Accounting relief for COVID-19-related rent concessions approved by the NZASB
Last month we summarised the NZASB’s approved practical expedient to simplify the accounting for COVID-19 rent concessions by lessees in our article, NZASB provides accounting relief for lessees who receive rent concessions. The amendments are also summarised in our International Financial Reporting Bulletin 2020 08 – IASB issues amendments to IFRS 16: COVID-19 related rent concessions.
This article showcases three examples to illustrate how the practical expedient impacts the accounting for rent concessions negotiated during the COVID-19 pandemic: two for rent waivers, and one for rent deferrals. In practice, concessions may also comprise a combination of rent waivers and rent deferrals.Differences in accounting for modifications vs applying the practical expedient
The table below demonstrates how the accounting for rent concessions by lessees using the practical expedient will be much simpler than accounting for a lease modification. We therefore expect most lessees to apply the practical expedient to COVID-19 rent concessions.
| Accounting for concession as a MODIFICATION |
Applying PRACTICAL EXPEDIENT |
| Need to assess whether there is a modification or not | No need to perform assessment as to whether there is lease modification or not. However, do need to assess whether lessee meets the four criteria to apply the practical expedient. |
|
Recalculate lease liability on date rent concession agreed between lessee & lessor |
Recalculate lease liability on date rent concession agreed between lessee & lessor |
|
Use revised IBR |
Use original IBR |
|
Difference between carrying amount at modification date and remeasured lease liability adjusted against the balance on the RIGHT-OF-USE (ROU) ASSET |
Difference between carrying amount at modification date and remeasured lease liability recognised in PROFIT OR LOSS |
|
Effect of rent concession recognised in profit or loss over remaining life of ROU asset |
Effect of rent concession recognised in profit or loss in the period that the rent concession is agreed to |
Example 1 – Waiver of rental payments
Tourism Co is a tourism operator and entered into a three-year lease for office premises on 1 January 2019. Lease payments are $100 per month paid in arrears. Lessee A’s incremental borrowing rate is 5% or 0.42% per month.
Tourism Co’s business experienced a significant downturn towards the end of March 2020 when the New Zealand Government imposed a ‘Do not travel’ ban on all incoming tourism from overseas.
On 1 April 2020, the lessor therefore agreed to waive 100% of lease payments owing for six months from April to September 2020Tourism Co meets the criteria and wishes to apply the practical expedient in accounting for this rent concession in its 30 June 2020 financial statements.
From the table below, the present value of the future remaining lease payments on 1 April 2020, based on the original terms of the lease, is $2,007.
| Opening balance | Interest | Payments | Closing balance | |
| 1 April 2020 | $2,007 | $8 | $100 | $1,915 |
| 1 May 2020 | $1,915 | $8 | $100 | $1,823 |
| 1 June 2020 | $1,823 | $8 | $100 | $1,731 |
| 1 July 2020 | $1,731 | $7 | $100 | $1,638 |
| 1 August 2020 | $1,638 | $7 | $100 | $1,545 |
| 1 September 2020 | $1,545 | $6 | $100 | $1,451 |
| 1 October 2020 | $1,451 | $6 | $100 | $1,357 |
| 1 November2020 | $1,357 | $6 | $100 | $1,263 |
| 1 December 2020 | $1,263 | $5 | $100 | $1,168 |
| 1 January 2021 | $1,168 | $5 | $100 | $1,073 |
| 1 February 2021 | $1,073 | $4 | $100 | $977 |
| 1 March 2021 | $977 | $4 | $100 | $882 |
| 1 April 2021 | $882 | $4 | $100 | $785 |
| 1 May 2021 | $785 | $3 | $100 | $688 |
| 1 June 2021 | $688 | $3 | $100 | $591 |
| 1 July 2021 | $591 | $2 | $100 | $494 |
| 1 August 2021 | $494 | $2 | $100 | $396 |
| 1 September 2021 | $396 | $2 | $100 | $298 |
| 1 October 2021 | $298 | $1 | $100 | $199 |
| 1 November 2021 | $199 | $1 | $100 | $100 |
| 1 December 2021 | $100 | $0 | $100 | $0 |
Step one: Recalculate lease liability on 1 April 2020
Although the rent concession will be received over six months (i.e. partially in the 30 June 2020 financial year, and partially in the subsequent year), applying the practical expedient means that the benefit of the concession is accounted for when it is agreed between the lessee and lessor. The lease liability is therefore remeasured on 1 April 2020 (net present value is $1,415).
The amortisation table for the lease liability based on the revised lease terms (rounded to the nearest dollar) on 1 April 2020 is as follows:
| Opening | Interest | Payment | Closing | |
| 1 April 2020 | $1,415 | $6 | $0 | $1,421 |
| 1 May 2020 | $1,421 | $6 | $0 | $1,427 |
| 1 June 2020 | $1,427 | $6 | $0 | $1,433 |
| 1 July 2020 | $1,433 | $6 | $0 | $1,439 |
| 1 August 2020 | $1,439 | $6 | $0 | $1,445 |
| 1 September 2020 | $1,445 | $6 | $0 | $1,451 |
| 1 October 2020 | $1,451 | $6 | $100 | $1,357 |
| 1 November2020 | $1,357 | $6 | $100 | $1,263 |
| 1 December 2020 | $1,263 | $5 | $100 | $1,168 |
| 1 January 2021 | $1,168 | $5 | $100 | $1,073 |
| 1 February 2021 | $1,073 | $4 | $100 | $977 |
| 1 March 2021 | $977 | $4 | $100 | $882 |
| 1 April 2021 | $882 | $4 | $100 | $785 |
| 1 May 2021 | $785 | $3 | $100 | $688 |
| 1 June 2021 | $688 | $3 | $100 | $591 |
| 1 July 2021 | $591 | $2 | $100 | $494 |
| 1 August 2021 | $494 | $2 | $100 | $396 |
| 1 September 2021 | $396 | $2 | $100 | $298 |
| 1 October 2021 | $298 | $1 | $100 | $199 |
| 1 November 2021 | $199 | $1 | $100 | $100 |
| 1 December 2021 | $100 | $0 | $100 | $0 |
Step two: Recognise difference in profit or loss
The difference between the carrying amount of the original lease liability on 1 April 2020, and the revised lease liability (after taking into account revised lease payments from the concession) is recognised in profit or loss.
| 1 April 2020 | $ |
| Lease liability – prior to rent concession | 2,007 |
| Lease liability – after to rent concession | (1,415) |
| Difference | 592 |
Tourism Co therefore recognises the following journal entry in profit or loss on 1 April 2020:
Dr Lease liability $592
Cr Profit or loss $592
Example 2 – Deferral of rental payments
Tourism Co is a tourism operator and entered into a three-year lease for office premises on 1 January 2019. Lease payments are $100 per month paid in arrears. Lessee A’s incremental borrowing rate is 5% or 0.42% per month.
Tourism Co’s business experienced a significant downturn towards the end of March 2020 when the New Zealand Government imposed a ‘Do not travel’ ban on all incoming tourism from overseas.
On 1 April 2020, the lessor therefore agreed to defer 100% of lease payments owing for six months from April to September 2020, to be spread over the remaining term of the lease.Tourism Co meets the criteria and wishes to apply the practical expedient in accounting for this rent concession in its 30 June 2020 financial statements.
As in Example 1 above, the present value of the future remaining lease payments on 1 April 2020, based on the original terms of the lease, is $2,007.
Step one: Recalculate lease liability on 1 April 2020
As noted in Example 1 above, the benefit of the concession is accounted for when it is agreed between the lessee and lessor. The lease liability is therefore remeasured on 1 April 2020 (net present value is $1,982).
The amortisation table for the lease liability based on the revised lease terms (rounded to the nearest dollar) on 1 April 2020 is as follows:
| Opening | Interest | Payment | Closing | |
| 1 April 2020 | $1,982 | $8 | $0 | $1,990 |
| 1 May 2020 | $1,990 | $8 | $0 | $1,998 |
| 1 June 2020 | $1,998 | $8 | $0 | $2,006 |
| 1 July 2020 | $2,006 | $8 | $0 | $2,015 |
| 1 August 2020 | $2,015 | $8 | $0 | $2,023 |
| 1 September 2020 | $2,023 | $8 | $0 | $2,032 |
| 1 October 2020 | $2,032 | $8 | 140 | $1,900 |
| 1 November2020 | $1,900 | $8 | 140 | $1,768 |
| 1 December 2020 | $1,768 | $7 | 140 | $1,635 |
| 1 January 2021 | $1,635 | $7 | 140 | $1,502 |
| 1 February 2021 | $1,502 | $6 | 140 | $1,368 |
| 1 March 2021 | $1,368 | $6 | 140 | $1,234 |
| 1 April 2021 | $1,234 | $5 | 140 | $1,099 |
| 1 May 2021 | $1,099 | $5 | 140 | $964 |
| 1 June 2021 | $964 | $4 | 140 | $828 |
| 1 July 2021 | $828 | $3 | 140 | $691 |
| 1 August 2021 | $691 | $3 | 140 | $554 |
| 1 September 2021 | $554 | $2 | 140 | $417 |
| 1 October 2021 | $417 | $2 | 140 | $278 |
| 1 November 2021 | $278 | $1 | 140 | $139 |
| 1 December 2021 | $139 | $1 | 140 | $0 |
Step two: Recognise difference in profit or loss
The difference between the carrying amount of the original lease liability on 1 April 2020, and the revised lease liability (after taking into account revised lease payments from the concession) is recognised in profit or loss.
| 1 April 2020 | $ |
| Lease liability – prior to rent concession | 2,007 |
| Lease liability – after to rent concession | (1,982) |
| Difference | 25 |
Tourism Co therefore recognises the following journal entry in profit or loss on 1 April 2020:
Dr Lease liability $25
Cr Profit or loss $25
Example 3 – Lessee chooses to pay half rental during COVID-19 period, with waiver only being formally agreed to by the lessor at a later date
Examples 1 and 2 above illustrate a fact pattern where the lessor agrees to a rent concession at the start of the pandemic.
In practice, we are seeing examples where the lessee, of its own accord, chooses to pay less than 100% of the monthly lease payment, in the hope that a formal rent concession will be agreed by the lessor at a later date. Because there has been no upfront agreement between the lessee and the lessor, the lease liability is not remeasured until the new terms have been agreed, at which point the practical expedient can be applied.Tourism Co is a tourism operator and entered into a three-year lease for office premises on 1 January 2019. Lease payments are $100 per month paid in arrears. Lessee A’s incremental borrowing rate is 5% or 0.42% per month. There are no penalties or additional interest charges for late lease payments.
Tourism Co’s business experienced a significant downturn towards the end of March 2020 when the New Zealand Government imposed a ‘Do not travel’ ban on all incoming tourism from overseas.
Tourism Co decided to unilaterally pay only 50% of monthly rentals from April 2020. The lessor adopted a ‘wait and see’ approach and only formally agreed to waive the unpaid lease payments on 30 September 2020.
Tourism Co meets the criteria and wishes to apply the practical expedient in accounting for this rent concession. However, as the terms of the concession were not formally agreed until September, Tourism Co cannot account for the benefit of this concession (waiver) in its 30 June 2020 financial statements.From the table below, the present value of the future remaining lease payments on 1 April 2020, based on the original terms of the lease, is $2,007 (i.e. same as examples above) .
| Opening balance | Interest | Payments | Lease payments not made - Transferred to creditors | Closing balance | |
| 1 April 2020 | $2,007 | $8 | $50 | $50 | $1,915 |
| 1 May 2020 | $1,915 | $8 | $50 | $50 | $1,823 |
| 1 June 2020 | $1,823 | $8 | $50 | $50 | $1,731 |
| 1 July 2020 | $1,731 | $7 | $50 | $50 | $1,638 |
| 1 August 2020 | $1,638 | $7 | $50 | $50 | $1,545 |
| 1 September 2020 | $1,545 | $6 | $50 | $50 | $1,451 |
| 1 October 2020 | $1,451 | $6 | $100 | $1,357 | |
| 1 November2020 | $1,357 | $6 | $100 | $1,263 | |
| 1 December 2020 | $1,263 | $5 | $100 | $1,168 | |
| 1 January 2021 | $1,168 | $5 | $100 | $1,073 | |
| 1 February 2021 | $1,073 | $4 | $100 | $977 | |
| 1 March 2021 | $977 | $4 | $100 | $882 | |
| 1 April 2021 | $882 | $4 | $100 | $785 | |
| 1 May 2021 | $785 | $3 | $100 | $688 | |
| 1 June 2021 | $688 | $3 | $100 | $591 | |
| 1 July 2021 | $591 | $2 | $100 | $494 | |
| 1 August 2021 | $494 | $2 | $100 | $396 | |
| 1 September 2021 | $396 | $2 | $100 | $298 | |
| 1 October 2021 | $298 | $1 | $100 | $199 | |
| 1 November 2021 | $199 | $1 | $100 | $100 | |
| 1 December 2021 | $100 | $0 | $100 | $0 |
Note: Cumulative interest expense for April to September 2020 is $44.
The remainder of this example demonstrates one possible practical way of accounting for the reduced lease payments.
Step one: Recognise $50 cash payment made and related interest and principal repayments
The journal entries to recognise the effect of the reduced lease payments from April to September on a cumulative basis are as follows:
Dr Interest expense $44
Dr Lease liability $256
Cr Cash $300
Recognising cumulative interest expense from April to September of $44 and related principal reduction on lease liability
The actual cash payments of $50 each month reduce the lease liability by the principal portion (i.e. $50 less interest for the relevant month).
Step two: Reassign short payments to creditors/accrual account
Because there has been no formal agreement of rent waivers, there is no remeasurement of the lease liability on 1 April 2020. Instead, each month when Tourism Co chooses to pay $50 instead of $100, the amount of the ‘short payment’ also reduces the lease liability balance, and is transferred to a separate creditors/accruals account as the obligation cannot be derecognised until agreed with lessor.
The cumulative journal entries to reflect this are as follows:
Dr Lease liability $300
Cr Creditors/accruals $300
To transfer the unpaid lease payments to creditors/accruals
The amortisation table remains the same throughout the lease period. Interest expense does not change, despite half the lease payments not being made for April to September 2020. This is because the delayed payments do not attract penalties or additional interest.Step three: Recognise the rent waiver on 30 September 2020
When the rent waiver is eventually agreed with the lessor on 30 September 2020, the $300 benefit of the rent concession is recognised in profit or loss. The journal entry is as follows:
Dr Creditors/accruals $300
Cr Profit or loss $300
Step four: Remeasure lease liability on date rent concession is agreed (30 September 2020)
There is no need to remeasure the lease liability on the date that the rent concession is agreed to by the lessor (30 September 2020) because the amortisation table has not changed (unpaid rentals being transferred to a creditors/accruals account).
For more on the above, please contact your local BDO Representative.