An amendment to IFRS 16 Leases related to Covid-19-related rent concessions has been published by the International Accounting Standards Board (IASB) to guide audit firms in Dubai in extending the application date of the amendment from last year – in May 2020 amendment – to enable lessees to account for Covid-19-related rent concessions beyond June 30, 2021.
In light of the current pandemic, extending the relief to cover rent concessions is proposed, which will reduce lease payments due on or before June 30, 2022. There are various rent concessions, including rent holidays or rent reductions for a short period, followed by increased rent payments in the future.
The IFRS 16 COVID-19-Related Rent Concessions amendment
The amendment allows Dubai & UAE entities to Covid-19-related rent concessions to apply for an extension of the current beneficial relief (which is optional). Under IFRS 16, paragraph 46A provides a practical expedient.
It allows audit experts in Dubai & UAE to account for rent concessions resulting from Covid-19 as they did not lease modifications. The rental settlement will be recognized in profits or losses for the period and not over the residual term of the lease.
Original amendment (In May 2020)
Recall that the original IFRS 16 amendment gives lessees an option to include rent reductions or holidays from rent when accounting for Covid-19-related lease concessions. A rental increase could follow this option in the future.
Changes in lease payments due to rent concessions related to Covid-19, subject to certain conditions, may be treated if the difference was not a lease modification. Consequently, the rent concession is recognized as profit or loss for the period without affecting the right-of-use asset.
On the other hand, a lease modification would describe changes to the lease that will require internal audit professionals to conduct complex analyses to determine whether they alter the covenants. Rent concessions are accounted for over the remaining lease term by adjusting lease liability at the contract revision date to reflect the revised lease payments discounted at a reasonable rate, with a corresponding adjustment to the right-of-use asset.
The following conditions must be met to qualify for the practical expedient:
- When lease payments change, the new consideration is substantially equivalent to, or less than, the previous consideration.
- A reduction in lease payments only affects payments due on or before June 30, 2021. For example, a rent concession would meet this requirement if it increases lease payments up to and including June 30, 2021.
- Other lease terms and conditions remain unchanged. Dubai & UAE companies should remain vigilant in assessing whether rent concessions granted to lessees are leased modifications, as the relief is only available.
The new amendment in March 2021 extended?
By adopting the March 2021 amendment, rent concessions are extended from June 30, 2021, to June 30, 2022. For example, a rent concession can meet the condition if it reduces lease payments to June 30, 2022, but an increased lease payment afterward.
Company audit experts must apply the practical expedient retrospectively to all lease contracts eligible under the May 2020 amendment and similar lease contracts under the March 2021 amendment, regardless of whether the lease contract became eligible through the original May 2020 amendment or through the later March 2021 amendment.
What This Means in Practice
Those entities in Dubai & UAE that have already used the practical expedient will be able to continue using the expanded scope of the practical expedient for contracts with similar characteristics and in similar circumstances. The relief must be continued until June 30, 2022 (if the contract otherwise satisfies other conditions) if, for example, rent concessions were granted up until June 30, 2021.
Companies’ financial audit professionals cannot choose practical expedients for specific contracts or rent concession dates only as part of the March 2021 amendment. As long as an entity has not previously applied the May 2020 amendment, it can use the March 2021 amendment. Still, the amendment must be applied retrospectively to all contracts with similar characteristics and all contracts in substantially the same circumstances.
Suppose the lease payment at issue is due after June 30, 2021. In that case, the rent concessions initially excluded from the scope of the May 2020 amendment may now be included in the new March 2021 amendment. They would therefore need to be restated retrospectively.
The disclosure requirements for Dubai & UAE Audit Entities in the first year of application
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraph 28 provides that Dubai entities must provide information about the impact of the initial application of a new amendment on the current and prior periods. Nevertheless, the recent amendment specifies that IAS 8 disclosures are not required to be disclosed as per paragraph 28(f) of the standard. The disclosures that are not required to be provided are:
Requirements for First-time Application
For first-time application to the accounting period beginning on or after April 1, 2021, the amendments should be retrospectively applied, with the cumulative effect being recognized at the beginning of the reporting period in which the amendment is implemented in an adjustment to the opening balance of retained earnings. The UAE Audit firm specialists must apply the amended figures without restating the comparative ones.
Read also: Accounting for Lease Liability under IFRS16