IFRS

FRS 116 Alert

This article covers the recent amendments to FRS 116 to provide practical expedients for lessees to account for rent concessions during the COVID-19 pandemic and certain GST related matters.

Amendments to FRS 116 and SFRS(i) 16 Leases

Executive summary

The Accounting Standards Council in Singapore has also published an amendment ‘COVID-19-Related Rent Concessions  (the amendment) to FRS 116 and SFRS (I) 16 (collectively referred as ‘Standards’).  The amendment adds a “practical expedient” to the Standard which provides practical expedient for lessees in assessing whether specific COVID-19 rent concessions are considered to be lease modifications.

If the practical expedient is applied, these rent concessions are treated as if they are not lease modifications. There are no changes for lessors.

Background

The COVID-19 pandemic is creating an additional burden on entities all over the world. As a result, lessors are providing lessees with rent concessions. These can be in the form of rent holidays or rent reductions for an agreed timeframe (possibly followed by increased rentals in future periods). In some jurisdictions, governments are making rent concessions a requirement, in others, they are merely encouraging them. However, where they occur, they will have a major impact for lessees, in particular, the retail and hospitality industries, where in many cases they have been forced to close their premises temporarily as a direct result of the pandemic.

The Standards contains specific requirements when accounting for changes to lease payments; and rent concessions are in the scope of these requirements. Lessees are required to assess whether rent concessions are lease modifications, and if they are, there is specific accounting treatment to be applied. However, applying these requirements to, potentially, a significant number of leases could be difficult, particularly from a practical perspective. Entities already have significant pressure upon them as a result of this pandemic, and what is set out in the Standards will add to the burden.

The practical expedient

The practical expedient allows lessees to elect  not to carry out an assessment to decide whether a COVID-19-related rent concession received is a lease modification. The lessee is permitted to account for the rent concession as if the change is not a lease modification.

The practical expedient is only applicable to rent concessions provided as a direct result of the COVID-19 pandemic. The practical expedient is only for lessees that are granted these rent concessions. There are no changes for lessors. All of the following conditions need to be met for the lessee expedient to be applied:

  • The rent concession must result in lease payments that are substantially the same or less than the original consideration for the lease immediately before the concession was provided.
  • The rent concession relates to payments that were originally due on or before 30 June So, payments included are those required to be reduced on or before 30 June 2021, but subsequent rental increases of amounts deferred can go beyond 30 June 2021.
  • There should be no other substantive changes to the other terms and conditions of the lease.

Disclosure

If applying the practical expedient, the amendments require the entity to disclose:

  • That it has applied the practical expedient to all its rent concessions, or, if only to some of them, a description of the nature of the contract it has applied the practical expedient to;
  • the amount in profit or loss for the reporting period that reflects the change in lease payments arising from rent concessions (as a result of applying the practical expedient).

Effective date

The amendment is applicable for reporting periods beginning on or after 1 June 2020. Earlier application will be permitted, including for financial statements not yet authorised for issue at 28 May 2020 (the date the amendment was issued).

Other tax related matters

While assisting clients with a smooth implementation of FRS 116, we have identified a trend of common GST pitfalls that clients have encountered.

Most lessees are aware that entering into a contract for a residential property, on behalf on an employee, results in direct tax implications, such as a benefit-in kind tax charge for the employee. However, they are often unaware of the less commonly-known GST implications.

Whilst this arrangement does not give rise to what is called a “deemed supply” for GST, any reimbursement of rent by the employee (via payroll deductions or otherwise) is a supply by the lessee for GST purposes, and is required to be reported on the lessee’s GST return.

Where the recovery of rent relates to a unfurnished residential property, the lessee is required to report the recovery as an exempt supply in its GST return.

If, however, the recovery of rent relates to either a serviced apartment or to furnished residential property, the lessee is required to charge and account for output GST on an element of the recovery from the employee and declare the output tax and standard rated supply in its GST return.

Any costs incurred by the lessee that directly relate to the running and / or maintenance of the residential property do not meet the “close-nexus” test and are classified as “fringe benefits” subsequently, any GST incurred is usually irrecoverable.

In summary, the common errors we identified can lead to an under-declaration of supplies, underpayment of output GST and / or over-claiming input tax, all of which could lead to potential unrecognised GST liabilities and be subject to penalties from the IRAS.

We have assisted a number of clients to identify, quantify and rectify their historic errors, as well as updated and implemented new internal controls and GST reporting processes to reduce the likelihood of recurrence. Further, through proactive and voluntarily engagement with the IRAS, we have ensured that clients have been able to mitigate any potential penalties.