Statement on accounting for lease modifications (amendment to IFRS 16)

In May 2020, following an accelerated due process, the International Accounting Standards Board (IASB) published an amendment to International Financial Reporting Standard (IFRS) 16 (Covid-19-related rent concessions – Amendment to IFRS 16) which provides practical relief to lessees in accounting for rent concessions granted due to Covid-19.

This amendment is effective for reporting periods beginning on or after 1 June 2020 in relation to Covid-19-related rent concessions that reduce lease payments due on or before 30 June 2021.

The Accounting Regulatory Committee (ARC) voted in favour of the amendment on 2 July and on 8 July the European Commission (EC) formally transmitted the file supporting endorsement of the amendment to the European Parliament (EP) and the European Council, which has three months to object before it is otherwise adopted. However, the amendment is not yet formally adopted in line with the necessary EU endorsement procedure. In strict terms, it is therefore not available for use by any issuers required by the Transparency Directive to use EU-adopted IFRS in their annual or interim financial statements.

We appreciate the practical difficulties such issuers would face in applying the existing IFRS 16 lease modifications requirements to Covid-19-related rent concessions and welcome international action to provide a uniform response to addressing these difficulties.

ESMA statement on accounting for lease modifications

We note the recent ESMA statement of 21 July 2020 on Actions to mitigate the impact of COVID-19 on the EU financial markets – Coordination of supervisory action on accounting for lease modifications. ESMA expects that NCAs “will not prioritise supervisory actions in relation to the application of the requirements for lease modifications contained in IFRS 16 as currently endorsed by the EU to COVID-19-related rent concessions that would otherwise fall within the scope of the IFRS 16 amendment.” We propose to follow ESMA’s approach. 

What this means for issuers

For the time being, we will permit issuers subject to our rules to use the modified IFRS 16 rather than the IFRS 16 as currently adopted by the EU.

This temporary relief is subject to two conditions: 

• issuers must apply the accounting treatment to those transactions as foreseen in the IFRS 16 amendment.
• issuers must disclose their use of the amendment as issued by the IASB in the notes to the financial statements.

How long this will last

This policy is intended to be temporary while the UK faces the disruption of the coronavirus pandemic and its aftermath. We will keep its application under review. However, we intend it to be in place until the amendment to the standard is formally adopted. Should the European Parliament or the European Council object to the adoption of the IFRS 16 amendment before the end of the Transition Period, we will end this temporary relief.

Statement on accounting for lease modifications (amendment to IFRS 16): Q&A

Questions and answers relating to accounting for lease modifications (amendment to IFRS 16)

Does the temporary relief apply to all listed companies?

This temporary relief applies to all listed companies that are required to comply with DTR 4.1 and DTR 4.2 (noting the exemptions under DTR 4.4) and that are required to prepare their accounts in accordance with EU-adopted IFRS, but we note that some companies may also be subject to transparency rules in other jurisdictions.  

How does this apply to issuers with a Home State under the Transparency Directive that is not the UK?

The FCA cannot extend this temporary relief to these issuers.

However, we would draw issuers’ attention to ESMA’s statement from 21 July 2020 on Actions to mitigate the impact of COVID-19 on the EU financial markets – Coordination of supervisory action on accounting for lease modifications and encourage issuers to contact the competent authority of their Home Member State for Transparency Directive purposes for further details of their response.

It is the responsibility of issuers to comply with other legislation to which they are subject in their own jurisdiction or elsewhere. 

Does this affect companies that are admitted to unlisted markets in the UK such as AIM or NEX Growth?

Our temporary relief is only available to companies subject to DTR 4.1 and DTR 4.2. This does not include those with securities admitted only to markets that are not regulated markets under MiFID – such as AIM or NEX Growth - for whom our concession is therefore not applicable. Issuers with securities admitted to trading on such venues should consult the rules of those venues to see if they are permitted to use the amended version of IFRS 16 or not.

Is the temporary relief available to listed companies that are not already required to comply with the transparency rules (or with corresponding requirements imposed by another EEA Member State)?

For the avoidance of doubt, the FCA will also grant this temporary relief to companies that are subject to the requirement to comply with DTR 4 via the Listing Rules (LR 9.2.6BR, LR 14.3.23R, LR 18.4.2R and 18.4.3R) and that are required to prepare their accounts in accordance with EU-adopted IFRS.

Does the temporary relief apply to companies that only have listed debt securities?

This will depend on whether the securities are admitted to trading on a regulated market:

• If the debt securities are admitted to trading on a regulated market the temporary relief applies.
• If the debt securities are not admitted to trading on a regulated market, the companies are not subject to DTR 4.1 or DTR 4.2. They are subject to LR 17.3.4R which requires the issuer to prepare its annual report and accounts in accordance with the issuer’s national law and, in all material respects, with national accounting standards or EU-adopted IFRS. Such issuers can avail themselves of the temporary relief where relevant, for example, where their accounts are prepared in accordance with EU-adopted IFRS.

How are these measures being achieved?

This is not a waiver or rule change. The FCA deems the Covid-19 pandemic and the ensuing challenges facing listed companies and their auditors as sufficient grounds to provide this temporary relief to achieve the desired outcome.