Lease ifrs16 in the light of the covid-19 uncertainty

Apr 11, 2020by Sandhya Budhraja

Lease IFRS 16 issued an advisory on how to account for leases due to modifications arising out of COVID 19. 

The coronavirus 2019 (COVlD–19) pandemic is affecting economic and financial markets, and virtually all industries are facing challenges associated with the economic conditions resulting from efforts to address it. For example, many entities in the travel, hospitality, leisure, and retail industries have seen sharp declines in revenues due to regulatory and organisational mandates (e.g. “shelter in place mandates, school closures) and voluntary changes in consumer behaviour (e.g. “social distancing").

As the pandemic increases in both magnitude and duration, entities are experiencing conditions oftenassociated with a general economic downturn. This includes, but is not limited to, financial market volatility and erosion, deteriorating credit, liquidity concerns, further increases in government intervention,increasing  unemployment, broad declines in consumer discretionary spending, increasing inventory levels,reductions in production because of decreased demand, layoffs and furloughs, and other restructuringactivities. The continuation of these circumstances could result in an even broader economic downturnwhich could have a prolonged negative impact on an entity's financial results.

 As a result of the COVlD–19 pandemic, certain entities are experiencing significantly reduced consumer traffic inretail stores and shopping areas, or indefinite closures due to quarantine measures and other governmentdirectives.

lmpairments to right–of use (ROU) assets could occur as a result of business closures, supply chaindisruption, or other consequences of the pandemic that negatively affect the future cash flows expectedto be derived from the use of the underlying asset. ROU assets measured applying a cost model arecarried at cost less any accumulated depreciation and any impairment losses (and adjusted for specific remeasurement of the lease liability). lmpairment is assessed applying the requirements in lAS 36.

Lessees in some affected markets are receiving rent abatements or other economic incentives.

A full text issued by on IFRS 16 leases can be read here

Take the free quiz on IFRS 16 Leases here to asses your knowledge

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