The impact of COVID-19 on IFRS 16 Leasing compliance

Last year, RentWorks published articles, explaining that IFRS 16 Leases replaced IAS 17 Leases and related interpretations effective for financial periods starting on or after 1 January 2019. Results issued for year-ends ending 31 December 2019 would have been the first reporting in line with the new lessee accounting model, except where IFRS 16 was early adopted. Therefore, some businesses have only recently, or are still in the process, of assessing the impact of the new requirements.

The primary purpose of the changes in IFRS 16 is to ensure that lease transactions that are economically similar, are reported in a consistent manner and that as a consequence financial transparency and visibility are improved. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases, with some exceptions and added benefits. This information will provide a basis for users to assess the amount, timing, and uncertainty of cash flows arising from leases. To meet this objective, lessees are required to recognise assets and liabilities arising from leases. The recognition of existing finance leases won’t change on transition to IFRS 16. However, in the case of existing operating leases the business has to elect, with either full or limited retrospective restatement, to reflect the requirements of IFRS 16.

Companies affected by IFRS 16 include all companies listed on the JSE (and their subsidiaries) and companies whose financial statements meet certain public interest scores and are, as a result thereof, regarded of public interest to the investment community, like state-owned organisations. Companies that voluntarily selected IFRS as its reporting framework are also affected by IFRS 16.

IASB announces amendment to IFRS 16 w.r.t. COVID-19-related rent concessions

Some recent good news to take note of is that due to the COVID-19 outbreak, which has had a dire effect on many companies worldwide, the International Accounting Standards Board (IASB) has issued an amendment to IFRS 16. According to Accountancy Daily, this adjustment will “make it easier for lessees to account for COVID-19-related rent concessions, such as rent holidays and temporary rent reductions,” and applies to coronavirus-related rent concessions that “reduce lease payments due on or before 30 June 2021.”

Companies are facing extraordinary challenges due to the COVID-19 pandemic and the relief provided by the amendment is welcomed by lessees. Many South African companies have only recently dealt with, or are still busy, with the transition to the new lessee accounting model and mastering its complexities.  This amendment grants the lessee the option to disregard the IFRS 16 requirement to assess whether a rent concession is a lease modification where the concession occurs as a direct consequence of COVID-19 and meets additional requirements. This amendment allows flexibility for the lessee as the selection is optional and the lessee is able to exercise the option at an individual contract level.

The specific requirements that a rent concession needs to meet, as referred to in above commentary, are:

• The revised consideration should be substantially the same, or less than, the consideration prior to change;
• The reduced lease payments only relate to payments that were originally due on or before 30 June 2021; and
• Other than the rent concession, there are no substantive changes to the other terms.

The IASB announced that the amendment is effective immediately and that early adoption is permitted.

Reach out to RentWorks

IFRS 16 will result in a more faithful representation of a company’s assets and liabilities, as well as greater transparency about the company’s financial leverage and employed capital. At RentWorks, IFRS 16 aligns with our core purpose of providing transparent, cost-effective, and sustainable solutions. Current and prospective RentWorks clients, can be assured that our specialist team has the expertise to assist your business with solutions to meet your business requirements and address the complexities of financial reporting standards.

Simply contact us on 0860 RENTAL/0860 736825.

For more information on IFRS 16 Leases, read the following articles previously published by RentWorks:

Does your business comply with IFRS 16?

Benefits of leasing remain under IFRS 16

Exemptions to IFRS 16: Leases

The impact IFRS 16 will have on businesses, from an accounting and operational perspective