Page 1 of 10The guidance below was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and is forgeneral reference only. The HKICPA, FRSC and their staff do not accept any responsibility orliability in respect of the guidance and any consequences that may arise from any personacting or refraining from action as a result of any materials in the guidance. Members ofthe HKICPA and other users of this guidance should also read the original text of HKFRS 16Leases, as found in the HKICPA Members’ Handbook (https://www.hkicpa.org.hk/-/media/HKICPA-Website/Members-Handbook/volumeII/hkfrs16.pdf) for further referenceand seek professional advice where necessary when applying the references contained inthis guidance.The HKICPA's Standard Setting Department welcomes your comments and feedback on thispaper, which should be sent to commentletters@hkicpa.org.hk.Illustrative examples on covid-19-related rent concessionsIn January 2020, the FRSC of the HKICPA published examples on rent concessions(January illustrative examples)1 to illustrate the application of HKFRS 16 Leases tosome common rent concession fact patterns observed in Hong Kong due to themarket conditions experienced at that time following months of political unrest.As a result of the covid-19 pandemic, many lessors are providing rent concessions tolessees. HKFRS/IFRS 16 Leases specifies how lessees account for changes in leasepayments, including rent concessions. However, the International AccountingStandards Board (IASB) was informed that applying those requirements to apotentially large volume of covid-19-related rent concessions could be challenging inpractice, particularly for lessees that are currently preparing their financial statementsapplying the new lessee accounting model in IFRS 16 for the first time. The IASBresponded by issuing the following:
educational material in April 2020 to highlight requirements within IFRS 16and other IFRS Standards that are relevant for companies considering how toaccount for rent concessions granted as a result of the covid-19 pandemic2;
and1 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/06_New-and-major-stds/ie161.pdf2 https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-16/ifrs-16-rent-concession-educational-material.pdfPage 2 of 10Covid-19-Related Rent Concessions (Amendment to IFRS 16) in May 2020,which provides lessees with a practical expedient for covid-19-related rentconcessions. No change has been made to lessor accounting. The Instituteissued an equivalent amendment to HKFRS 16 in June 2020.Covid-19-Related Rent Concessions (Amendment to HKFRS 16)
Paragraph 46A of the Amendment to HKFRS 16 provides a practical expedient that alessee may elect not to assess whether a rent concession that meets the conditionsin paragraph 46B is a lease modification. A lessee that makes this election shallaccount for any change in lease payments resulting from such a rent concession inthe same way as if the change were not a lease modification.Paragraph 46B of the Amendment to HKFRS 16 states that the practical expedient inparagraph 46A applies only to rent concessions occurring as a direct consequence ofthe covid-19 pandemic and only if all of the following conditions are met:
a) the change in lease payments results in revised consideration for the leasethat is substantially the same as, or less than, the consideration for the leaseimmediately preceding the change;
b) any reduction in lease payments affects only payments originally due on orbefore 30 June 2021; andc) there is no substantive change to other terms and conditions of the lease.A lessee that chooses to apply the practical expedient shall apply it consistently to alllease contracts with similar characteristics and in similar circumstances, as requiredby paragraph 2 of HKFRS 16 [paragraph BC205C of the Amendment to HKFRS 16].Paragraphs BC205E(a)-(c) of the Amendment to HKFRS 16 provide examples ofaccounting for changes in lease payments if they are eligible for applying thepractical expedient:
a) forgiveness or waiver of lease payments would generally be accounted for asa variable lease payment applying paragraph 38 of HKFRS 16 with acorresponding adjustment to the lease liability.b) a change in lease payments that reduces payments in one period butproportionally increases payments in another does not extinguish the lessee’slease liability or change the consideration for the lease – instead, it changesonly the timing of individual payments. In this case, applying paragraph 36 ofHKFRS 16, a lessee would continue to both recognise interest on the leaseliability and reduce that liability to reflect lease payments made to the lessor.Page 3 of 10c) a reduction in lease payments, incorporating both a forgiveness of paymentsand a change in the timing of payments.Note: Even in the absence of the practical expedient, a change in lease paymentsdescribed in (b) does not meet the definition of a lease modification as there is nochange in the scope of a lease, or the consideration for a lease (i.e. the accountingwould be the same regardless of whether the practical expedient is elected).However, applying the practical expedient would mean that the assessment ofwhether the change in lease payments described in (b) meets the definition of alease modification would not be required.Paragraph 60A of the Amendment to HKFRS 16 requires a lessee that applies thepractical expedient in paragraph 46A to disclose:
a) that it has applied the practical expedient to all rent concessions that meet theconditions in paragraph 46B or, if not applied to all such rent concessions,information about the nature of the contracts to which it has applied thepractical expedient; andb) the amount recognised in profit or loss for the reporting period to reflectchanges in lease payments that arise from rent concessions to which thelessee has applied the practical expedient in paragraph 46A.The Amendment to HKFRS 16 is effective for annual reporting periods beginning onor after 1 June 2020. Earlier application is permitted, including in financial statements– interim or annual – not authorised for issue at 4 June 2020, the date theamendment was issued [paragraphs C1A and BC205B of the Amendment to HKFRS16].If a rent concession provided for a particular lease contract either:
a)
does not meet the conditions to apply the practical expedient, orb) meets the conditions to apply the practical expedient, but the lessee does notelect to apply the practical expedient for lease contracts with similarcharacteristics and in similar circumstances to that particular lease contract(see paragraph 2 of HKFRS 16),then the lessee must determine whether the rent concession meets the definition of alease modification in Appendix A of HKFRS 16. If the rent concession is a leasemodification, the requirements for lessee accounting under paragraphs 44-46 ofHKFRS 16 apply (as described in the January illustrative examples).Page 4 of 10Background information for the illustrative examplesThis publication provides examples to illustrate the application of the Amendment toHKFRS 16 to common rent concession fact patterns observed in Hong Kong asdescribed below. The examples do not consider the accounting for the related right-of-use asset in each of the contracts.Other considerations and analysis may be necessary depending on the facts andcircumstances of each lessee.Details of Entity A’s lease contractsEntity A (Lessee) leases different locations in Hong Kong for operation as gymcenters. Entity A enters into the following non-cancellable lease arrangements withdifferent lessors:
LocationLessorLeaseterm#CommencementdateMonthly leasepaymentContract 1for Gym 1Plaza XLessor X5 years1 March 2019$100,000Contract 2for Gym 2Plaza YLessor Y3 years1 January 2019$80,000Contract 3for Gym 3Plaza ZLessor Z3 years1 April 2019$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 made on the first day of each month for Contracts 1 and 2.Lease payments are made on the first day of April, July, October and January on aquarterly basis for Contract 3 (i.e. payment of next 3 months’ rent in advance).None of the contracts contain a force majeure or similar clause that could trigger rentreduction or suspension of rent in the event that the premises (or any part of them)
are affected by events beyond the control of the contracted parties so as to renderthem unfit or unavailable for use by the tenant.Rent concessions provided to Entity ACertain social events took place and affected Entity A’s business during the secondhalf of 2019. Gym 1 was not available for use for 9 full days during November 2019due to the closure of Plaza X. In addition, Entity A’s business was affected by thePage 5 of 10covid-19 pandemic outbreak in Hong Kong in early 2020. Gyms 1, 2 and 3 were allclosed for 42 full days during March to May 2020 due to the government closureorder. Entity A’s actual performance during these affected periods was significantlyworse than forecast. In view of the situation, all of the Lessors agreed to provide rentconcessions to Entity A as described below.Lessor X signed an addendum to the original lease contract with Entity A on 1January 2020 (Addendum 1) and another addendum on 1 April 2020 (Addendum 2).Based on the negotiation between Entity A and Lessor X, and as specified in theaddendums:
as agreed on 1 January 2020, the 10% rent reduction for the three monthsfrom November 2019 to January 2020 was compensation to Entity A for theclosure of Plaza X in November 2019 as a result of the social events.as agreed on 1 April 2020, the rent concession was a forgiveness of the rentfor Gym 1 in April 2020 as a result of the HKSAR government actions due tothe covid-19 pandemic.Lessors Y and Z each signed an addendum to the original lease contract with EntityA on 1 April 2020. The reason for the rent concession is not specified in theaddendums. However, the main issue discussed during the negotiation of the rentconcession between Entity A and Lessors Y and Z was the effect of covid-19 andrelated government closure order.The signed addendums established the lessors’ commitment in relation to the rentconcessions and the rent concessions are unconditional upon signing theaddendums. Other terms and conditions of the original lease contracts remainunchanged. The rent concessions provided to Entity A are summarised as follows:
LessorRent concessions provided to Entity AContract 1Lessor XAddendum 1:
A 10% rent reduction for the three months fromNovember 2019 to January 2020, totaling $30,000 forthe 9 days’ closure[calculated as $100,000 x 10% x 3].Addendum 2:
Forgiveness of rent for April 2020 of $100,000.Contract 2Lessor YDeferral of rent for April, May and June 2020, which is tobe paid in January, February and March 2021 (i.e. aPage 6 of 10three-month rent holiday from April to June 2020, but arevised monthly lease payments of $160,000 duringJanuary to March 2021).Contract 3Lessor ZA 20% rent rebate for the month of March 2020 (paid incash on 1 April 2020) and a 20% rent reduction for themonth of April 2020, totaling $48,000 [calculated as$120,000 x 20% x 2].Entity A’s reporting periodEntity A has a December year-end and chooses to early adopt the Amendment toHKFRS 16 in its interim financial statements for the period ending 30 June 2020 (i.e.the date of initial application of the Amendment to HKFRS 16 is 1 January 2020).Entity A elects to apply the practical expedient to all eligible rent concessions for all ofits lease contracts applying paragraph 2 of HKFRS 16.Question: How does Entity A account for the rent concessions for the six-month financial period ending 30 June 2020?Note: The following analysis would also be applicable to an entity with a March year-end that is currently preparing its annual financial statements for the year ended 31March 2020 and chooses early application of the Amendment to HKFRS 16 in thosefinancial statements.Contract 1Rent concession under Addendum 1 signed on 1 January 2020Considering the reason for the negotiation of the rent concession, the amountgranted by Lessor X on 1 January 2020 is for the 9 days’ closure of Plaza X inNovember 2019. Entity A judges such rent concession is not occurring as a directconsequence of the covid-19 pandemic. Therefore, the practical expedient inparagraph 46A of the Amendment to HKFRS 16 cannot be applied.Therefore, Entity A must determine whether the reduction in the consideration for thelease meets the definition of a lease modification in Appendix A of HKFRS 16. (Seethe January illustrative examples for further guidance).Rent concession under Addendum 2 signed on 1 April 2020Considering the timing and the reason for the rent concession granted by Lessor X,Entity A judges that the rent concession is occurring as a direct consequence of thePage 7 of 10covid-19 pandemic. The rent concession also meets the conditions in paragraphs46B(a)-(c) of the Amendment to HKFRS 16 because it reduces the consideration forthe lease, it is a forgiveness of lease payments originally due on or before 30 June2021 (forgiveness of the payment due in April 2020), and there are no substantivechanges to other terms and conditions of the contract. Therefore, all the conditions inparagraph 46B of the Amendment to HKFRS 16 are met.Entity A applies the practical expedient in paragraph 46A of the Amendment toHKFRS 16 and accounts for the rent concession under Addendum 2 as follows:
Entity A accounts for the forgiveness of the April 2020 lease payment of$100,000 as a variable lease payment recognised in profit or loss in theperiod in which the event or condition that triggers the payment occurs (i.e. on1 April 2020 because the forgiveness of rent became unconditional on thatdate) [paragraph 38 of HKFRS 16].The forgiveness of the lease payment results in a partial extinguishment ofEntity A’s lease liability and so Entity A makes a corresponding adjustment of$100,000 to the lease liability.Notes on Contract 1:
Differentiation of the effect of the covid-19 pandemic from other negative eventsParagraph 46B of the Amendment to HKFRS 16 states that the practical expedientapplies only to rent concessions occurring as a direct consequence of the covid-19pandemic. In some cases, it may be difficult to differentiate whether the rentconcession is occurring as a direct consequence of the covid-19 pandemic or due tothe combination of the covid-19 pandemic and other situations. In such cases,entities should apply judgement when assessing if the rent concession is occurringas a direct consequence of the covid-19 pandemic based on its specific facts andcircumstances.An explicit statement in the supplementary agreement between the lessor and thelessee specifying the reason for the rent concession may not be conclusive. Otherfactors to consider may include, but are not limited to, the following:
the reasons for the initial negotiation between the lessor and the lesseeregarding the rent concession;
the timing of the negotiation and agreement of the rent concession; andthe relevant laws and regulations in the specific jurisdiction.Page 8 of 10Timing of recognition of reduction in lease paymentsIf an entity accounts for a reduction in lease payments (such as forgiveness ofpayments) as a variable lease payment applying paragraph 38 of HKFRS 16, itgenerally recognises the variable payment in profit or loss in the period in which theevent or condition that triggers the payment occurs. The lessee would also make acorresponding adjustment to the lease liability—in effect derecognising that part ofthe lease liability that has been extinguished.If a lessor agrees to give a lessee a rent concession in a form of reduction in leasepayments over a period of time (e.g. several months) and the lessee applies thepractical expedient in paragraph 46A of the Amendment to HKFRS 16, a questionmay arise regarding whether the lessee should recognise the rent reduction in profitand loss:
i)
at the time when the lessor and the lessee agree on the rent concession; orii) over the period of the rent concession granted (i.e. over the months ofreduced rent).Judgement may be required in determining the timing of recognition of the reductionof rent in profit or loss and will depend on the facts and circumstances of the entity.Factors to consider in applying this judgement may include whether the reduction inlease payments is unconditional, i.e. depends only on the passage of time, orwhether it is subject to future conditions (e.g. the government closure order must stillbe in place at a future date for the lessee to be entitled to the rent concession). Forexample:
if a lessor agrees to give an upfront rent reduction with no future conditions, itmay be appropriate to recognise the reduction of rent at the time of theagreement, orif a lessor agrees to grant a 20% rent reduction for one month, and dependingon the development of the covid-19 pandemic (and hence whether thegovernment closure order will continue for the next month), the lessor maygrant a 20% rent reduction for the following month, it may be appropriate torecognise the reduction of rent on a month by month basis.Contract 2The reason for the rent concession granted by Lessor Y to Entity A is not explicitlystated in the addendum. However, the concession is granted subsequent to theoutbreak of covid-19 and the related government closure order of gyms, and this wasthe main issue discussed during the negotiations between Entity A and Lessor Y.Page 9 of 10Therefore, Entity A judges the rent concession is occurring as a direct consequenceof the covid-19 pandemic.The arrangement with Lessor Y does not increase the consideration for the lease.The rent concession meets the conditions in paragraphs 46B(a) and (b) that therevised consideration for the lease is substantially the same as the considerationimmediately preceding the change, and the reduction in lease payments is related topayments originally due on or before 30 June 2021 (payments due in April to June2020). Furthermore, the three-month rent holiday in April to June 2020 (i.e. before 30June 2021) followed by three additional months of substantially equivalent paymentsin January to March 2021 would not fail the third condition in paragraph 46B(c)
[paragraph BC205D(c) of the Amendment to HKFRS 16]. Therefore, all the conditionsin paragraph 46B of the Amendment to HKFRS 16 are met.Entity A applies the practical expedient in paragraph 46A of the Amendment toHKFRS 16 and accounts for the rent concession by remeasuring the lease liability on1 April 2020 based on the revised lease payments, continuing to recognise intereston the lease liability and reducing the lease liability for payments made to Lessor Yapplying paragraph 36 of HKFRS 16 as follows:
no reduction in the lease liability from April to June 2020, as no payments aremade to the lessor;
a reduction in the lease liability of $80,000 for each month from July 2020 toDecember 2020, and from April 2021 to December 2021; anda reduction in the lease liability of $160,000 for each month during January toMarch 2021 to reflect the increased lease payments made.Notes on Contract 2:
Accounting for reduction in present value of lease liabilityFor simplicity, the interest element for lease payments is ignored in this example.However, the reduction in the present value of the lease liability upon remeasurementof that liability to reflect the change in timing of individual payments would berecognised in profit or loss at the date of the addendum signed between Entity A andLessor Y (i.e.1 April 2020).Assessment of change in considerationParagraph BC205D(a) of the Amendment to HKFRS 16 explains that “substantiallythe same as” in paragraph 46B(a) ensures an increase in payments that reflects onlythe time value of money would not preclude a lessee from applying the practicalPage 10 of 10expedient (i.e. an increase in the nominal amount of deferred lease payments thatreflects only the time value of money should not prevent a lessee from applying thepractical expedient).Contract 3Based on the same reasoning as for Contract 2, Entity A also judges the rentconcession granted by Lessor Z is occurring as a direct consequence of the covid-19pandemic. The rent concession also meets the conditions in paragraphs 46B(a)-(c) ofthe Amendment to HKFRS 16 because it reduces the consideration for the lease, it isa reduction of lease payments originally due on or before 30 June 2021 (the March2020 lease payment was due on 1 January 2020 and the April 2020 lease paymentwas due on 1 April 2020), and there are no substantive changes to other terms andconditions of the contract. Therefore, all the conditions in paragraph 46B of theAmendment to HKFRS 16 are met.Entity A applies the practical expedient in paragraph 46A of the Amendment toHKFRS 16 and accounts for the rent concession as follows:
Entity A paid the March 2020 lease payment for the use of Gym 3 on 1January 2020. The related reduction of lease payment of $24,000 (calculatedas $120,000 x 20%) is paid to Entity A in a form of a lump sum cash rebate on1 April 2020.Entity A is due to pay the April 2020 lease payment for the use of Gym 3 on 1April 2020. The related reduction of lease payment is provided to Entity A in aform of rent reduction ($24,000 direct reduction in April 2020).Entity A accounts for the 20% reduction of March and April 2020 leasepayments of $48,000 ($24,000 x 2) as a variable lease payment recognised inprofit or loss in the period in which the event or condition that triggers thepayment occurs (i.e. on 1 April 2020 because the rent concession becameunconditional on that date) [paragraph 38 of HKFRS 16], with acorresponding adjustment to cash ($24,000 for the March 2020 rent rebate)
and the lease liability ($24,000 for April 2020 rent reduction).
Illustrative examples on COVID-19-related rent concessions
下载原件Page 1 of 10The guidance below was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and is forgeneral reference only. The HKICPA, FRSC and their staff do not accept any responsibility orliability in respect of the guidance and any consequences that may arise from any personacting or refraining from action as a result of any materials in the guidance. Members ofthe HKICPA and other users of this guidance should also read the original text of HKFRS 16Leases, as found in the HKICPA Members’ Handbook (https://www.hkicpa.org.hk/-/media/HKICPA-Website/Members-Handbook/volumeII/hkfrs16.pdf) for further referenceand seek professional advice where necessary when applying the references contained inthis guidance.The HKICPA's Standard Setting Department welcomes your comments and feedback on thispaper, which should be sent to commentletters@hkicpa.org.hk.Illustrative examples on covid-19-related rent concessionsIn January 2020, the FRSC of the HKICPA published examples on rent concessions(January illustrative examples)1 to illustrate the application of HKFRS 16 Leases tosome common rent concession fact patterns observed in Hong Kong due to themarket conditions experienced at that time following months of political unrest.As a result of the covid-19 pandemic, many lessors are providing rent concessions tolessees. HKFRS/IFRS 16 Leases specifies how lessees account for changes in leasepayments, including rent concessions. However, the International AccountingStandards Board (IASB) was informed that applying those requirements to apotentially large volume of covid-19-related rent concessions could be challenging inpractice, particularly for lessees that are currently preparing their financial statementsapplying the new lessee accounting model in IFRS 16 for the first time. The IASBresponded by issuing the following:
educational material in April 2020 to highlight requirements within IFRS 16and other IFRS Standards that are relevant for companies considering how toaccount for rent concessions granted as a result of the covid-19 pandemic2;
and1 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/06_New-and-major-stds/ie161.pdf2 https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-16/ifrs-16-rent-concession-educational-material.pdfPage 2 of 10Covid-19-Related Rent Concessions (Amendment to IFRS 16) in May 2020,which provides lessees with a practical expedient for covid-19-related rentconcessions. No change has been made to lessor accounting. The Instituteissued an equivalent amendment to HKFRS 16 in June 2020.Covid-19-Related Rent Concessions (Amendment to HKFRS 16)
Paragraph 46A of the Amendment to HKFRS 16 provides a practical expedient that alessee may elect not to assess whether a rent concession that meets the conditionsin paragraph 46B is a lease modification. A lessee that makes this election shallaccount for any change in lease payments resulting from such a rent concession inthe same way as if the change were not a lease modification.Paragraph 46B of the Amendment to HKFRS 16 states that the practical expedient inparagraph 46A applies only to rent concessions occurring as a direct consequence ofthe covid-19 pandemic and only if all of the following conditions are met:
a) the change in lease payments results in revised consideration for the leasethat is substantially the same as, or less than, the consideration for the leaseimmediately preceding the change;
b) any reduction in lease payments affects only payments originally due on orbefore 30 June 2021; andc) there is no substantive change to other terms and conditions of the lease.A lessee that chooses to apply the practical expedient shall apply it consistently to alllease contracts with similar characteristics and in similar circumstances, as requiredby paragraph 2 of HKFRS 16 [paragraph BC205C of the Amendment to HKFRS 16].Paragraphs BC205E(a)-(c) of the Amendment to HKFRS 16 provide examples ofaccounting for changes in lease payments if they are eligible for applying thepractical expedient:
a) forgiveness or waiver of lease payments would generally be accounted for asa variable lease payment applying paragraph 38 of HKFRS 16 with acorresponding adjustment to the lease liability.b) a change in lease payments that reduces payments in one period butproportionally increases payments in another does not extinguish the lessee’slease liability or change the consideration for the lease – instead, it changesonly the timing of individual payments. In this case, applying paragraph 36 ofHKFRS 16, a lessee would continue to both recognise interest on the leaseliability and reduce that liability to reflect lease payments made to the lessor.Page 3 of 10c) a reduction in lease payments, incorporating both a forgiveness of paymentsand a change in the timing of payments.Note: Even in the absence of the practical expedient, a change in lease paymentsdescribed in (b) does not meet the definition of a lease modification as there is nochange in the scope of a lease, or the consideration for a lease (i.e. the accountingwould be the same regardless of whether the practical expedient is elected).However, applying the practical expedient would mean that the assessment ofwhether the change in lease payments described in (b) meets the definition of alease modification would not be required.Paragraph 60A of the Amendment to HKFRS 16 requires a lessee that applies thepractical expedient in paragraph 46A to disclose:
a) that it has applied the practical expedient to all rent concessions that meet theconditions in paragraph 46B or, if not applied to all such rent concessions,information about the nature of the contracts to which it has applied thepractical expedient; andb) the amount recognised in profit or loss for the reporting period to reflectchanges in lease payments that arise from rent concessions to which thelessee has applied the practical expedient in paragraph 46A.The Amendment to HKFRS 16 is effective for annual reporting periods beginning onor after 1 June 2020. Earlier application is permitted, including in financial statements– interim or annual – not authorised for issue at 4 June 2020, the date theamendment was issued [paragraphs C1A and BC205B of the Amendment to HKFRS16].If a rent concession provided for a particular lease contract either:
a)
does not meet the conditions to apply the practical expedient, orb) meets the conditions to apply the practical expedient, but the lessee does notelect to apply the practical expedient for lease contracts with similarcharacteristics and in similar circumstances to that particular lease contract(see paragraph 2 of HKFRS 16),then the lessee must determine whether the rent concession meets the definition of alease modification in Appendix A of HKFRS 16. If the rent concession is a leasemodification, the requirements for lessee accounting under paragraphs 44-46 ofHKFRS 16 apply (as described in the January illustrative examples).Page 4 of 10Background information for the illustrative examplesThis publication provides examples to illustrate the application of the Amendment toHKFRS 16 to common rent concession fact patterns observed in Hong Kong asdescribed below. The examples do not consider the accounting for the related right-of-use asset in each of the contracts.Other considerations and analysis may be necessary depending on the facts andcircumstances of each lessee.Details of Entity A’s lease contractsEntity A (Lessee) leases different locations in Hong Kong for operation as gymcenters. Entity A enters into the following non-cancellable lease arrangements withdifferent lessors:
LocationLessorLeaseterm#CommencementdateMonthly leasepaymentContract 1for Gym 1Plaza XLessor X5 years1 March 2019$100,000Contract 2for Gym 2Plaza YLessor Y3 years1 January 2019$80,000Contract 3for Gym 3Plaza ZLessor Z3 years1 April 2019$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 made on the first day of each month for Contracts 1 and 2.Lease payments are made on the first day of April, July, October and January on aquarterly basis for Contract 3 (i.e. payment of next 3 months’ rent in advance).None of the contracts contain a force majeure or similar clause that could trigger rentreduction or suspension of rent in the event that the premises (or any part of them)
are affected by events beyond the control of the contracted parties so as to renderthem unfit or unavailable for use by the tenant.Rent concessions provided to Entity ACertain social events took place and affected Entity A’s business during the secondhalf of 2019. Gym 1 was not available for use for 9 full days during November 2019due to the closure of Plaza X. In addition, Entity A’s business was affected by thePage 5 of 10covid-19 pandemic outbreak in Hong Kong in early 2020. Gyms 1, 2 and 3 were allclosed for 42 full days during March to May 2020 due to the government closureorder. Entity A’s actual performance during these affected periods was significantlyworse than forecast. In view of the situation, all of the Lessors agreed to provide rentconcessions to Entity A as described below.Lessor X signed an addendum to the original lease contract with Entity A on 1January 2020 (Addendum 1) and another addendum on 1 April 2020 (Addendum 2).Based on the negotiation between Entity A and Lessor X, and as specified in theaddendums:
as agreed on 1 January 2020, the 10% rent reduction for the three monthsfrom November 2019 to January 2020 was compensation to Entity A for theclosure of Plaza X in November 2019 as a result of the social events.as agreed on 1 April 2020, the rent concession was a forgiveness of the rentfor Gym 1 in April 2020 as a result of the HKSAR government actions due tothe covid-19 pandemic.Lessors Y and Z each signed an addendum to the original lease contract with EntityA on 1 April 2020. The reason for the rent concession is not specified in theaddendums. However, the main issue discussed during the negotiation of the rentconcession between Entity A and Lessors Y and Z was the effect of covid-19 andrelated government closure order.The signed addendums established the lessors’ commitment in relation to the rentconcessions and the rent concessions are unconditional upon signing theaddendums. Other terms and conditions of the original lease contracts remainunchanged. The rent concessions provided to Entity A are summarised as follows:
LessorRent concessions provided to Entity AContract 1Lessor XAddendum 1:
A 10% rent reduction for the three months fromNovember 2019 to January 2020, totaling $30,000 forthe 9 days’ closure[calculated as $100,000 x 10% x 3].Addendum 2:
Forgiveness of rent for April 2020 of $100,000.Contract 2Lessor YDeferral of rent for April, May and June 2020, which is tobe paid in January, February and March 2021 (i.e. aPage 6 of 10three-month rent holiday from April to June 2020, but arevised monthly lease payments of $160,000 duringJanuary to March 2021).Contract 3Lessor ZA 20% rent rebate for the month of March 2020 (paid incash on 1 April 2020) and a 20% rent reduction for themonth of April 2020, totaling $48,000 [calculated as$120,000 x 20% x 2].Entity A’s reporting periodEntity A has a December year-end and chooses to early adopt the Amendment toHKFRS 16 in its interim financial statements for the period ending 30 June 2020 (i.e.the date of initial application of the Amendment to HKFRS 16 is 1 January 2020).Entity A elects to apply the practical expedient to all eligible rent concessions for all ofits lease contracts applying paragraph 2 of HKFRS 16.Question: How does Entity A account for the rent concessions for the six-month financial period ending 30 June 2020?Note: The following analysis would also be applicable to an entity with a March year-end that is currently preparing its annual financial statements for the year ended 31March 2020 and chooses early application of the Amendment to HKFRS 16 in thosefinancial statements.Contract 1Rent concession under Addendum 1 signed on 1 January 2020Considering the reason for the negotiation of the rent concession, the amountgranted by Lessor X on 1 January 2020 is for the 9 days’ closure of Plaza X inNovember 2019. Entity A judges such rent concession is not occurring as a directconsequence of the covid-19 pandemic. Therefore, the practical expedient inparagraph 46A of the Amendment to HKFRS 16 cannot be applied.Therefore, Entity A must determine whether the reduction in the consideration for thelease meets the definition of a lease modification in Appendix A of HKFRS 16. (Seethe January illustrative examples for further guidance).Rent concession under Addendum 2 signed on 1 April 2020Considering the timing and the reason for the rent concession granted by Lessor X,Entity A judges that the rent concession is occurring as a direct consequence of thePage 7 of 10covid-19 pandemic. The rent concession also meets the conditions in paragraphs46B(a)-(c) of the Amendment to HKFRS 16 because it reduces the consideration forthe lease, it is a forgiveness of lease payments originally due on or before 30 June2021 (forgiveness of the payment due in April 2020), and there are no substantivechanges to other terms and conditions of the contract. Therefore, all the conditions inparagraph 46B of the Amendment to HKFRS 16 are met.Entity A applies the practical expedient in paragraph 46A of the Amendment toHKFRS 16 and accounts for the rent concession under Addendum 2 as follows:
Entity A accounts for the forgiveness of the April 2020 lease payment of$100,000 as a variable lease payment recognised in profit or loss in theperiod in which the event or condition that triggers the payment occurs (i.e. on1 April 2020 because the forgiveness of rent became unconditional on thatdate) [paragraph 38 of HKFRS 16].The forgiveness of the lease payment results in a partial extinguishment ofEntity A’s lease liability and so Entity A makes a corresponding adjustment of$100,000 to the lease liability.Notes on Contract 1:
Differentiation of the effect of the covid-19 pandemic from other negative eventsParagraph 46B of the Amendment to HKFRS 16 states that the practical expedientapplies only to rent concessions occurring as a direct consequence of the covid-19pandemic. In some cases, it may be difficult to differentiate whether the rentconcession is occurring as a direct consequence of the covid-19 pandemic or due tothe combination of the covid-19 pandemic and other situations. In such cases,entities should apply judgement when assessing if the rent concession is occurringas a direct consequence of the covid-19 pandemic based on its specific facts andcircumstances.An explicit statement in the supplementary agreement between the lessor and thelessee specifying the reason for the rent concession may not be conclusive. Otherfactors to consider may include, but are not limited to, the following:
the reasons for the initial negotiation between the lessor and the lesseeregarding the rent concession;
the timing of the negotiation and agreement of the rent concession; andthe relevant laws and regulations in the specific jurisdiction.Page 8 of 10Timing of recognition of reduction in lease paymentsIf an entity accounts for a reduction in lease payments (such as forgiveness ofpayments) as a variable lease payment applying paragraph 38 of HKFRS 16, itgenerally recognises the variable payment in profit or loss in the period in which theevent or condition that triggers the payment occurs. The lessee would also make acorresponding adjustment to the lease liability—in effect derecognising that part ofthe lease liability that has been extinguished.If a lessor agrees to give a lessee a rent concession in a form of reduction in leasepayments over a period of time (e.g. several months) and the lessee applies thepractical expedient in paragraph 46A of the Amendment to HKFRS 16, a questionmay arise regarding whether the lessee should recognise the rent reduction in profitand loss:
i)
at the time when the lessor and the lessee agree on the rent concession; orii) over the period of the rent concession granted (i.e. over the months ofreduced rent).Judgement may be required in determining the timing of recognition of the reductionof rent in profit or loss and will depend on the facts and circumstances of the entity.Factors to consider in applying this judgement may include whether the reduction inlease payments is unconditional, i.e. depends only on the passage of time, orwhether it is subject to future conditions (e.g. the government closure order must stillbe in place at a future date for the lessee to be entitled to the rent concession). Forexample:
if a lessor agrees to give an upfront rent reduction with no future conditions, itmay be appropriate to recognise the reduction of rent at the time of theagreement, orif a lessor agrees to grant a 20% rent reduction for one month, and dependingon the development of the covid-19 pandemic (and hence whether thegovernment closure order will continue for the next month), the lessor maygrant a 20% rent reduction for the following month, it may be appropriate torecognise the reduction of rent on a month by month basis.Contract 2The reason for the rent concession granted by Lessor Y to Entity A is not explicitlystated in the addendum. However, the concession is granted subsequent to theoutbreak of covid-19 and the related government closure order of gyms, and this wasthe main issue discussed during the negotiations between Entity A and Lessor Y.Page 9 of 10Therefore, Entity A judges the rent concession is occurring as a direct consequenceof the covid-19 pandemic.The arrangement with Lessor Y does not increase the consideration for the lease.The rent concession meets the conditions in paragraphs 46B(a) and (b) that therevised consideration for the lease is substantially the same as the considerationimmediately preceding the change, and the reduction in lease payments is related topayments originally due on or before 30 June 2021 (payments due in April to June2020). Furthermore, the three-month rent holiday in April to June 2020 (i.e. before 30June 2021) followed by three additional months of substantially equivalent paymentsin January to March 2021 would not fail the third condition in paragraph 46B(c)
[paragraph BC205D(c) of the Amendment to HKFRS 16]. Therefore, all the conditionsin paragraph 46B of the Amendment to HKFRS 16 are met.Entity A applies the practical expedient in paragraph 46A of the Amendment toHKFRS 16 and accounts for the rent concession by remeasuring the lease liability on1 April 2020 based on the revised lease payments, continuing to recognise intereston the lease liability and reducing the lease liability for payments made to Lessor Yapplying paragraph 36 of HKFRS 16 as follows:
no reduction in the lease liability from April to June 2020, as no payments aremade to the lessor;
a reduction in the lease liability of $80,000 for each month from July 2020 toDecember 2020, and from April 2021 to December 2021; anda reduction in the lease liability of $160,000 for each month during January toMarch 2021 to reflect the increased lease payments made.Notes on Contract 2:
Accounting for reduction in present value of lease liabilityFor simplicity, the interest element for lease payments is ignored in this example.However, the reduction in the present value of the lease liability upon remeasurementof that liability to reflect the change in timing of individual payments would berecognised in profit or loss at the date of the addendum signed between Entity A andLessor Y (i.e.1 April 2020).Assessment of change in considerationParagraph BC205D(a) of the Amendment to HKFRS 16 explains that “substantiallythe same as” in paragraph 46B(a) ensures an increase in payments that reflects onlythe time value of money would not preclude a lessee from applying the practicalPage 10 of 10expedient (i.e. an increase in the nominal amount of deferred lease payments thatreflects only the time value of money should not prevent a lessee from applying thepractical expedient).Contract 3Based on the same reasoning as for Contract 2, Entity A also judges the rentconcession granted by Lessor Z is occurring as a direct consequence of the covid-19pandemic. The rent concession also meets the conditions in paragraphs 46B(a)-(c) ofthe Amendment to HKFRS 16 because it reduces the consideration for the lease, it isa reduction of lease payments originally due on or before 30 June 2021 (the March2020 lease payment was due on 1 January 2020 and the April 2020 lease paymentwas due on 1 April 2020), and there are no substantive changes to other terms andconditions of the contract. Therefore, all the conditions in paragraph 46B of theAmendment to HKFRS 16 are met.Entity A applies the practical expedient in paragraph 46A of the Amendment toHKFRS 16 and accounts for the rent concession as follows:
Entity A paid the March 2020 lease payment for the use of Gym 3 on 1January 2020. The related reduction of lease payment of $24,000 (calculatedas $120,000 x 20%) is paid to Entity A in a form of a lump sum cash rebate on1 April 2020.Entity A is due to pay the April 2020 lease payment for the use of Gym 3 on 1April 2020. The related reduction of lease payment is provided to Entity A in aform of rent reduction ($24,000 direct reduction in April 2020).Entity A accounts for the 20% reduction of March and April 2020 leasepayments of $48,000 ($24,000 x 2) as a variable lease payment recognised inprofit or loss in the period in which the event or condition that triggers thepayment occurs (i.e. on 1 April 2020 because the rent concession becameunconditional on that date) [paragraph 38 of HKFRS 16], with acorresponding adjustment to cash ($24,000 for the March 2020 rent rebate)
and the lease liability ($24,000 for April 2020 rent reduction).