Does your business comply with AASB 16 Leases? Have you received any rent concessions since recognition? You might be required to comply with the practical expedient added relevant to COVID-19!
The leasing standard came into effect for annual reporting periods beginning on or after 1 January 2019. For entities operating with a June year end, this meant the 2020 financial year end was the first in capitalising leases on the balance sheet. Since the introduction of the standard, an amendment was issued applicable for periods beginning on or after 1 June 2020 (early application permitted) to assist in lessee accounting (but not lessors) for COVID-19 related rent concessions.
The Issue In light of the pandemic, many entities saw changes in their payment schedules granted in order to assist in coping with the financial hardship imposed, such as rent relief or deferral. As stated in AASB 16 Leases, lease modifications warrant ‘remeasurement of the lease liability by discounting the reviewed lease payments using a revised discount rate’ It was originally expected that the changes in payment terms would in fact constitute a lease modification.
Lessees were faced with significant difficulty in complying with the requirements of the leasing standard for these rent concessions, and thus a practical expedient was added covering the period up to 30 June 2021, now proposed to be extended by a further 12 months.
Should the relevant conditions be met, i.e., the concession falls within the scope of the amendment, application of the practical expedient requires no need to perform assessment of a lease modification, but to recalculate the lease liability and with any differences recognised in the profit or loss.
If your lessor has waived any lease payments, your lease liability is required to be recalculated at net present value(NPV) at the agreed upon date (i.e., the date of which lease payments no longer align with the original agreement). This entails reducing your lease liability at a point in time, with the difference between before and after the rent concession, be appropriately recognised as rent relief in the way of income in the profit or loss.
Should your circumstances result in the deferment of lease payments, the application of the practical expedient remains consistent with the above; the lease liability will be recalculated at the agreed upon date, factoring in the NPV of the new payment schedule. The difference, albeit smaller in this case, is again recognised through the profit or loss.
In both scenarios and without modification to the lease, it is important to note that the Right-of-Use asset remains untouched, being amortised over it’s useful life in line with it’s original measurement
In applying the practical expedient, the entity is subject to certain disclosures in the financial statements, including which leases it has applied the amendment to, and the amount recognised in the profit or loss reflecting the changes in lease payments.
If you would like to learn more about AASB 16 Leases or the implications of rent relief and deferral, please give us a call on 03 5221 6399 and speak with one of our Audit team members who will be able to guide you in the right direction.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.