Issue 21 Contents
Many lessors have provided, or are expected to provide, rent concessions to lessees as a result of the covid-19 pandemic. Such rent concessions are particularly prevalent for leases of retail property. Rent concessions include rent holidays or rent reductions for a period, possibly followed by increased rent payments.
In May 2020 the Board added a practical expedient to IFRS 16 Leases to help lessees account for covid-19-related rent concessions. Lessees can apply the practical expedient immediately.
Reminder—How lessees apply IFRS 16
Applying IFRS 16, a lessee recognises a right-of-use asset, which represents the lessee’s right to use the underlying asset for the duration of the contract, and a lease liability, which represents the present value of future lease payments to be made to the lessor. The lessee accounts for the right-of-use asset and lease liability as it would account for any other non-current asset and financial liability, recognising a depreciation charge for the right-of-use asset and interest on the lease liability over the lease term.
How would a lessee account for a rent concession without the practical expedient?
A rent concession typically results in a change in lease payments. IFRS 16 requires a lessee to consider whether such a change represents a modification of the original contract. The original contract is modified if the lessee and lessor in effect negotiate a new price for the lessee’s right to use the underlying asset for the remainder of the contract term. In such a case, the lessee must determine a new discount rate and remeasure its right-of-use asset and lease liability. If a rent concession reduces total lease payments and is accounted for as a lease modification, a lessee will recognise the resulting gain through reduced depreciation over the remaining term of the lease.
However, some changes to payments will not represent a modification of the original contract—for instance, a change that was contemplated in the original terms and conditions of the contract such as in a force majeure clause. In such a case, the lessee and lessor are not renegotiating a modified contract price. Instead, the payments are changing because an event occurs that was already considered during the original negotiation. Consequently, the lessee neither determines a new discount rate nor remeasures its right-of-use asset. Instead, the lessee recognises any gain from a reduction in total lease payments in profit or loss when the rent concession occurs.
Irrespective of the accounting, any material non-cash change in a lessee’s lease liability will be visible in the lessee’s reconciliation of financing cash flows in the notes. A rent concession that reduces total lease payments is a material non-cash change in a lessee’s lease liability.
What does the practical expedient do?
The Board’s amendment allows a lessee to assume that some rent concessions occurring as a direct consequence of the covid-19 pandemic are not lease modifications. A lessee applying the practical expedient will therefore recognise any profit or loss effects of covid-19-related rent concessions as they occur.
The practical expedient can be applied only to rent concessions that reduce lease payments on or before 30 June 2021. A lessee must apply the practical expedient consistently to groups of leases with similar characteristics and in similar circumstances.
What will lessees using the expedient have to disclose?
If a lessee has applied the practical expedient, it will clearly state so in the financial statements. Together with the other disclosures required by IFRS 16, the lessee is required to disclose:
- information about the contracts to which it has applied the practical expedient; and
- the amount recognised in profit or loss relating to the application of the practical expedient.
Covid-19-related rent concessions are unlikely to have an immediate effect on cash flows, because the practical effect of such concessions is likely to be the absence of a cash outflow. However, any non-cash changes in lease liabilities will be visible in the lessee’s reconciliation of financing cash flows.
How can investors conduct pro-forma analysis that includes the effect of rent concessions?
Although investors may be tempted to analyse pro-forma effects by using simplifications, they should exercise caution in attempting to analyse the effect of rent concessions in isolation. This is because the Covid-19 pandemic and its impact on business are likely to produce a multitude of effects that may interact with the reporting outcomes described in this article for rent concessions.
Key point summary
Why is the IASB looking into the presentation of Supply Chain Finance or Reverse Factoring arrangements?
In a reverse factoring arrangement (also referred to as supply chain finance), a company contracts a financial institution to pay amounts the entity owes to its suppliers. The financial institution pays the entity’s suppliers, and the entity pays the financial institution at a later date.
The IFRS Interpretations Committee (Committee) received a request asking:
- how an entity presents liabilities to which reverse factoring arrangements relate—in other words, how the entity presents liabilities to pay for goods or services received when the related invoices are part of a reverse factoring arrangement; and
- what information about reverse factoring arrangements an entity is required to disclose in its financial statements.
What is the Committee’s tentative agenda decision on this topic?
The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for a company to decide how to present in the financial statements information about liabilities that are part of reverse factoring arrangements and their related cash flows. The requirements also provide an adequate basis for selecting what information to disclose in the notes—for example, information about liquidity risks in reverse factoring arrangements. Consequently, the Committee decided not to add these matters to its standard-setting agenda.
Further information can be found on the project page.
What does the tentative agenda decision mean for investors?
The Board and the Committee are considering investor concerns about reverse factoring arrangements. The feedback that we gather from investors on the decision in the short-term can also provide useful input on the need for a long-term solution. These different horizons are explained below:
Short-term horizon: An agenda decision is a tool that supports consistent application of IFRS Standards through the influence it has in the market. This is because, to be complaint with IFRS Standards, companies must apply the applicable Standards, reflecting the material in an agenda decision. That material may provide additional insights that might change a company’s understanding of how to apply IFRS Standards. The tentative agenda decision on reverse factoring arrangements explains, in one place, how IFRS Standards apply to those transactions. If finalised, the agenda decision could positively influence accounting practice. Companies using reverse factoring arrangements that previously might have thought IFRS Standards contain no applicable requirements could revisit their accounting policies.
Long-term horizon: The door to future standard-setting remains open. The Committee is considering a narrow-scope standard-setting project to develop disclosure requirements for arrangements entered to fund payables to suppliers, including reverse factoring arrangements. During the comment period for the tentative agenda decision, respondents can provide additional feedback on this project, which the Board or Committee can discuss at a future meeting.
Will the Committee reconsider its tentative agenda decision?
The Committee will reconsider its tentative decision, including the reasons for not adding these matters to its standard-setting agenda, at a future meeting.
How can I comment on the Committee’s decision and what is the deadline for submission?
You can submit a comment letter through the project page. The deadline for commenting on the decision is 30 September 2020.
Goodwill and Impairment
The Board is seeking feedback on the accounting for Business Combinations, in particular, on disclosures, goodwill and impairment. The Board published a discussion paper in March 2020 which discusses whether the Board can improve the usefulness of information companies provide about the business they acquire.
The Discussion Paper looks at how companies can provide investors with information on the subsequent performance of acquisitions and will also consider the often-debated topic of whether the Board should reintroduce amortisation of goodwill.
Investors’ views on these topics will be critical in the Board’s deliberations of the next steps to take on this project, and whether to develop an exposure draft containing any of the proposals discussed in the Discussion Paper. The Board is asking for stakeholder comments by 31 December 2020.
Primary Financial Statements
We would like to remind you that the comment letter period for the Exposure Draft General Presentation and Disclosures will close on 30 September 2020. The proposals in the Exposure Draft aim to improve how information is communicated in the financial statements, with a focus on information in the statement of profit or loss.
A brief overview of the proposals can be found in this Snapshot.
To read and comment on the General Presentation and Disclosures Exposure Draft and the accompanying Basis for Conclusions and Illustrative Examples, please go to the comment letter page.
IASB investment experience bolstered with appointment of Zach Gast
The Trustees of the IFRS Foundation have appointed Zach Gast as a member of the International Accounting Standards Board (Board), effective 1 August 2020. Mr Gast, from Maryland, USA, has more than 20 years of investment experience. He joins the Board for an initial term of five years from the Center for Financial Research and Analysis (CFRA)—a provider of independent investment research—where he served as president, directing the organisation’s forensic accounting and equity research strategy. Meet the new Board member: Zach Gast.
IFRS Foundation Virtual Conference 2020—speakers confirmed
Our virtual conference will include speakers from Carlsberg Group and the United States Securities and Exchange Commission. One of the members of our Capital Markets Advisory Committee, Florian Esterer, will also be appearing as a panellist. Further information and details of how to register for the conference can be found here.
IFRS Foundation meetings to be held remotely in 2020
The IFRS Foundation continues to share global concerns about the impact of the coronavirus (covid-19) pandemic, and is monitoring developments guided by public health authorities.
IASB completes response to IBOR reform with amendments to IFRS Standards
The Board has finalised its response to the ongoing reform of inter-bank offered rates (IBOR) and other interest rate benchmarks by issuing a package of amendments to IFRS Standards. The amendments are aimed at helping companies to provide investors with useful information about the effects of the reform on those companies’ financial statements.
Four new members appointed to the IFRS Interpretations Committee
The Trustees of the IFRS Foundation, who are responsible for the oversight and governance of the Board, have appointed Renata Bandeira, Sophie Massol, Jon Nelson and Donné Sephton to the IFRS Interpretations Committee.
IFRS Foundation publishes revised Due Process Handbook
On 21 August 2020 Trustees of the IFRS Foundation published the revised Due Process Handbook, which sets out the procedural requirements of the International Accounting Standards Board (Board) and the IFRS Interpretations Committee and related matters. The revised Handbook follows a review by the Trustees’ Due Process Oversight Committee (DPOC) to ensure the Handbook remains fit for purpose as a result of developments in the Board’s and the Interpretations Committee’s processes and continues to reflect good practice. This review included a public consultation in 2019 on the proposed amendments.
Digital reporting—questions for practitioners, standard-setters and researchers
Board Member Ann Tarca delivered a speech at the virtual annual conference of the Accounting & Finance Association of Australia and New Zealand (AFAANZ). She discussed developments in digital reporting, including tagging of financial statements.
Webinars on Exposure Draft General Presentation and Disclosures—recordings now available
Webinars were recently held on the Exposure Draft General Presentation and Disclosures in English, Chinese, Japanese, Korean, Portuguese and Spanish. Recordings of the live webinars are now available. These webinars are the third in a series discussing the detailed proposals in the Exposure Draft. They focus on the Board’s proposals on disaggregation, including proposals for the analysis of operating expenses and unusual income and expenses.
Recordings of the webinar series' fourth and final instalment, where staff explain the Board’s detailed proposals for management performance measures, will be available in due course.
New two-part webcast: Amendments to IFRS 17 Insurance Contracts—recordings now available
A new two-part webcast in a series to support the implementation of IFRS 17 Insurance Contracts is now available. It provides an overview of the amendments to IFRS 17 made by the Board in June 2020.
Recording of IASB and EAA virtual seminar
The IASB, in conjunction with the European Accounting Association (EAA), held a virtual research seminar on 10 July 2020, which provided an overview of the Board’s Exposure Draft General Presentation and Disclosures and relevant academic literature.