronavirus epidemic, lessors in many countries and regions have or are expecting to provide rent relief to lessees. Although International Financial Reporting Standard No. 16-Leases has made relevant provisions on the accounting treatment of changes in lease payments, including rent relief, many lessees have reported to the Council that the new crown virus is evaluated in accordance with the provisions of the current standards Whether the epidemic-related rent reduction or exemption is a lease change and corresponding accounting treatment is facing greater difficulties. In response to the demands of stakeholders, the Board of Directors has drafted a soliciting opinion draft, and intends to provide the lessee with practical simplified handling methods for the rent reduction and exemption related to the new coronavirus epidemic.
Second, the main content of the consultation draft
The amendments proposed in the consultation draft mainly include: First, allow the lessee to choose not to assess whether the rent reduction related to the new coronavirus epidemic is a lease change, and allow it to adopt the same accounting treatment method as the rent change for non-lease changes. The second is to clarify that the aforementioned simplified treatment method is only applicable to the rent reduction and exemption that directly leads to and meets certain conditions. The third is to require the lessee to disclose the fact that the aforementioned simplified processing method is applied.
3. The main issues for comments
Question 1: Regarding the simplified approach to practice (see paragraphs 46A and 46B of the revised [Draft] of IFRS No. 16)
Paragraph 46A of the revised draft of IFRS No. 16 recommends: To simplify the practice, the lessee may choose not to assess whether the rent reduction associated with the new coronavirus outbreak is a lease change. In making this choice, the lessee should apply the same accounting treatment for changes in rents related to the new coronavirus epidemic as those for non-lease changes in current standards.
Paragraph 46B of the revised draft of IFRS No. 16 recommends that the above-mentioned practical simplified treatment method is only applicable to rent reductions that directly lead to and meet the following conditions when the new coronavirus epidemic occurs:
(1) Changes in rents cause the revised lease consideration to be reduced or equal to the pre-modified lease consideration;
(2) The reduced rent only affects the rent payment due in 2020;
(3) There are no major changes in other terms and conditions of lease.
Do you agree that the above provisions can provide tenants with practical convenience and enable them to continue to provide useful information about leases to users of financial statements? What are the reasons for consent or disagreement? If you disagree, please provide your suggestions and the reasons.
Question 2: Regarding the effective date and transitional provisions (see paragraphs C1A and C20A of the revised [Draft] of IFRS 16)
Paragraphs C1A and C20A of the revised draft of IFRS 16 recommend:
(1) Implementation will begin during the annual reporting period beginning on or after June 1, 2020. Allow early implementation (including revision of financial reports that have not been authorized for publication on the date of publication);
(2) Retrospective application. At the beginning of the annual report period for the first implementation of the amendment, the lessee adjusts the opening balance of retained earnings (or other equity items, as appropriate) based on the cumulative impact of the first day of implementation of the amendment.
Do you agree with the above suggestions? What are the reasons for agreeing or disagreeing? If you disagree, please provide your suggestions and reasons.