The COVID-19 pandemic has forced the temporary closure, or a reduction of operating hours, of office buildings, shopping centers, restaurants, and other businesses. As a result, many lessors have, or will be, providing lease concessions to tenants who have faced economic disruption due to the COVID-19 pandemic. Lease concessions may vary in form, but payment forgiveness and deferral of payments are expected to be the most common types of concessions granted. As a result of lease agreements not containing provisions for rent concessions specific to COVID-19, in early April, the Financial Accounting Standards Board (FASB) issued a question-and-answer document (Q&A) addressing questions on the impact of the COVID-19 pandemic on lease concessions.
Prior to the issuance of the FASB Q&A document, subsequent changes to lease payments that were not included in a lease agreement were accounted for as lease modifications under FASB ASC 840, Leases. Further, if the lease agreement, did, in fact, include an enforceable right and obligation for concessions in the agreement, the concessions would not have been accounted for under the lease modification guidance.
To provide clarity in response to the global crisis, the FASB believes it would be acceptable for entities to forgo the evaluation of enforceable rights and obligations in the lease agreement. Rather, entities may account for COVID-19-related rent concessions either:
- As if they were part of the enforceable rights and obligations under the existing lease agreement; or,
- As a lease modification
This election is only available for rent concessions related to the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or obligations of the lessee.
Some rent concessions will provide a deferral of payments with no substantive changes to the consideration of the original lease agreement. Therefore, the deferral affects the timing of rent payments but not the consideration that is transferred. There are multiple ways to account for deferrals, with the most common methods being:
- Account for rent concessions as if no changes to the lease contract were made. Despite the change in the timing of payments, a lessor would increase its rent receivable, and a lessee would increase its rent payable. In the income statement, a lessor would continue to recognize rental revenue and a lessee would continue to recognize rental expense during the deferral period.
- Account for the deferred payments as variable lease payments. This approach would result in lower total rental revenue (or rental expense) during the periods of the deferral and a greater total rental revenue (or rental expense) during the periods in which the deferred amount is paid.
In June 2020, the FASB issued Accounting Standards Update 2020-05 which delays the effective date of the lease standard by one year for certain companies and organizations. The standard will now take effect for fiscal years beginning after December 15, 2021.