IFRS IC Agenda Decision Lessor Forgiveness of Lease Payments

In the absence of an IASB objection in October, the IFRS IC issued an Agenda Decision (see addendum to the September IFRIC Update, available here) addressing the recognition of rent concessions granted by the lessor in application of IFRS 9 and IFRS 16.

Keywords: Mazars, Thailand, IFRS, Lease payments, Lessor forgiveness

22 December 2022

This final decision follows a question submitted to the IFRS IC concerning a rent concession that modifies the terms and conditions of a lease contract classified as an operating lease by the lessor.

In the request submitted to the IFRS IC, the lessor legally released the lessee from its obligation to make specifically identified lease payments, some of which were amounts contractually due but not paid, while others were amounts not yet contractually due. No other changes were made to the lease contract.

The request asked the IFRS IC to clarify:

  • how the lessor should apply the expected credit loss model in IFRS 9 to the operating lease receivable before the rent concession is granted if it expects to forgive payments due from the lessee under the lease contract; and
  • whether the lessor applies the derecognition requirements in IFRS 9 or the lease modification requirements in IFRS 16 in accounting for the rent concession.

In its Agenda Decision, the IFRS IC answered these two questions in turn.

In its response to the first question, the IFRS IC clarified that:

  • in accordance with paragraph 2.1(b)(i) of IFRS 9, the lessor is required to apply the impairment requirements in IFRS 9 to the gross carrying amount of an operating lease receivable from the date it recognises the receivable; and
  • in accordance with paragraph 5.5.17 of IFRS 9, prior to granting the lease concession, the lessor measures the expected credit losses on its operating lease receivable in a way that reflects ‘an unbiased and probability-weighted amount’, the ‘time value of money’ and ‘reasonable and supportable information’. This measurement includes the lessor considering its expectations of forgiving lease payments recognised as part of that receivable.

In its response to the second question, the IFRS IC clarified that the lessor should account for the rent concession by applying:

  • the derecognition provisions of IFRS 9 (paragraphs 2.1(b)(i) and 3.2.3(a)) to forgiven lease payments that are recognised as an operating lease receivable, at the date the lease concession is granted; and
  • the lease modification provisions of IFRS 16 (paragraphs 81 and 87) to forgiven lease payments that have not been recognised as an operating lease receivable (since they were not yet contractually due), provided that the definition of a lease modification under IFRS 16 is met (i.e. a change in the consideration for a lease that was not part of the original terms and conditions of the lease).

Finally, the IFRS IC concluded that the principles and requirements of existing standards provide an adequate basis for answering these questions, and decided not to add a standard-setting project to the IASB’s work plan.