by RSM IFRS Advisory Committee
Guidance in accordance with IFRS
As expected, the effects of COVID-19 are evolving rapidly and are creating unique circumstances for each entity. Recent developments by the International Accounting Standards Board (IASB) aim to alleviate some of the challenges posed to entities as they navigate through financial reporting implications as a result of COVID-19. We offer the following high-level overview of a few additional financial reporting considerations.
Impairment under IFRS 9 Financial Instruments
With regards to a significant increase in credit risk (SICR) since initial recognition, entities are generally required to recognize a loss allowance equal to the lifetime expected credit losses. Guidance has been issued by IASB and local banking regulators, (see Application of IFRS 9 in light of the coronavirus uncertainty) on how qualitative criteria should be incorporated to assess SICR in the light of loan deferrals, covenant breaches, and other assistance provided to borrowers by lenders in the current COVID-19 environment. Since SICR is a significant judgment, management might be required to disclose changes in how SICR is determined.
Entities are required to incorporate forward-looking information on macro-economic factors into their calculation of expected credit losses, which might prove difficult, and have added complexities in the current uncertain environment. Entities should factor government assistance programs and COVID-19 implications on the economy and long-term economic factors, among others when considering forward-looking macro-economic factors. Guidance has been issued by IASB and local banking regulators, on criteria that entities should consider when updating forwarding-looking macro-economic factors (see Application of IFRS 9 in light of the coronavirus uncertainty).
IFRS 16 Leases
As lessees look to rent concessions and other relief from lease payment, both lessors and lessees will need to consider whether changes to the original scope (for example, a reduction in the square footage of an office lease) and/or consideration would result in a lease modification under IFRS 16. For example, a rent concession would normally meet the definition of a lease modification, since there is a change in consideration that was not part of the original terms and conditions of the lease. This would result in re-measuring the lease liability at the effective date of modification using the interest rate implicit in the lease for the remainder of the lease term, or if indeterminable, the lessee’s incremental borrowing rate at the modification date.
However, the IASB received feedback and acknowledged that applying requirements under IFRS 16 to a large volume of COVID-19 related rent concessions could be practically difficult for lessees. In response to this feedback, the IASB published an exposure draft to propose providing an optional practical expedient to lessees (no change to lessors) to not account for COVID-19 rent concessions as lease modifications. Under the proposed expedient, a lessee receiving a COVID-19 rent concession would be required to meet all of the following conditions:
- The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change
- Any reduction in lease payments affects only payments originally due on or before June 30, 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments in 2020 and first half of 2021, and subsequently have increased lease payments for periods on or beyond July 1, 2021); and
- There is no substantive change to other terms and conditions of the lease.
The IASB proposed an effective date beginning for reporting periods on or after 1 June 2020, with earlier application permitted. Lessees will also be required to disclose amounts recognized in profit and loss to reflect changes in lease payments arising from COVID-19 related rent concessions if the practical expedient is applied. Entities electing to apply the expedient are required to use retrospective application, and recognize the cumulative effect of initial application as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment. Lessees would not be required to restate prior period figures and the IASB clarified that lessees will not be required to disclose the information required by paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
If the proposed practical expedient is not applicable, entities should determine the impact of any lease modifications under IFRS 16 and its effects, including whether there is a partial lease liability extinguishment and / or impairment of its right-of-use assets if there is an effect on ongoing economic performance. The IASB has published educational materials over IFRS 16 implications as a result of COVID-19 which can be found here.
Classification of Liabilities
The IASB has also proposed to defer the amendments to IAS 1 First-time Adoption of IFRS regarding the classification of liabilities that were issued in January 2020. Amendments were originally applicable to entities with annual reporting periods beginning on or after January 1, 2022, to be applied retrospectively in accordance with IAS 8, but proposal suggests deferral to January 1, 2023. The initial amendments to IAS 1 would ultimately result in some entities reclassifying debt from non-current to current, potentially affecting compliance with its loan covenants. The effective date for the amendments was therefore set to allow affected entities enough time for implementation and to renegotiate their debt covenants, if necessary. As a result of the COVID-19 pandemic, the IASB recognized that it has created pressures that could delay both implementation as well as renegotiation of loan covenants prompting the proposal for deferral. However, entities would still be permitted to adopt early.
COVID-19 virus will likely continue to have a significant adverse impact on the global economy and the financial reporting of all entities. Entities should continuously assess the changing conditions of the virus on their business and communicate this to other members of the entity and their auditors to identify solutions.