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Key points

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.
COVID-19 will impact many areas of accounting and reporting for all industries, as outlined in our In depth publication Accounting implications of the effects of coronavirus.
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.
IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAQ 2.6.4 – 'Determining fair value where an entity might be forced to liquidate assets considers what to do when there is a clear expectation or other evidence that the sale of an asset will take place in a manner that is not orderly.
Other sources of guidance
Valuation in times of market uncertainty - PwC UK Valuations 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
As a result of COVID-19, collectability of rentals on some operating leases has become increasingly uncertain. If a lessor assesses some rents on an operating lease to be uncollectable, FAQ 4.5 – Should a lessor in an operating lease continue to recognise lease income when its collectability is uncertain due to COVID-19? explores the question of whether a lessor should continue to recognise the corresponding lease income.
Lessees might also be operating at reduced capacity or be forced to close their premises at various times, either voluntarily or as a result of laws or regulation. FAQ 4.11 considers whether it is appropriate for a lessor in an operating lease to change the pattern of income recognition in light of COVID-19 .
Voluntary forgiveness of amounts contractually due for past rent
COVID-19 has caused financial constraints to tenants. Lessors may agree to forgive some amount of payments contractually due for past rent without changing the scope of the lease or other terms. FAQ 4.8 - Accounting by operating lessors for voluntary forgiveness of amounts contractually due for past rent discusses the accounting guidance in such situations
Accounting for initial direct costs where an operating lease is modified
A lessor may determine that changes to operating leases as a result of the impact of COVID-19 represent lease modifications. FAQ 4.9 – Lessor accounting for initial direct costs where an operating lease is modified explores the accounting treatment for such costs.
Government grants
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:
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