Government amends Ind AS 116 to provide practical expedient to lessees

The Issue

Ind AS 116 / IFRS 16 deals with Accounting for leases. Due to COVID-19, there may be changes in the terms of lease arrangements or lessor may give some concession to the lessee with respect to lease payments, rent free holidays etc. Generally, under Ind AS 116, rent concessions often meet the definition of a lease modification, unless they were envisaged in the original lease agreement. This will lead to the application of accounting relating to the modification of leases commonly known as lease modification accounting. This accounting can be complex as the lessee may be required to recalculate lease assets and liabilities using a revised discount rate.

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Amendment

Government amends Ind AS 116 to give an optional concession to the lessees not to apply lease modification accounting to the rent concessions arising as a direct consequence of COVID-19 in 2020.

“As a practical expedient, a lessee may elect not to treat rent concession as lease modifications if the following conditions are met. -

the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
any reduction in lease payments affects only payments originally due on or before the 30th June, 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before the 30thJune, 2021 and increased lease payments that extend beyond the 30thJune, 2021); and
there is no substantive change to other terms and conditions of the lease.”

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For Lessors

The amendment is applicable only for the lessees and not for lessors as lease modification accounting is relatively straightforward for them. Lessors are required to assess whether the rent concession are lease modifications and account for them accordingly.

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Effective Date

A lessee shall apply the amendment for annual reporting periods beginning on or after April 01, 2020. In case a lessee has not yet approved the financial statements for issue before the issuance of this amendment, then the same may be applied for annual reporting periods beginning on or after April 01, 2019.

Practical Aspects

An entity had obtained premises on lease for a period of five years commencing 1 April 2019 at a monthly lease payment of INR 20,000. Entity has received rent concession as a direct consequence of COVID-19 pandemic. How would the amendment be applicable in different scenarios?

Scenario 1: Rent is reduced to INR 15,000 for May 2020-July 2020 and increased by INR 5,000 from original rent for August 2020 to October 2020, i.e., will pay INR 25,000 for these three months. Apart from this, there is no change in any term or conditions of the lease

Impact: The practical expedient can be availed as all three conditions are met.

Scenario 2: Rent is reduced for period before June 2021 but increased thereafter to compensate for time value of money. Apart from this, there is no change in any term or conditions of the lease.

Impact: If the nominal cash flows have increased to compensate for the time value of money, it would appear appropriate for entities to assess that consideration for lease is substantially the same. Option can be availed.

Scenario 3: Rent is reduced to INR 15,000 for May 2020 -July 2021

Impact: The lease rentals are to be considered in its entirety. If a rent concession resulted in reduced lease payments beyond June 2021, the entire rent concession would fail this criterion and the practical expedient would be unavailable.

Scenario 4: Lease payment is reduced to INR 15,000 for May 2020 -July 2020 and increased by INR 20,000 for August 2021-October 2021.

Impact: Change in lease payments results in consideration for the lease being significantly higher than consideration preceding such change and increase does not appear to represent time value of money.

Scenario 5: Lessor agrees to reduce the monthly lease payment provided leased space is reduced from 8,000 sq. ft to 5,000 sq. ft.

Impact: Change results in substantive change to other terms of the lease (scope is being decreased), hence option is not available.

Scenario 6: Lessor agrees for rent holiday for May 2020 -July 2020. However, at the end of the lease term, it got extended for another 3 months with substantially equivalent payments. Apart from this, there is no change in any term or conditions of the lease.

Impact: Option is available. A simple concession that essentially replaces the period of the rent concession with an equivalent period at the end of the lease and with substantially equivalent payments can be considered not to be a substantive change to the lease but, instead, simply a payment concession.

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