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IFRS 16 and covid-19

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On 24 April 2020, the IASB issued ED/2020/2 Covid-19-Related Rent Concessions Proposed amendment to IFRS 16 (the ED) with a comment period ending 8 May 2020. The ED proposes an amendment to IFRS 16 to permit lessees, as a practical expedient, not to assess whether particular covid-19-related rent concessions are lease modifications. Instead, lessees that apply the practical expedient would account for those rent concessions as if they were not lease modifications. The ED proposes no change for lessors.

Given the urgency of the matter both the IASB and EFRAG have substantially reduced their consultation periods and are having a fast track due process.

On 12 May 2020, EFRAG issued a Final Comment Letter. In its Final Comment Letter, EFRAG agreed with the proposals in the ED. EFRAG agreed with the need to provide relief for lessees given the challenges they face in assessing whether lease modifications have occurred under the circumstances of covid-19 and taking account of the initial overall challenges of implementing IFRS 16 Leases requirements.

However, EFRAG supported expanding the scope of the amendment to include all rent concessions granted during 2020 and not just payments due in 2020.

In order not to delay the amendments for lessees, EFRAG suggested that the IASB, as part of a separate project, consider lessor accounting for covid-19-related rent concessions. Like lessees, lessors also face complexity in assessing the accounting implications of covid-19-related rent concessions in particular, whether rent concessions should be treated as a modification or as a reduction in rent payments.

EFRAG suggested that paragraph 46B of the ED should be updated to incorporate the requirement currently in paragraph BC4 that the practical expedient has to be applied consistently to contracts with similar characteristics and in similar circumstances. In addition, the IASB should clarify whether the amendment ought to be applied to covid-19-related rent concessions on a case-by-case basis or on a portfolio by portfolio basis.

EFRAG agreed with the requirement for entities to disclose the fact that the proposed amendment has been applied. To enable users to assess the impact of entities applying the amendment, EFRAG considered that, subject to practicability, the IASB should add a specific requirement to disclose the following in respect of the amendment: nature and extent of rent concessions for which the option has been applied, the financial statement line items affected and the amount recognised in financial statements.

Finally, EFRAG noted that there is need for further clarity in the language applied in respect of the applicability of amendment to interim financial statements. The same applies on the timing of profit or loss effects of concessions that are forgiveness or reduction of rental payments. The text should be in the main standard and not only in the Basis for Conclusion.

In order to receive timely input from our stakeholders, EFRAG issued a preparatory draft of the Endorsement Advice.

The issuance of a preparatory draft of the Endorsement Advice before the issuance of the final amendment is to allow for the finalisation of the endorsement advice as soon as possible after the IASB has issued the amendment to IFRS 16. The preparatory draft of the Endorsement Advice is based on the assumption that the contents of the final amendment will not be substantially different from the contents of the ED.

Comments on the preparatory Draft Endorsement Advice should be provided by 20 May 2020.

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