The COVID-19 outbreak has developed rapidly in 2020, with a significant global impact. Measures taken to contain the virus have affected economic activity, which in turn has implications for financial reporting.
In this Spotlight we provide a summary of accounting issues that real estate entities might face and where to find further guidance. While this Spotlight focuses on issues that are likely to be the most frequently encountered, many others are certain to arise. As the situation continues to evolve, so too will the consequential accounting issues. For these reasons, the following is not an exhaustive list of all relevant accounting considerations.
Valuation of Investment Property
Impact of COVID-19 on investment property valuation
COVID-19 has given rise to many significant uncertainties including: the length of time and severity of the impact of COVID-19, how effective measures taken to control the spread of the virus will be, and how quickly activities may return to more normal conditions once the pandemic is over. In turn, these uncertainties have affected the valuation of investment property. FAQ 2.6.1 Impact of COVID-19 on investment property valuation
looks at whether it is possible for management to determine the fair value of an investment property in accordance with IFRS 13.Further, FAQ 2.6.2 Uncertainties in cash flows and change in valuation technique for level 3 fair value measurement
considers how current uncertainties should be factored into fair value measurement and is relevant for investment property as these are often level 3 fair value measurements.
Other sources of guidance
Lease accounting implications for lessors
Accounting for lease concessions granted to tenants
As a result of the COVID-19 pandemic, landlords have granted rental concessions to a number of tenants. These concessions take a variety of forms, including payment holidays, cash rebates and deferral of lease payments. On 10 April 2020, the IASB issued a document intended to support the consistent application of IFRS to lease concessions related to COVID-19. FAQ 4.1
How should lease concessions related to COVID-19 be accounted for considers the accounting implications of lease concessions for both lessees and lessors. FAQ 4.6 – ‘COVID-19-related modifications to operating leases
: lessor perspective’ explores in further detail the specific accounting issues for lessors in operating leases.
Force majeure clauses
Some lease contracts contain force majeure clauses that apply in the case of serious unforeseen circumstances beyond the control of the parties to the contract. In addition, actions of governments taken in response to COVID-19 might be accounted for in a similar way to some force majeure clauses. The nature of such clauses can differ. The existence of force majeure clauses in leasing contracts may result in payments being accounted for as variable lease payments rather than as lease modifications. FAQ 4.2 What are the accounting implications of a force majeure clause in a lease contract in the context of COVID-19
explores the accounting considerations further.
Impairment of lease receivables
For any financial instruments that are within the scope of IFRS 9’s expected credit loss (ECL) model, the impact of COVID-19 on the ECL should be considered. Lease receivables are in the scope of IFRS 9’s ECL model, including accrued receivable balances related to lease incentives. FAQ 4.3 Impairment of lease receivables
explains the scope of IFRS 9’s requirements in the context of lease receivables and how an ECL assessment is impacted when a lessor expects a lessee to pay all amounts due under the lease, but later than the contractual due date.
The assumptions and simplifications used previously in provision matrices under the simplified approach might no longer hold in the current environment and may need to be revisited. The following FAQs outline some of the key matters to consider:
Reassessment of lease term
In the current environment, retail tenants may need to reassess the lease term of their property leases. FAQ 4.4 Should lease terms be reassessed as a result of COVID-19
explores this further from a lessee perspective. However, it also notes that a lessor does not reassess lease term after the commencement date of lease and so would not assess whether or not an option is now reasonably certain to be exercised by the lessee.
Recognition of lease income
Voluntary forgiveness of amounts contractually due for past rent
Accounting for initial direct costs where an operating lease is modified
In many jurisdictions, governments might provide multiple reliefs or measures to help affected businesses in dealing with the economic impact of COVID-19. These reliefs might come in a variety of forms, including refunds of prior levies and taxes paid and waiver of indirect taxes. Guidance on the accounting for such reliefs or measures can be found in the following FAQs: