Accounting departments across the country are facing multiple challenges, from daily cash management to complex accounting matters. In addition, most entities are navigating the available governmental relief programs related to the COVID-19 pandemic and are negotiating rent deferrals and concessions with their lessors. Accounting for rent deferrals and concessions raised a number of questions by the lessor and the lessee. Can you imagine the number of leases Walmart or Starbucks have?
The Financial Accounting Standards Board (“FASB”) staff has developed a question-and-answer document to address frequently asked questions in regards to rent concessions resulting from the COVID-19 pandemic. The FASB staff has provided interpretive guidance, in the form of an accounting policy election, to simplifying the accounting for lease concessions resulting from the COVID-19 pandemic. If such election is made, entities will not have to analyze each lease agreement to determine if enforceable rights and obligations for rent concessions exist in the agreement. In other words, they can elect to not apply the lease modification guidance as outlined in the new lease accounting standard (Topic 842) or the accounting for a change in lease provisions guidance as outlined in the legacy lease accounting standard (Topic 840) to those agreements.
This election is available for rent concessions that are related to the COVID-19 pandemic and do not result in a substantial increase in the lessor’s rights or the lessee’s obligations under the agreement. For example, total cash flows resulting from the modified agreement are substantially the same as or less than the total cash flows required by the original agreement. However, the term “substantially the same or less” was not defined by the FASB staff and entities will need to use reasonable judgement.
The FASB staff noted that there are multiple ways to account for rent deferrals when electing to not apply the lease modification method; however, the FASB staff has not indicated a preference for one method over the other. The FASB staff listed the following two methods:
1. Account for the concessions as if no changes to the lease contract were made. Under this method, a lessor would increase its lease receivable, and a lessee would increase its lease payable. In the income statement, a lessor would continue to recognize income, and a lessee would continue to recognize expense during the deferral period.
2. Account for the deferred payments as variable lease payments.
Regardless of the election made, entities should disclose material concessions and its accounting impacts. This FASB staff interpretive guidance is a welcomed simplification for many businesses that are already working through several new accounting changes, such as revenue recognition, leases, and credit losses.
Visit Haskell & White’s COVID-19 Resource Center for ongoing updates and resources available to further assist you, or contact our local accounting firm so we can discuss your particular situation.