There is a mixed bag of news around Covid-19. A number of sports stadiums are back to full capacity, masks have been taken off, and life is returning to normal in a number of places. Other areas, which are often the least prepared to deal with the virus, are facing worse problems than ever.
What are IFRS 16 Rent Concessions?
In this post, you will learn what a rent concession, also known as a rent discount, tenant credit, or write-off, is. It is a reduction in the rental rate or security deposit fee that a property manager or landlord gives the tenant.
It is often called concessions or reductions, and they are temporary or long-term reductions made to entice a renter to a property either by using temporary incentives or by providing a reduction in exchange for certain services provided by the tenant.
How Does This Relate To Accounting, Particularly IFRS 16 – Leases?
An Overview of Rent Concessions Under IFRS 16
Coronavirus has taken a financial toll across the world. According to estimates, it could be as high as $16 trillion, but even this number could be low since the extent of long-term damage to the economy is still unknown.
Since many industries in UAE and businesses experienced huge losses and forced shutdowns, many were granted rent relief – either from private landlords or from government programs.
It was imperative to account for these concessions because they directly affected leases, yet many businesses in Dubai and UAE were struggling to survive at that time, so having to take COVID-19-related lease concessions into account according to IFRS 16 was a regulatory burden that many could not meet at that point.
In May of 2020, the International Accounting Standards Board (IASB) launched”Covid-19-Related Rent Concessions – Amendment under IFRS 16. This amendment relates to rent concessions granted by landlords or other entities to tenants.
In the IFRS 16 standard, a change in a lease’s scope or consideration is defined as: “A change from the original terms and conditions of a lease”.
This includes, for instance, extending or shortening the term of a contractual lease or modifying the right to use one or more underlying assets. Most Covid-19 concessions are modeled within this framework.
What Companies Should Know About the Details in The Publication
Several issues are discussed in Section 1 of the report, including how to assess whether a rent concession is a lease modification.
It is explained in Section 2 of this report how a lessee accounts for a rent concession as part of a lease modification.
It investigates whether a lessee can use the COVID-19 amendment to IFRS 16 for rent concessions related to COVID-19, as well as how to account for rent concessions that are not accounted for as lease modifications. In a situation where the lessee elects to exercise the option, the concession would not be considered as a lease modification.
Lessors’ obligations to account for rent concessions are discussed in Section 3.
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Here’s what Farahat & Co say about the concessions:
- Rent concessions related to COVID-19 are exempt from being assessed as lease modifications
- Rent concessions related to COVID-19 should be accounted for like lease modifications by lessees who use the exemption
- Lessees who apply for the exemption should disclose it
- Renters must apply for the exemption retroactively following IAS 8, but not restate prior periods
The important thing to remember is that these concessions won’t last forever, so companies should already be thinking about how they’ll handle lease changes.
IFRS 16 Covid-Related Rent Concessions Extended
Covid-19 left an economic shock that lasted longer than expected. Since the pandemic began, many countries and industries have suffered some of the worst financial and health effects.
IASB’s resolution, therefore, extends the relief provided by the amendment by an additional year. Lessees can use the relief on reduced or renegotiated lease payments originally due before June 30, 2022.
Staying On Top Of Leasing Headaches With Rent Concessions
Even though this is a welcome relief, companies need to be careful when applying this amendment. You’ll have to look at the impact on your income statement – particularly as it relates to previous periods – and how much disclosure you have to make.
Leases in general are getting more complex. Complying with the relevant standards, especially IFRS 16, is always a challenge. For UAE companies with a lot of leases, lease accounting software might be a good idea.
Lease accounting software can do a lot, like minimizing risk, managing all contracts in one place, optimizing contracts, changing leases easily, reducing technical drag, and generating an audit trail.
The concessions offered by the IASB are undoubtedly a welcome development, but it is important to be cognizant of the impact of rental concessions under IFRS 16, as well as the fact that the effective dates have already been altered once.
You can stay ahead of leasing headaches by implementing the appropriate leasing accounting software and concentrating on your core areas of business.