FRC issues statement on Amendment to IFRS 16 – COVID-19-Related Rent Concessions
The FRC has issued a statement on accounting for lease modifications following the amendment to IFRS 16 – COVID-19-Related Rent Concessions
The Financial Reporting Council (FRC) has issued a statement confirming it will not pursue regulatory action where issuers take advantage of the provisions contained in the Accounting for Lease Modifications (Amendment to IFRS 16 – Covid-19-Related Rent Concessions) before its adoption by the EU.
IFRS 16, Leases, contains accounting requirements for changes in lease payments, including rent concessions. In May 2020, following an accelerated due process, the International Accounting Standards Board (IASB) published an amendment to IFRS 16 (Covid-19-Related Rent Concessions), providing practical reliefs for preparers accounting for Covid-19-related rent concessions. This amendment is effective for annual reporting periods beginning on or after 1 June 2020, but may also be applied early.
However, the amendment is still subject to EU adoption, which is expected to complete during Autumn 2020, and EU law is still applicable in the United Kingdom during the transition period following EU exit.
The FRC notes the European Securities and Markets Authority’s (ESMA) statement of 21 July 2020 and the Financial Conduct Authority’s (FCA) statement of 18 August 2020. Both the FCA and ESMA will not “prioritise supervision action” relating to issuers’ decisions on whether or not to apply the reliefs that the amendment provides for, noting that where issuers’ use the reliefs, they will diverge from IFRS 16 as currently endorsed by the EU.
The FRC supports these statements and will similarly not pursue regulatory action against companies taking advantage of the reliefs permitted by the amendment. Consistent with the FCA and ESMA announcements, the FRC is taking this stance in respect of both annual and interim accounts. Should endorsement of the amendment not proceed as expected this position will be reviewed.
Where companies use the reliefs permitted by the IFRS 16 amendment, they are expected to disclose this in the notes to their financial statements.
The FRC reminds directors of the need to ensure the impact of applying this amendment, prior to EU adoption, on the lawfulness of any distributions is carefully considered. The FRC also expects auditors to comply with all of their obligations, for example, any requirement to report under s837 of the Companies Act 2006.