COVID-19 is affecting individuals and businesses in many different ways, with some industries having a more challenging time than others. Many landlords are now looking at options for how they can ease the rental payment challenges for their tenants.
Deferred, rent-free and reduced or abatement are all examples of lease changes that we have seen a lot more of in the last month. The terminology can, at times be confusing, as can how to deal with them.
Although all situations are different, and there is no single solution, there are some things you may want to keep in mind when making changes. One particular thing you may want to be conscious about is changing the original charge line or date as this is a direct reflection on the lease terms of the original lease agreement. It may also have an unintended consequence of confusing gaps in your reporting when looking back at the period in years from now or when it’s time for an audit. Another thing to keep in mind is that generally, it’s more transparent to generate an invoice and corresponding adjustment if you’ve agreed to a rent-free or deferred rent period with your tenants*.
Changes to the rent charge*
Typically, the lease charge process requires a different COA for rent-free or abatement periods. You may want to consider adding a charge line with the rent reduction for the specific time frame, as well as an adjusting lease charge for the applicable period. Or, in some cases, you may be able to leave the rent as it is, knowing this will be collected at a later stage. Any time-bound changes can be automated by being flagged and added to the diary.
Progenesis’ solution provides a lot of different financial reports, some of which can run on a cash or accrual basis. When running as accrual, the selected report will reflect invoices in the system for the designated period regardless of their receipt/payment status. When running as cash, the same statement will reflect the payments or receipts for the selected period irrespectively of the original date of the invoice. Some organisations who run their business on an accrual basis are finding it useful during these unusual COVID-19 times to run some reports on a cash basis to get a better idea of their exact financial position.
IFRS 16 (AASB 16) and changes in rent
Generally, all potential lease changes will flow through to your Progen Compliance provided that your lease is a subject to IFRS 16 and that the profile is set up accordingly. However, as for how any rent changes due to COVID-19 may or may not affect your lease liability, and what rules apply, it is advisable to discuss this with your auditor.
For some organisations, the rental charge/pay process will be as usual, with no changes at all. Regardless of the situation, Progenesis’ software handles them all. If you are unsure of how to manage your particular situation, don’t hesitate to contact your auditor for advice and then reach out to us. We are here to assist you with suggestions on how you can adapt your lease charges to meet your required outcomes.
* You should obtain legal advice regarding how to handle your particular situation.
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