The Accounting Standards Board (AcSB) has proposed amendments to Section 3065, Leases in an exposure draft published in September. The proposed amendments provide relief for both lessees and lessors on accounting for lease modifications received or granted as a result of the COVID-19 pandemic. These amendments would also apply to not-for-profit
Many private enterprises and not-for-profit organizations have negotiated lease payment deferrals or payment waivers. The current accounting guidance in Section 3065 requires that any modifications to a lease such as these be accounted for as a new lease. The major ramification of this is that leases are recorded on a straight line basis over the life of the lease. Thus, the impact the payment deferrals and waivers on the current financial period may not be significant if the lease is of a long duration. So while these entities would immediately benefit from the reduction in cash outflows the benefit would not necessarily be reflected in earnings which could impact items such as creditor financial covenants. Also, for any entity with many leases for which relief was received the requirement to apply the current accounting methods could be fairly onerous.
The proposed amendments are optional and would apply only to existing leases for changes occurring as a direct consequence of the COVID-19 pandemic. The relief would be limited to lease payments originally due on or before December 31, 2021. Modified leases that meet these requirements would not be accounted for as a new lease. This optional relief from the current accounting guidance would apply to both lessees and lessors.
Relief in the form of payment deferrals
For lease modifications resulting in a deferral of the original lease payments with no changes to the total payments required by the original lease contract, a lessee and a lessor would continue to account for the lease according to the terms of the original lease contract. To account for the modification, a lessee would recognize a lease payable and a lessor would recognize a lease receivable for the amount representing the deferred lease payments.
Relief in the form of payment waivers
For lease modifications resulting in a reduction in the total payments required by the original lease, a lessee and a lessor would continue to account for the lease according to the terms of the original lease contract. To account for the modification, a lessee and a lessor would recognize the reduction in total lease payments in net income in the period to which the lease payments relate.
In order to be transparent the proposed amendments also come along with some disclosure requirements. An entity electing to use the proposed temporary relief from the current requirements would need to disclose the following items:
- That the entity used the optional accounting relief
- In the case of a deferral of lease payments, the aggregate carrying amount of lease payables and lease receivables relating to the deferral
- In the case of a reduction of lease payments, the total amount recognized in net income for the reporting period relating to the reduced payments
Obviously time is of the essence here and so the exposure and comment period was very brief, having already ended on October 2. As similar changes to US GAAP and IFRS have already been made we expect these amendments to ASPE and ASNPO to be approved swiftly. The AcSB has indicated that the amendments would be effective for fiscal years ending on or after December 31, 2020, with earlier application permitted so that the practical expedient is available for most COVID-19-related lease modifications granted or received in 2020.
You can download a copy of the exposure draft here.