Page 1 of 15Updated May 2023The guidance below was developed by the Financial Reporting StandardsCommittee (FRSC) of the Hong Kong Institute of Certified Public Accountants(HKICPA) and is for general reference only. The HKICPA, FRSC and their staff do notaccept any responsibility or liability in respect of the guidance and anyconsequences that may arise from any person acting or refraining from action as aresult of any materials in the guidance. Members of the HKICPA and other users ofthis guidance should also read the original text of HKFRS 16 Leases, as found in theHKICPA Members’ Handbook for further reference and seek professional advicewhere necessary when applying the references contained in this guidance.The HKICPA's Standard Setting Department welcomes your comments and feedbackon this guidance, which should be sent to commentletters@hkicpa.org.hk.This guidance has been updated to incorporate the analysis and conclusion in theagenda decision Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16)
published by the IFRS Interpretations Committee (IC) in October 2022. In thatagenda decision, the IC clarified the accounting for a particular type of rentconcession from the perspective of a lessor.The analysis and conclusion in that agenda decision are relevant to entitiesapplying HKFRS as HKFRS are converged with IFRS Accounting Standards. Assuch, we have added Part II to this guidance to provide an example to illustratethe application of the agenda decision. In addition, minor edits have been madeto Part I of this guidance to clarify the fact patterns of the rent concessions. Newtext is underlined and deleted text is struck through in Part I.Please note that none of the rent concessions contemplated in this guidance isrelated to the COVID-19 pandemic and so the Amendment to HKFRS 16 Covid-19-Related Rent Concessions does not apply. Readers should refer to ourseparate publication for guidance on that amendment.Page 2 of 15Updated May 2023Part I - Illustrative examples on common rent concessionsIn this publication, we provide examples to illustrate application of HKFRS 16 Leasesto some common rent concession fact patterns observed in Hong Kong due to therecent market conditions when this publication was first issued in January 2020. Thispublication identifies key considerations in accounting for rent concessions for bothlessors and lessees for the fact patterns described in the background information.Other considerations and analysis may be necessary for different fact patterns.Background informationRetailer X (Lessee) leases retail spaces in different shopping malls in Hong Kong tosell cosmetic products. Retailer X enters into the following non-cancellable leasearrangements with different lessors:
LocationLessorLeaseterm#CommencementdateMonthly leasepayment*Contract 1for Shop 1Shoppingmall ALessor A5 years1 January20X9$100,000Contract 2for Shop 2Shoppingmall BLessor B3 years1 May20X9$80,000Contract 3for Shop 3Shoppingmall CLessor C3 years1 March20X9$120,000Note: The numbers used in the table above are for illustration purposes only.#There are no renewal/ termination options provided by the contracts*Lease payments are contractually due and paid on the first day of each month unless otherwise statedContract 3 contains a specific clause (referred to as a suspension clause) thatprovides for rent reduction or suspension of rent in the event that the premises (or anypart of them) are destroyed or damaged by catastrophic fire, typhoon, force majeureor are affected by other adverse events beyond the control of the tenant and landlordso as to render the premises unfit or not available for use by the tenant. Thesuspension clause in Contract 3 creates a contractual obligation for Lessor C tocompensate Retailer X if the leased premises are not available or unfit for use byRetailer X in such circumstances. Contracts 1 and 2 do not contain a similar specificclause.Page 3 of 15Updated May 2023Lessors A, B and C classify the leases with Retailer X above as operating leases andrecognise the lease payments as income on a straight-line basis applying HKFRS
16.81.Adverse events which are beyond the control of the Lessors and Retailer X took placeand affected the business of Retailer X. Shops 1, 2 and 3 were not available for useas a result of the closure of Shopping malls A, B and C for five full days duringSeptember 20X9. Retailer X’s actual sales from July to September 20X9 significantlyunderperformed in comparison to its projected sales and barely covered the leasepayments and other outgoings.As a result, Lessor A proactively approached and encouraged Retailer X to continueits business in Shopping mall A despite the prevailing economic condition. Inaddition, Retailer X informed Lessor B of the difficulties in operating and maintainingits business and asked Lessor B for rent concessions in early October 20X9. As at31 October 20X9, Retailer X has fully settled the original amount of lease paymentsup to the month of October 20X9 and thus, there is no operating lease receivable inthe lessors’ financial statements in relation to the three lease contracts.To preserve their good relationships with Retailer X, all of the Lessors agreed toprovide rent concessions to Retailer X. Lessors A and B each signed an addendum tothe original lease contracts with Retailer X on 1 November 20X9, which establishedtheir commitment in relation to the rent concession. Lessor C confirmed that it wouldexecute the suspension clause in the original contract and provide a rent concession.Other terms and conditions of the original lease contracts remain unchanged. Therent concessions are summarised as follows:
Page 4 of 15Updated May 2023LessorRent concession provided to Retailer XContract 1Lessor AOne-off lump sum subsidy payment of $50,000 tobe paid in December 20X9.Contract 2Lessor BFifty percent rent reduction for the three monthsfrom August to October 20X9, totaling $120,000[calculated as $80,000 x 50% x 3]. The reductiontakes the form of a one-off payment from Lessor Bin January 20Y0.Contract 3Lessor CRent rebate of $20,000 [agreed to be calculatedon a time apportioned basis: 5/30 x $120,000(based on the original lease payment forSeptember)] in respect of Shopping mall C closureunder specified circumstances as stipulated in thesuspension clause. The rebate is to be settledthrough Retailer X paying reduced rent of$100,000 in December 20X9.Question:
How do Retailer X and the Lessors account for the rent concessions underHKFRS 16?Analysis:
Contract 1Lessor A is not contractually obligated to provide a rent concession under the originallease contract, ie. the relief is given voluntarily by Lessor A as a result of freshnegotiation to encourage Retailer X to continue operating in Shopping mall A despitethe change in the economic outlook.The negotiation and agreement of the rent concession leads to a reduction in theconsideration for the lease that was not part of the original terms and conditions of thelease. The change meets the definition of a lease modification in Appendix A ofHKFRS 16.Page 5 of 15Updated May 2023On 1 November 20X9, the effective date of the lease modification (i.e. the datewhen Lessor A and Retailer X agreed to the terms of the rent concession), RetailerX and Lessor A account for the rent concession as follows:
Retailer XLessor A- Retailer X determines there is nochange in the lease term of themodified lease and remeasures thelease liability by discounting therevised lease payments using arevised discount rate [HKFRS 16.45(b)
and (c)].- The revised lease payments of$4,950,000 comprise the monthlylease payments over the remaininglease term less $50,000 receivablefrom Lessor A (calculated as $100,000x 50 months - $50,000).- The revised discount rate isdetermined as the interest rate implicitin the lease for the remainder of thelease term. If that rate cannot bereadily determined, Retailer X uses itsincremental borrowing rate at theeffective date of the modification (ie. 1November 20X9) [HKFRS 16.45(c)].- The remeasurement of the leaseliability is accounted for by making acorresponding adjustment to theright-of-use asset with no gain or lossrecognised because the modificationdoes not decrease the scope of thelease [HKFRS 16.46(b)].- As there is no outstandingoperating lease receivable inrelation to this contract, HKFRS 9Financial Instruments is notapplicable.- Lessor A accounts for themodification as a new lease,considering any prepaid or accruedlease payments relating to theoriginal lease as part of the leasepayments for the new lease[HKFRS 16.87].- Lessor A recognises the rentconcession of $50,000 as a leaseincentive, which reduces the leaseincome on a straight-line basis fromthe effective date of the modificationto the end of the lease term, ie. fromNovember 20X9 to December20Y3. This results in a reduction of$1,000 lease income per month(calculated as $50,000/50 months)
and the revised monthly leaseincome is$99,000 (calculated as $100,000 -$1,000) [HKFRS 16.81].Page 6 of 15Updated May 2023Contract 2Based on the same reasoning as for Contract 1, the rent concession is accounted foras a lease modification by both Retailer X and Lessor B. At the effective date of thelease modification, 1 November 20X9, Retailer X and Lessor B account for the rentconcession as follows:
Retailer XLessor B- Retailer X determines there is nochange in the lease term of themodified lease and remeasures thelease liability by discounting therevised lease payments ($2,280,000,calculated as $80,000 x 30 monthsless $120,000 rebate receivable),using a revised discount rate at theeffective date of the modification.There is a corresponding adjustment tothe right-of-use asset with no gain orloss recognised because themodification does not decrease thescope of the lease [HKFRS 16.45(b)
and (c) and 46(b)].- As there is no operating leasereceivable relating to the leasepayments from August to October20X9, HKFRS 9 is not applicable.- Lessor B applies the leasemodification requirements inHKFRS 16. Lessor B recognisesthe rent concession of $120,000 asa lease incentive, which reducesthe lease income on a straight-linebasis from the effective date of themodification to the end of the leaseterm, ie. from November 20X9 toApril 20Y2. This results in areduction of $4,000 lease incomeper month (calculated as$120,000/30 months) and therevised monthly lease income is$76,000 (calculated as $80,000 -$4,000) [HKFRS 16.81].Note:
For Contracts 1 and 2, the accounting treatment would be the same from theperspective of the lessee (Retailer X) regardless of whether the rent concession isrelated to lease payments for past months (ie. before the effective date of themodification) or forthcoming months during the lease term given that the rentconcession is not stipulated in the original contract. All lease modifications areaccounted for at the effective date of the modification by the lessee applying HKFRS
16.44-46. and, for operating leases, as a new lease by the lessor applying HKFRS
16.87.Page 7 of 15Updated May 2023As for the lessors, the accounting treatment involves a two-step process, viz. aconsideration of HKFRS 9 and then HKFRS 16. Part II of this publication illustratesthe accounting for a modified rent concession of Contract 2 where the rentconcession involves a waiver of operating lease receivable (i.e. amountscontractually due but not paid) as well as a reduction in lease payments that are notyet contractually due. As can be seen in Part II, the accounting outcome of the rentconcession will differ depending on the terms of the rent concession as well aswhether there is an operating lease receivable the settlement of which has beenforgiven.Page 8 of 15Updated May 2023Contract 3Contract 3 has a suspension clause specifying that compensation to Retailer X has tobe made by Lessor C if Shop 3 is not available for use by Retailer X due to anyadverse events beyond the control of Lessor C and Retailer X. When the contract wasentered into in March 20X9, both Retailer X and Lessor C considered it was extremelyunlikely that adverse events would happen such that Shopping mall C would beclosed and the shop would not be available for use. Nevertheless, Lessor C includessuch a suspension clause in all of its lease contracts as protection for lessees.Retailer X applied judgement and concluded at contract inception that the suspensionclause has no real economic substance because the events covered by thesuspension clause are extremely unlikely to occur. Retailer X considered the monthlylease payments in the contract essentially unavoidable and hence in-substance fixedlease payments [HKFRS 16.B42]. Therefore, on the commencement date of the lease,Retail X recognised a lease liability and a right-of-use asset including all leasepayments (ie $120,000 x 36 months) [HKFRS 16.22]. By the same token, Lessor Crecognises operating lease income on a straight-line basis based on a monthly rentalof $120,000.Lessor C is contractually obliged to compensate Retailer X because of the closure ofShopping mall C in September 20X9 in accordance with the suspension clausestipulated in the original terms and conditions of Contract 3. Therefore, the rent rebateis accounted for as part of the original lease, and not as a lease modification asdefined in Appendix A of HKFRS 16.Page 9 of 15Updated May 2023Retailer X and Lessor C account for the rent concession as follows:
Retailer XLessor C- Since the rebate is calculated based on thelost trading days due to the closure ofShopping mall C and is not dependent on anindex or a rate as described in HKFRS
16.27(b), any variability to the leasepayments is recognised when the event thattriggers those payments occurs; ie. whenShopping mall C is closed [HKFRS 16.38(b)].The rebate may be considered as a variablelease payment.- Retailer X recognises the $20,000 rebate inprofit and loss in September 20X9 becausethe rebate relates to closure of Shopping mallC which gave rise to the entitlement to thecompensation under the suspension clause.There would be a similar reduction in thelease liability to reflect the fact the rebate issettled through paying a lower rent in a futuremonth (i.e. December 20X9). The leaseliability would be discounted using theunchanged discount rate.- Lessor C recognises therebate of $20,000 due toRetailer X in profit or loss inSeptember 20X9.Reminders:
Remeasuring lease liabilities and reassessing the discount rateA lease modification is defined as a change in the scope of a lease, or theconsideration for a lease, that was not part of the original terms and conditions of thelease. In defining lease modifications, the IASB differentiated between scenarios thatcould result in the remeasurement of existing lease assets and lease liabilities that arenot lease modifications (for example, a change in the lease payments based oncontractual clauses included in the original contract) and those resulting in a leasemodification (for example, a change in the consideration resulting from changes to theterms and conditions of the original lease).Page 10 of 15Updated May 2023For lease modifications that in substance do not represent the creation of a separatelease and do not decrease the scope of the lease (as illustrated for Contracts 1 & 2),the IASB decided that a lessee should remeasure the existing lease liability using adiscount rate determined at the effective date of the modification and make acorresponding adjustment to the carrying amount of the right-of-use asset. The use ofa revised discount rate in remeasuring the lease liability reflects that, in modifying thelease, there is a change in the interest rate implicit in the lease (which the discountrate is intended to approximate). The adjustment to the carrying amount of theright-of-use asset reflects the fact there is effectively a change in the cost of theright-of-use asset as a result of the modification. This approach results in accountingoutcomes that faithfully represent the substance of a lease modification. [HKFRS
16.BC201-BC204]The IASB decided that, in most cases, an entity should not reassess the discount rateduring the lease term. This approach is generally consistent with the approach appliedto financial instruments accounting for using the effective interest method.Nonetheless, in the IASB’s view, there are some circumstances in which an entityshould reassess the discount rate to reflect current market economic conditions, forexample, when there is a change in the assessment of the lease term. In the IASB’sview, in those circumstances, the economics of the lease have changed and it isappropriate to reassess the discount rate to be consistent with the change in the leasepayments included in the measurement of the lease liability (and right-of-use asset)
[HKFRS 16.BC193-BC194]. HKFRS 16 does not require the use of a revised discountrate to remeasure lease liabilities if the changes in future lease payments are inaccordance with the terms and conditions of the original lease, provided that there areno changes to the lease term or the assessment of whether the lessee is reasonablycertain to exercise an option to purchase the underlying asset.Assessment of whether the suspension clause has real economic substanceWhen there is a specific clause in a contract that provides rights to the lessee andobligations to the lessor for rent reduction or suspension of rent upon the occurrenceof specified events leading to the premises being unfit or not available for use, thelessee and lessor perform an assessment at contract inception of whether the leasepayments related to such a clause are in-substance fixed or variable lease payments(e.g. they would consider whether the clause has real economic substance or not).The specific facts and circumstances of the lessor and the lessee, together with therelevant market and economic conditions should be considered in carrying out thisassessment, including considering the likelihood of the leased premise not beingPage 11 of 15Updated May 2023available under those specific circumstances.A lessee may have determined that a suspension clause did not have real economicsubstance in the past. However, entities should assess the likelihood of such eventsoccurring in the future when making judgement as to whether the suspension clausecontinues to have no real economic substance (for example, when entering into newlease contracts or on modification of existing lease contracts).The legal implication of suspension clausesLease contracts in Hong Kong are not standardised. Both lessors and lessees arerecommended to seek legal advice if they are unsure of the legal implications ofsuspension clauses, for example, advice aboutthe enforceability of a specific clause in a lease contract under specifiedcircumstances;
in the absence of having a specific clause in the contract, whether anyregulations or laws under the Hong Kong legal system (or under another legalsystem if the contract is subject to the laws of other jurisdictions) and/orcustomary business practice such that there is a legal obligation for the lessorto compensate the lessee.In addition, if the lessor has not yet agreed to offer any payments or compensation tothe lessee for events during a particular financial year, it may be necessary for bothparties to seek legal advice and consider subsequent events in order to establishwhether the lessor has an obligation to compensate for those events and the amountof compensation, respectively, at the year-end date.Fair value measurement of investment propertyWhen a lessor accounts for the leased asset as an investment property under HKAS40 Investment Property, the fair value of the investment property should exclude theprepaid or accrued operating lease income because the lessor recognises it as aseparate liability or asset [HKAS 40.50(c)].Page 12 of 15Updated May 2023Part II – Lessor forgiveness of lease paymentsIn October 2022, the IC published an agenda decision Lessor Forgiveness of LeasePayments to clarify the accounting for a particular type of rent concession from theperspective of a lessor. In the submitted fact pattern, the lessor forgives certain leasepayments due from the lessee, some of which are contractually due but not paid (i.e.the lessor has already recognised these amounts as operating lease receivable) andsome of which are not yet contractually due. No other changes are made to the leasecontract, nor are there any other negotiations between the lessor and the lessee thatmight affect the accounting for the rent concession.The agenda decision addresses the following two questions:
(a)
How the lessor applies the expected credit loss (ECL) model in IFRS 9 to theoperating lease receivable before the rent concession is granted if it expects toforgive payments due from the lessee under the lease contract; and(b)
Whether the lessor applies the derecognition requirements in IFRS 9 or the leasemodification requirements in IFRS 16 when accounting for the rent concession.The IC concluded that the lessor accounts for the rent concession described in thefact pattern under both IFRS 9 and IFRS 16 – it applies the ECL model andderecognition requirements in IFRS 9 to the operating lease receivable forgiven, andthe lease modification requirements in IFRS 16 to future forgiven lease payments(which had not been recognised as an operating lease receivable). The principlesand requirements are further explained in the following example.Illustrative exampleBuilding on the background information in Part I, we have modified the fact pattern ofContract 2 as follows for the purposes of this example:
(a) On 31 October 20X9, Lessor B and Retailer X signed an addendum to theoriginal lease contract to confirm the rent concession arrangement.(b) Retailer X has not yet paid the lease payment for October 20X9 at the time ofsigning the rent concession arrangement. As such, operating lease receivablewith a gross carrying amount of $80,000 remains outstanding in Lessor B’sfinancial statements as at 31 October 20X9.Page 13 of 15Updated May 2023(c) Instead of providing a one-off rent rebate of $120,000 in January 20Y0 (seedetails in Part I), Lessor B decided to forgive the lease payment of $80,000 forOctober 20X9 and reduce the lease payment to HK$40,000 for November 20X9.(d) No other changes are made to the lease contract, nor are there any othernegotiations between the lessor and the lessee that might affect the accountingfor the rent concession.Question:
How should Lessor B account for the rent concession?Analysis:
Lessor B grants the rent concession to Retailer X on 31 October 20X9. Lessor Blegally releases Retailer X from its obligation to make specifically identified leasepayments comprising:
(a) An amount of $80,000 that is contractually due but not paid (i.e. October 20X9lease payment). Lessor B has recognised such an amount as an operating leasereceivable.(b) An amount of $40,000 that is not yet contractually due (i.e. reduced leasepayment for November 20X9).Applying the agenda decision, the accounting considerations and financial impact toLessor B on this rent concession are summarised below:
Accounting considerationsFinancial impact to Lessor BApplying the impairment and derecognition requirements in HKFRS 9 to theoperating lease receivableBefore the rent concession is granted-By applying HKFRS 9.5.5.17, the ECL onthe operating lease receivable ismeasured on a probability-weightedbasis, by evaluating a range of possibleoutcomes, including its expectation offorgiving lease payments recognised aspart of that operating lease receivable.The expectation of forgiving the leasepayments reflects a potential cashshortfall which should be considered inthe ECL model.-Lessor B applies the ECL model tothe gross carrying amount of theoperating lease receivable of$80,000.-In considering the cash shortfallsfor measuring ECL, Lessor Bconsiders the expectation offorgiving lease payment of $80,000and recognises an impairment lossof the same amount in profit or loss.Page 14 of 15Updated May 2023Accounting considerationsFinancial impact to Lessor B-The lessor estimates the ECL to includeall cash shortfalls, being the differencebetween:
all contractual cash flows due underthe lease contract with the lesseethat are included in the grosscarrying amount of the operatinglease receivable, andall cash flows the lessor expects toreceive, using ‘reasonable andsupportable information’ about ‘pastevents, current conditions, andforecasts of future economicconditions’.On the date the rent concession is granted-Immediately prior to the date the leasepayments are forgiven, the lessorremeasures the ECL on the operatinglease receivable and recognises anychanges to the ECL in profit or loss.-The rent concession legally releases thelessee from its obligation to makespecifically identified lease payments.The lessor applies the derecognitionrequirements in HKFRS 9.3.2.3 toderecognise the operating leasereceivables relating to the forgiven leasepayments including any associated ECLallowance.-Lessor B considers that animpairment loss of $80,000 on theoperating lease receivable isappropriate.-Upon signing the addendum to theoriginal lease contract on 31October 20X9, Lessor B legallyreleases Retailer X from itsobligation to make lease paymentsof $120,000, of which $80,000 forOctober 20X9 has been recognisedas an operating lease receivable.Hence, Lessor B derecognises theoperating lease receivable and theassociated loss allowance, both at$80,000.Applying the lease modification requirements in HKFRS 16 to future leasepayments which are not yet contractually due-Where the rent concession is notincluded in the original lease and itmeets the definition of a leasemodification in HKFRS 16, the lessoraccounts for the modified lease as a newlease from the date of granting the rentconcession under HKFRS 16.87.-The lessor applies the lease modificationrequirements to future lease payments,considering any prepaid or accrued leasepayments relating to the original lease aspart of the lease payments for the newlease. Operating lease receivables arenot accrued lease payments.-Lessor B accounts for the modifiedlease as a new lease from 31October 20X9 and recognises therevised lease payments of$2,360,000 (calculated as $40,000+ $80,000 x 29 months) as incomeon a straight-line basis fromNovember 20X9 to April 20Y2. Thereduced lease payment of $40,000for the month of November 20X9results in a reduction of $1,333lease income per month (calculatedas $40,000/30 months) and therevised monthly lease income is$78,667 (calculated as $80,000 -$1,333) [HKFRS 16.81].Page 15 of 15Updated May 2023Note:
As we can see from this example, although the same amount of rent concession isgranted by Lessor B ($120,000), the accounting outcome here is different from that ofContract 2 in Part I.It is because in this example, Lessor B intends to forgive and has subsequentlyforgiven lease payment that is recognised as an operating lease receivable to whichthe impairment and derecognition requirements of HKFRS 9 apply. In measuring theECL, Lessor B should take into account the expectation of forgiving the leasepayments as a potential cash shortfall, resulting in an impairment loss of $80,000 inprofit or loss even before the rent concession is granted.In contrast, in Part I, Retailer X has fully settled the operating lease receivable at thetime the rent concession was contemplated. As such, there is no operating leasereceivable to which HKFRS 9 can be applied and the full amount of the rentconcession is amortised over the remaining lease term by a reduction of monthlylease income under HKFRS 16. This results in Lessor B recognising a lower leaseincome per month in Part I (i.e. $76,000 for Contract 2 in Part I as opposed to $78,667for Contract 2 in Part II).In light of the above, lessors that have previously granted rent concessions and/orintend to grant rent concessions in the future should pay attention to the accountingimplications of this agenda decision, as it might impact the timing of recognising theeffects of the rent concession in profit or loss. Lessors should revisit their accountingpolicy and consider reasonable and supportable information available without unduecost or effort about expectations of forgiveness of lease payments as at the reportingdate for the purposes of assessing ECL for operating lease receivables.Further observationFor Contracts 1 and 2 in Part I, if the lease payments are contractually due buthave not been settled by the time the rent concession is contemplated, Lessors Aand B would need to consider whether any rent concessions relate to rent for pastmonths for which an operating lease receivable has been recognised and, if so,assess whether an impairment loss is required on those operating leasereceivables. The lessors would also need to consider all the changes holistically todetermine whether their contractual right to the cash flows from the operating leasereceivable has expired in which case the derecognition requirements in HKFRS 9would apply.
Updated Illustrative examples on rent concessions
下载原件Page 1 of 15Updated May 2023The guidance below was developed by the Financial Reporting StandardsCommittee (FRSC) of the Hong Kong Institute of Certified Public Accountants(HKICPA) and is for general reference only. The HKICPA, FRSC and their staff do notaccept any responsibility or liability in respect of the guidance and anyconsequences that may arise from any person acting or refraining from action as aresult of any materials in the guidance. Members of the HKICPA and other users ofthis guidance should also read the original text of HKFRS 16 Leases, as found in theHKICPA Members’ Handbook for further reference and seek professional advicewhere necessary when applying the references contained in this guidance.The HKICPA's Standard Setting Department welcomes your comments and feedbackon this guidance, which should be sent to commentletters@hkicpa.org.hk.This guidance has been updated to incorporate the analysis and conclusion in theagenda decision Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16)
published by the IFRS Interpretations Committee (IC) in October 2022. In thatagenda decision, the IC clarified the accounting for a particular type of rentconcession from the perspective of a lessor.The analysis and conclusion in that agenda decision are relevant to entitiesapplying HKFRS as HKFRS are converged with IFRS Accounting Standards. Assuch, we have added Part II to this guidance to provide an example to illustratethe application of the agenda decision. In addition, minor edits have been madeto Part I of this guidance to clarify the fact patterns of the rent concessions. Newtext is underlined and deleted text is struck through in Part I.Please note that none of the rent concessions contemplated in this guidance isrelated to the COVID-19 pandemic and so the Amendment to HKFRS 16 Covid-19-Related Rent Concessions does not apply. Readers should refer to ourseparate publication for guidance on that amendment.Page 2 of 15Updated May 2023Part I - Illustrative examples on common rent concessionsIn this publication, we provide examples to illustrate application of HKFRS 16 Leasesto some common rent concession fact patterns observed in Hong Kong due to therecent market conditions when this publication was first issued in January 2020. Thispublication identifies key considerations in accounting for rent concessions for bothlessors and lessees for the fact patterns described in the background information.Other considerations and analysis may be necessary for different fact patterns.Background informationRetailer X (Lessee) leases retail spaces in different shopping malls in Hong Kong tosell cosmetic products. Retailer X enters into the following non-cancellable leasearrangements with different lessors:
LocationLessorLeaseterm#CommencementdateMonthly leasepayment*Contract 1for Shop 1Shoppingmall ALessor A5 years1 January20X9$100,000Contract 2for Shop 2Shoppingmall BLessor B3 years1 May20X9$80,000Contract 3for Shop 3Shoppingmall CLessor C3 years1 March20X9$120,000Note: The numbers used in the table above are for illustration purposes only.#There are no renewal/ termination options provided by the contracts*Lease payments are contractually due and paid on the first day of each month unless otherwise statedContract 3 contains a specific clause (referred to as a suspension clause) thatprovides for rent reduction or suspension of rent in the event that the premises (or anypart of them) are destroyed or damaged by catastrophic fire, typhoon, force majeureor are affected by other adverse events beyond the control of the tenant and landlordso as to render the premises unfit or not available for use by the tenant. Thesuspension clause in Contract 3 creates a contractual obligation for Lessor C tocompensate Retailer X if the leased premises are not available or unfit for use byRetailer X in such circumstances. Contracts 1 and 2 do not contain a similar specificclause.Page 3 of 15Updated May 2023Lessors A, B and C classify the leases with Retailer X above as operating leases andrecognise the lease payments as income on a straight-line basis applying HKFRS
16.81.Adverse events which are beyond the control of the Lessors and Retailer X took placeand affected the business of Retailer X. Shops 1, 2 and 3 were not available for useas a result of the closure of Shopping malls A, B and C for five full days duringSeptember 20X9. Retailer X’s actual sales from July to September 20X9 significantlyunderperformed in comparison to its projected sales and barely covered the leasepayments and other outgoings.As a result, Lessor A proactively approached and encouraged Retailer X to continueits business in Shopping mall A despite the prevailing economic condition. Inaddition, Retailer X informed Lessor B of the difficulties in operating and maintainingits business and asked Lessor B for rent concessions in early October 20X9. As at31 October 20X9, Retailer X has fully settled the original amount of lease paymentsup to the month of October 20X9 and thus, there is no operating lease receivable inthe lessors’ financial statements in relation to the three lease contracts.To preserve their good relationships with Retailer X, all of the Lessors agreed toprovide rent concessions to Retailer X. Lessors A and B each signed an addendum tothe original lease contracts with Retailer X on 1 November 20X9, which establishedtheir commitment in relation to the rent concession. Lessor C confirmed that it wouldexecute the suspension clause in the original contract and provide a rent concession.Other terms and conditions of the original lease contracts remain unchanged. Therent concessions are summarised as follows:
Page 4 of 15Updated May 2023LessorRent concession provided to Retailer XContract 1Lessor AOne-off lump sum subsidy payment of $50,000 tobe paid in December 20X9.Contract 2Lessor BFifty percent rent reduction for the three monthsfrom August to October 20X9, totaling $120,000[calculated as $80,000 x 50% x 3]. The reductiontakes the form of a one-off payment from Lessor Bin January 20Y0.Contract 3Lessor CRent rebate of $20,000 [agreed to be calculatedon a time apportioned basis: 5/30 x $120,000(based on the original lease payment forSeptember)] in respect of Shopping mall C closureunder specified circumstances as stipulated in thesuspension clause. The rebate is to be settledthrough Retailer X paying reduced rent of$100,000 in December 20X9.Question:
How do Retailer X and the Lessors account for the rent concessions underHKFRS 16?Analysis:
Contract 1Lessor A is not contractually obligated to provide a rent concession under the originallease contract, ie. the relief is given voluntarily by Lessor A as a result of freshnegotiation to encourage Retailer X to continue operating in Shopping mall A despitethe change in the economic outlook.The negotiation and agreement of the rent concession leads to a reduction in theconsideration for the lease that was not part of the original terms and conditions of thelease. The change meets the definition of a lease modification in Appendix A ofHKFRS 16.Page 5 of 15Updated May 2023On 1 November 20X9, the effective date of the lease modification (i.e. the datewhen Lessor A and Retailer X agreed to the terms of the rent concession), RetailerX and Lessor A account for the rent concession as follows:
Retailer XLessor A- Retailer X determines there is nochange in the lease term of themodified lease and remeasures thelease liability by discounting therevised lease payments using arevised discount rate [HKFRS 16.45(b)
and (c)].- The revised lease payments of$4,950,000 comprise the monthlylease payments over the remaininglease term less $50,000 receivablefrom Lessor A (calculated as $100,000x 50 months - $50,000).- The revised discount rate isdetermined as the interest rate implicitin the lease for the remainder of thelease term. If that rate cannot bereadily determined, Retailer X uses itsincremental borrowing rate at theeffective date of the modification (ie. 1November 20X9) [HKFRS 16.45(c)].- The remeasurement of the leaseliability is accounted for by making acorresponding adjustment to theright-of-use asset with no gain or lossrecognised because the modificationdoes not decrease the scope of thelease [HKFRS 16.46(b)].- As there is no outstandingoperating lease receivable inrelation to this contract, HKFRS 9Financial Instruments is notapplicable.- Lessor A accounts for themodification as a new lease,considering any prepaid or accruedlease payments relating to theoriginal lease as part of the leasepayments for the new lease[HKFRS 16.87].- Lessor A recognises the rentconcession of $50,000 as a leaseincentive, which reduces the leaseincome on a straight-line basis fromthe effective date of the modificationto the end of the lease term, ie. fromNovember 20X9 to December20Y3. This results in a reduction of$1,000 lease income per month(calculated as $50,000/50 months)
and the revised monthly leaseincome is$99,000 (calculated as $100,000 -$1,000) [HKFRS 16.81].Page 6 of 15Updated May 2023Contract 2Based on the same reasoning as for Contract 1, the rent concession is accounted foras a lease modification by both Retailer X and Lessor B. At the effective date of thelease modification, 1 November 20X9, Retailer X and Lessor B account for the rentconcession as follows:
Retailer XLessor B- Retailer X determines there is nochange in the lease term of themodified lease and remeasures thelease liability by discounting therevised lease payments ($2,280,000,calculated as $80,000 x 30 monthsless $120,000 rebate receivable),using a revised discount rate at theeffective date of the modification.There is a corresponding adjustment tothe right-of-use asset with no gain orloss recognised because themodification does not decrease thescope of the lease [HKFRS 16.45(b)
and (c) and 46(b)].- As there is no operating leasereceivable relating to the leasepayments from August to October20X9, HKFRS 9 is not applicable.- Lessor B applies the leasemodification requirements inHKFRS 16. Lessor B recognisesthe rent concession of $120,000 asa lease incentive, which reducesthe lease income on a straight-linebasis from the effective date of themodification to the end of the leaseterm, ie. from November 20X9 toApril 20Y2. This results in areduction of $4,000 lease incomeper month (calculated as$120,000/30 months) and therevised monthly lease income is$76,000 (calculated as $80,000 -$4,000) [HKFRS 16.81].Note:
For Contracts 1 and 2, the accounting treatment would be the same from theperspective of the lessee (Retailer X) regardless of whether the rent concession isrelated to lease payments for past months (ie. before the effective date of themodification) or forthcoming months during the lease term given that the rentconcession is not stipulated in the original contract. All lease modifications areaccounted for at the effective date of the modification by the lessee applying HKFRS
16.44-46. and, for operating leases, as a new lease by the lessor applying HKFRS
16.87.Page 7 of 15Updated May 2023As for the lessors, the accounting treatment involves a two-step process, viz. aconsideration of HKFRS 9 and then HKFRS 16. Part II of this publication illustratesthe accounting for a modified rent concession of Contract 2 where the rentconcession involves a waiver of operating lease receivable (i.e. amountscontractually due but not paid) as well as a reduction in lease payments that are notyet contractually due. As can be seen in Part II, the accounting outcome of the rentconcession will differ depending on the terms of the rent concession as well aswhether there is an operating lease receivable the settlement of which has beenforgiven.Page 8 of 15Updated May 2023Contract 3Contract 3 has a suspension clause specifying that compensation to Retailer X has tobe made by Lessor C if Shop 3 is not available for use by Retailer X due to anyadverse events beyond the control of Lessor C and Retailer X. When the contract wasentered into in March 20X9, both Retailer X and Lessor C considered it was extremelyunlikely that adverse events would happen such that Shopping mall C would beclosed and the shop would not be available for use. Nevertheless, Lessor C includessuch a suspension clause in all of its lease contracts as protection for lessees.Retailer X applied judgement and concluded at contract inception that the suspensionclause has no real economic substance because the events covered by thesuspension clause are extremely unlikely to occur. Retailer X considered the monthlylease payments in the contract essentially unavoidable and hence in-substance fixedlease payments [HKFRS 16.B42]. Therefore, on the commencement date of the lease,Retail X recognised a lease liability and a right-of-use asset including all leasepayments (ie $120,000 x 36 months) [HKFRS 16.22]. By the same token, Lessor Crecognises operating lease income on a straight-line basis based on a monthly rentalof $120,000.Lessor C is contractually obliged to compensate Retailer X because of the closure ofShopping mall C in September 20X9 in accordance with the suspension clausestipulated in the original terms and conditions of Contract 3. Therefore, the rent rebateis accounted for as part of the original lease, and not as a lease modification asdefined in Appendix A of HKFRS 16.Page 9 of 15Updated May 2023Retailer X and Lessor C account for the rent concession as follows:
Retailer XLessor C- Since the rebate is calculated based on thelost trading days due to the closure ofShopping mall C and is not dependent on anindex or a rate as described in HKFRS
16.27(b), any variability to the leasepayments is recognised when the event thattriggers those payments occurs; ie. whenShopping mall C is closed [HKFRS 16.38(b)].The rebate may be considered as a variablelease payment.- Retailer X recognises the $20,000 rebate inprofit and loss in September 20X9 becausethe rebate relates to closure of Shopping mallC which gave rise to the entitlement to thecompensation under the suspension clause.There would be a similar reduction in thelease liability to reflect the fact the rebate issettled through paying a lower rent in a futuremonth (i.e. December 20X9). The leaseliability would be discounted using theunchanged discount rate.- Lessor C recognises therebate of $20,000 due toRetailer X in profit or loss inSeptember 20X9.Reminders:
Remeasuring lease liabilities and reassessing the discount rateA lease modification is defined as a change in the scope of a lease, or theconsideration for a lease, that was not part of the original terms and conditions of thelease. In defining lease modifications, the IASB differentiated between scenarios thatcould result in the remeasurement of existing lease assets and lease liabilities that arenot lease modifications (for example, a change in the lease payments based oncontractual clauses included in the original contract) and those resulting in a leasemodification (for example, a change in the consideration resulting from changes to theterms and conditions of the original lease).Page 10 of 15Updated May 2023For lease modifications that in substance do not represent the creation of a separatelease and do not decrease the scope of the lease (as illustrated for Contracts 1 & 2),the IASB decided that a lessee should remeasure the existing lease liability using adiscount rate determined at the effective date of the modification and make acorresponding adjustment to the carrying amount of the right-of-use asset. The use ofa revised discount rate in remeasuring the lease liability reflects that, in modifying thelease, there is a change in the interest rate implicit in the lease (which the discountrate is intended to approximate). The adjustment to the carrying amount of theright-of-use asset reflects the fact there is effectively a change in the cost of theright-of-use asset as a result of the modification. This approach results in accountingoutcomes that faithfully represent the substance of a lease modification. [HKFRS
16.BC201-BC204]The IASB decided that, in most cases, an entity should not reassess the discount rateduring the lease term. This approach is generally consistent with the approach appliedto financial instruments accounting for using the effective interest method.Nonetheless, in the IASB’s view, there are some circumstances in which an entityshould reassess the discount rate to reflect current market economic conditions, forexample, when there is a change in the assessment of the lease term. In the IASB’sview, in those circumstances, the economics of the lease have changed and it isappropriate to reassess the discount rate to be consistent with the change in the leasepayments included in the measurement of the lease liability (and right-of-use asset)
[HKFRS 16.BC193-BC194]. HKFRS 16 does not require the use of a revised discountrate to remeasure lease liabilities if the changes in future lease payments are inaccordance with the terms and conditions of the original lease, provided that there areno changes to the lease term or the assessment of whether the lessee is reasonablycertain to exercise an option to purchase the underlying asset.Assessment of whether the suspension clause has real economic substanceWhen there is a specific clause in a contract that provides rights to the lessee andobligations to the lessor for rent reduction or suspension of rent upon the occurrenceof specified events leading to the premises being unfit or not available for use, thelessee and lessor perform an assessment at contract inception of whether the leasepayments related to such a clause are in-substance fixed or variable lease payments(e.g. they would consider whether the clause has real economic substance or not).The specific facts and circumstances of the lessor and the lessee, together with therelevant market and economic conditions should be considered in carrying out thisassessment, including considering the likelihood of the leased premise not beingPage 11 of 15Updated May 2023available under those specific circumstances.A lessee may have determined that a suspension clause did not have real economicsubstance in the past. However, entities should assess the likelihood of such eventsoccurring in the future when making judgement as to whether the suspension clausecontinues to have no real economic substance (for example, when entering into newlease contracts or on modification of existing lease contracts).The legal implication of suspension clausesLease contracts in Hong Kong are not standardised. Both lessors and lessees arerecommended to seek legal advice if they are unsure of the legal implications ofsuspension clauses, for example, advice aboutthe enforceability of a specific clause in a lease contract under specifiedcircumstances;
in the absence of having a specific clause in the contract, whether anyregulations or laws under the Hong Kong legal system (or under another legalsystem if the contract is subject to the laws of other jurisdictions) and/orcustomary business practice such that there is a legal obligation for the lessorto compensate the lessee.In addition, if the lessor has not yet agreed to offer any payments or compensation tothe lessee for events during a particular financial year, it may be necessary for bothparties to seek legal advice and consider subsequent events in order to establishwhether the lessor has an obligation to compensate for those events and the amountof compensation, respectively, at the year-end date.Fair value measurement of investment propertyWhen a lessor accounts for the leased asset as an investment property under HKAS40 Investment Property, the fair value of the investment property should exclude theprepaid or accrued operating lease income because the lessor recognises it as aseparate liability or asset [HKAS 40.50(c)].Page 12 of 15Updated May 2023Part II – Lessor forgiveness of lease paymentsIn October 2022, the IC published an agenda decision Lessor Forgiveness of LeasePayments to clarify the accounting for a particular type of rent concession from theperspective of a lessor. In the submitted fact pattern, the lessor forgives certain leasepayments due from the lessee, some of which are contractually due but not paid (i.e.the lessor has already recognised these amounts as operating lease receivable) andsome of which are not yet contractually due. No other changes are made to the leasecontract, nor are there any other negotiations between the lessor and the lessee thatmight affect the accounting for the rent concession.The agenda decision addresses the following two questions:
(a)
How the lessor applies the expected credit loss (ECL) model in IFRS 9 to theoperating lease receivable before the rent concession is granted if it expects toforgive payments due from the lessee under the lease contract; and(b)
Whether the lessor applies the derecognition requirements in IFRS 9 or the leasemodification requirements in IFRS 16 when accounting for the rent concession.The IC concluded that the lessor accounts for the rent concession described in thefact pattern under both IFRS 9 and IFRS 16 – it applies the ECL model andderecognition requirements in IFRS 9 to the operating lease receivable forgiven, andthe lease modification requirements in IFRS 16 to future forgiven lease payments(which had not been recognised as an operating lease receivable). The principlesand requirements are further explained in the following example.Illustrative exampleBuilding on the background information in Part I, we have modified the fact pattern ofContract 2 as follows for the purposes of this example:
(a) On 31 October 20X9, Lessor B and Retailer X signed an addendum to theoriginal lease contract to confirm the rent concession arrangement.(b) Retailer X has not yet paid the lease payment for October 20X9 at the time ofsigning the rent concession arrangement. As such, operating lease receivablewith a gross carrying amount of $80,000 remains outstanding in Lessor B’sfinancial statements as at 31 October 20X9.Page 13 of 15Updated May 2023(c) Instead of providing a one-off rent rebate of $120,000 in January 20Y0 (seedetails in Part I), Lessor B decided to forgive the lease payment of $80,000 forOctober 20X9 and reduce the lease payment to HK$40,000 for November 20X9.(d) No other changes are made to the lease contract, nor are there any othernegotiations between the lessor and the lessee that might affect the accountingfor the rent concession.Question:
How should Lessor B account for the rent concession?Analysis:
Lessor B grants the rent concession to Retailer X on 31 October 20X9. Lessor Blegally releases Retailer X from its obligation to make specifically identified leasepayments comprising:
(a) An amount of $80,000 that is contractually due but not paid (i.e. October 20X9lease payment). Lessor B has recognised such an amount as an operating leasereceivable.(b) An amount of $40,000 that is not yet contractually due (i.e. reduced leasepayment for November 20X9).Applying the agenda decision, the accounting considerations and financial impact toLessor B on this rent concession are summarised below:
Accounting considerationsFinancial impact to Lessor BApplying the impairment and derecognition requirements in HKFRS 9 to theoperating lease receivableBefore the rent concession is granted-By applying HKFRS 9.5.5.17, the ECL onthe operating lease receivable ismeasured on a probability-weightedbasis, by evaluating a range of possibleoutcomes, including its expectation offorgiving lease payments recognised aspart of that operating lease receivable.The expectation of forgiving the leasepayments reflects a potential cashshortfall which should be considered inthe ECL model.-Lessor B applies the ECL model tothe gross carrying amount of theoperating lease receivable of$80,000.-In considering the cash shortfallsfor measuring ECL, Lessor Bconsiders the expectation offorgiving lease payment of $80,000and recognises an impairment lossof the same amount in profit or loss.Page 14 of 15Updated May 2023Accounting considerationsFinancial impact to Lessor B-The lessor estimates the ECL to includeall cash shortfalls, being the differencebetween:
all contractual cash flows due underthe lease contract with the lesseethat are included in the grosscarrying amount of the operatinglease receivable, andall cash flows the lessor expects toreceive, using ‘reasonable andsupportable information’ about ‘pastevents, current conditions, andforecasts of future economicconditions’.On the date the rent concession is granted-Immediately prior to the date the leasepayments are forgiven, the lessorremeasures the ECL on the operatinglease receivable and recognises anychanges to the ECL in profit or loss.-The rent concession legally releases thelessee from its obligation to makespecifically identified lease payments.The lessor applies the derecognitionrequirements in HKFRS 9.3.2.3 toderecognise the operating leasereceivables relating to the forgiven leasepayments including any associated ECLallowance.-Lessor B considers that animpairment loss of $80,000 on theoperating lease receivable isappropriate.-Upon signing the addendum to theoriginal lease contract on 31October 20X9, Lessor B legallyreleases Retailer X from itsobligation to make lease paymentsof $120,000, of which $80,000 forOctober 20X9 has been recognisedas an operating lease receivable.Hence, Lessor B derecognises theoperating lease receivable and theassociated loss allowance, both at$80,000.Applying the lease modification requirements in HKFRS 16 to future leasepayments which are not yet contractually due-Where the rent concession is notincluded in the original lease and itmeets the definition of a leasemodification in HKFRS 16, the lessoraccounts for the modified lease as a newlease from the date of granting the rentconcession under HKFRS 16.87.-The lessor applies the lease modificationrequirements to future lease payments,considering any prepaid or accrued leasepayments relating to the original lease aspart of the lease payments for the newlease. Operating lease receivables arenot accrued lease payments.-Lessor B accounts for the modifiedlease as a new lease from 31October 20X9 and recognises therevised lease payments of$2,360,000 (calculated as $40,000+ $80,000 x 29 months) as incomeon a straight-line basis fromNovember 20X9 to April 20Y2. Thereduced lease payment of $40,000for the month of November 20X9results in a reduction of $1,333lease income per month (calculatedas $40,000/30 months) and therevised monthly lease income is$78,667 (calculated as $80,000 -$1,333) [HKFRS 16.81].Page 15 of 15Updated May 2023Note:
As we can see from this example, although the same amount of rent concession isgranted by Lessor B ($120,000), the accounting outcome here is different from that ofContract 2 in Part I.It is because in this example, Lessor B intends to forgive and has subsequentlyforgiven lease payment that is recognised as an operating lease receivable to whichthe impairment and derecognition requirements of HKFRS 9 apply. In measuring theECL, Lessor B should take into account the expectation of forgiving the leasepayments as a potential cash shortfall, resulting in an impairment loss of $80,000 inprofit or loss even before the rent concession is granted.In contrast, in Part I, Retailer X has fully settled the operating lease receivable at thetime the rent concession was contemplated. As such, there is no operating leasereceivable to which HKFRS 9 can be applied and the full amount of the rentconcession is amortised over the remaining lease term by a reduction of monthlylease income under HKFRS 16. This results in Lessor B recognising a lower leaseincome per month in Part I (i.e. $76,000 for Contract 2 in Part I as opposed to $78,667for Contract 2 in Part II).In light of the above, lessors that have previously granted rent concessions and/orintend to grant rent concessions in the future should pay attention to the accountingimplications of this agenda decision, as it might impact the timing of recognising theeffects of the rent concession in profit or loss. Lessors should revisit their accountingpolicy and consider reasonable and supportable information available without unduecost or effort about expectations of forgiveness of lease payments as at the reportingdate for the purposes of assessing ECL for operating lease receivables.Further observationFor Contracts 1 and 2 in Part I, if the lease payments are contractually due buthave not been settled by the time the rent concession is contemplated, Lessors Aand B would need to consider whether any rent concessions relate to rent for pastmonths for which an operating lease receivable has been recognised and, if so,assess whether an impairment loss is required on those operating leasereceivables. The lessors would also need to consider all the changes holistically todetermine whether their contractual right to the cash flows from the operating leasereceivable has expired in which case the derecognition requirements in HKFRS 9would apply.