Page 19 - 6. COMPILER QB - INDAS 116

iii) Computation of Unearned Finance Income

Rs.

Total lease payments (Rs.3,06,593 x 3) 9,19,779

Add: Unguaranteed residual value 50,000

Gross investment in the lease 9,69,779

Less: Present value of investment (lease payments and residual value) (37,565 +
7,62,435) (8,00,000)
Unearned finance income 1,69,779

Q12. (July. 21 – 4 Marks)

Ted entered into a lease contract with lessor to lease 2,000 sqm of retail space for 5 years. The rentals are
payable monthly in advance. The lease commenced on 1st April 2019. In the year 2020, as a direct
consequence of Covid 19 pandemic, Ted has negotiated with the lessor which may results in the following
situations:
 Lessor agrees a rent concession under which the monthly rent will be reduced by 30% per month for
the 12 months commencing 1st October 2020.

 Ted is granted a rent concession by the lessor whereby the lease payments for the period October

2020 to December 2020 are deferred. Three months are added to the end of the lease term at same
monthly rent.
 Lessor offers to reduce monthly rent by 50% for the months October 2020 to March 2021 on the

condition that its space is reduced from 2,000 sq m to 1,500 sq m.
Analyze the given situations in the light of Ind AS 116 and comment on whether rent concession/deferral is
eligible for practical expedient?

SOLUTION
Applicability of practical expedient:

The practical expedient applies only to rent concessions occurring as a direct consequence of the covid-19 pandemic.
As a practical expedient, a lessee may elect not to assess a rent concession as a lease modification only if all of the
following conditions are met:
(a) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less
than, the consideration for the lease immediately preceding the change;

(b) any reduction in lease payments affects only payments originally due on or before the 30th June, 2021; and
(c) there is no substantive change to other terms and conditions of the contract

Analysis:
Based on above guidance, answer to the given situations with the lessor would be as follows:

1. Lessor agrees a rent concession under which the monthly rent will be reduced by 30% per month for the 12
months commencing 1st October 2020:

The rent deferral does not satisfy the criteria to apply the practical expedient because out of the listed eligibility criteria
given in Ind AS 116, rent concession reduces lease payments starting from October, 2020 and reduction will continue till
September, 2021 which is beyond 30th June 2021. Therefore, Ted is not permitted to apply the practical expedient.

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