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In the wake of the Covid-19 pandemic, the Ministry of Corporate Affairs (MCA) has changed accounting standards on Leases (IND AS 116) and Business Combinations (IND AS 103) to provide relief to businesses.
The amendment to IND AS 116 is expected to bring significant relief to lessees for accounting for rent concessions provided by lessors during the current pandemic times.
For convenience, lessees, under the amendment, have been granted an option not to assess whether a rent concession occurring as a direct consequence of the pandemic is a lease modification or not. Lessees who opt for this could account for those rent concessions as if they were not lease modifications, say accounting experts.
Many lessors have provided rent concessions to lessees as a result of the pandemic. Rent concessions include rent holidays or rent reductions for a period of time, possibly followed by increased rent payment in future periods.
It may be recalled that the International Accounting Standards Board (IASB) had on May 28 brought amendment to the IFRS 16 ( Leases) to provide relief to lessees from applying IFRS16 guidance on lease modification accounting for rent concessions arising as a consequence of the pandemic. A similar relief has now been granted under IND AS 116.
Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services, EY India,said: “This amendment was keenly awaited by Indian corporates who were gearing up for their Q1 results. Lease modification requires re-computation of lease liability using discount rate on the date of modification. This would have posed significant challenge to company whose volume of leases are very high. The amendment to IND AS 116 will provide significant relief to such lessees for accounting for rent concessions from lessors specifically arising from the Covid-19 pandemic,” he said.
Sandip Grover, Partner, Ortis Law Offices, said the modification/amendments being brought to the Accounting Standard Rules definitely simplify the accounting requirements for lessees. On the other hand, as the circumstances differ for lessors and accounting has not changed substantially for lessors, the recent amendment rightly does not reflect any change in the accounting requirements for lessors, he said.
Business combination
The Ministry also amended IND AS 103 to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition.
The amendments to IND AS 103 will lead to more consistency in applying the definition of a business across entities applying IFRS and entities applying US GAAP.
Khetan said that the previous guidance on the definition of a business created some diversity in practice. Fair value concentration test is likely to simplify the assessment of business considerably, he added.