IFRIC agenda decision - Lessor forgiveness of lease payments
IFRS Interpretations Committee (the Committee) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, these decisions are regarded as being highly persuasive in practice. All entities reporting under IFRS should be aware of these decisions, as they could impact the way particular transactions and balances are accounted for.
In the addendum to the update from its September 2022 meeting, the IFRS Interpretations Committee (Committee) issued a final agenda decision dealing with two questions regarding the accounting by a lessor who provides rent concessions to a lessee and forgives certain lease payments.
- Lessee is experiencing financial hardship and is granted a rent concession by their Lessor
- The rent concession changes the original terms and conditions of the lease, which is classified as an operating lease by the Lessor
- Lessor legally releases Lessee form its obligation to make specified lease payments
- Some of the lease payments are contractually due but not paid – Lessor has recognised these as a lease receivable and income
- Other lease payments are not yet contractually due
- At the date the rent concession is granted, Lessor applies the expected credit loss (ECL) model in IFRS 9 Financial Instruments to the operating lease receivable.
Two questions were put to the Committee:
- How does Lessor apply the ECL model in IFRS 9 to the operating lease receivable before it grants the rent concession to Lessee if it expects to forgive payments due from Lessee in future?
- When accounting for the rent concession, does Lessor apply the derecognition requirements in IFRS 9 or the lease modification requirements in IFRS 16 Leases?
Rationale for agenda decision – Applying the ECL model to operating lease receivables
The derecognition and impairment requirements contained in IFRS 9 apply to operating lease receivables. IFRS 9 defines ‘credit loss’ as ‘…the difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (i.e. all cash shortfalls)…’.
Paragraph 5.5.17 of IFRS 9 also requires that an entity measure ECL in a way that reflects:
- An unbiased and probability-weighted amount determined by evaluating a range of possible outcomes
- The time value of money
- Reasonable and supportable information that is available without undue cost or effort at reporting date about past events, current conditions and forecasts of future economic conditions.
The Lessor should therefore apply the impairment requirements in IFRS 9 to the operating lease receivable. In doing so, the Lessor estimates ECL to include all cash shortfalls, being the difference between:
- All contractual cash flows due under the lease contract with the Lessee that are included in the operating lease receivable
- All cash flows the Lessor expects to receive, using reasonable and supportable information about past events, current conditions, and forecasts of future economic conditions.
Even before the Lessor grants a rent concession to the Lessee, the Lessor’s measurement of ECL takes into account its expectations of forgiving lease payments due and recognised as an operating lease receivable from Lessee.
Rationale for agenda decision – Accounting for rent concession (IFRS 9 or IFRS 16)
Derecognition of operating lease receivable
When the Lessor formally grants the rent concession to the Lessee, it legally releases the Lessee from its obligation to make specifically identified lease payments, some of which have been recognised as an operating lease receivable. Therefore, in accordance with paragraph 3.2.3(a) of IFRS 9, on the date it grants the rent concession to the Lessee, Lessor:
- Derecognises the operating lease receivable relating to the forgiven lease payments
- Remeasures the ECL on the operating lease receivable
- Recognises any change to the ECL in profit or loss.
Modification to future lease payments
As the rent concession described in the fact pattern was not contemplated in the original lease, it is a lease modification and is accounted for as a new lease under paragraph 87 of IFRS 16. This means that all future lease payments are determined and recognised by the Lessor as income recognised on a straight-line basis over the remaining lease term. When determining the lease payments for the new lease, the Lessor must take into account prepaid or accrued lease payments relating to the original lease.
The Committee noted that lease payments contractually due from the Lessee and recognised by the Lessor as an operating lease receivable are not accrued lease payments, and therefore not considered to be part of lease payments for the new lease.
The Committee concluded that the Lessor accounts for the rent concession described in this fact pattern under both IFRS 9 and IFRS 16, i.e., it accounts for derecognition of the operating lease receivable forgiven under IFRS 9, and the modification of future lease payments (not yet recognised as an operating lease receivable) under IFRS 16 as a new lease.
The Committee further concluded that the principles and requirements in IFRS Standards provide an adequate basis for the Lessor to determine how to apply the ECL model in IFRS 9 to an operating lease receivable, and how to account for the rent concession described in the fact pattern. It therefore decided not to add a standard-setting project to its work plan.
Refer to our FAQ for a more in-depth analysis of the agenda decision.
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