In light of the devastating economic impacts of the COVID-19 pandemic, an unprecedented number of leasing concessions have been negotiated between lessees and lessors. Typically, companies reporting under generally accepted accounting principles would be required to determine if each impacted leasing contract includes enforceable rights and obligations to provide for concessions under the circumstances. If no such rights and obligations exist, companies would historically be required to apply the lease modification standards, which may require reassessment of the classification of the lease, reallocation of consideration between leasing and nonleasing components, remeasurement of the lease over the remaining lease term using new discount rates, and adjustments to the lease liability and right-of-use asset recorded on the balance sheet.
Due to the volume of concessions taking place and the accompanying administrative burden that such analysis would cause, the FASB issued guidance which includes relief for leasing concessions related to the COVID-19 pandemic. The relief is available to all companies regardless of whether they are applying the old leasing standard (Topic 840) or the new standard (Topic 842). If elected, companies may bypass the analysis typically required of each lease contract and proceed as though enforceable rights and obligations for concessions existed in the lease contract, thereby avoiding the lease modification provisions. The relief is available for COVID-related lease concessions that result in total payments that are less than or substantially the same as the total payments required by the original contract.
When this election is made, rent reductions and abatements may be recorded as variable lease payments during the current period and no remeasurement of or modification to the straight-line schedule is required.
In the case of rent deferrals, companies have the following options:
- Account for the concessions as if no changes to the lease contract were made. Accounts payable is recorded as payments accrued and rent income or expense continues to be recognized under the original lease terms during the deferral period. The payable is relieved when the deferred rent is ultimately paid. Under this method, there are no changes to current period rental income or expense. Additionally, no remeasurement of or modification to the straight-line schedule is required.
- Account for the deferred payments as variable lease payments. In this case, no payable is recorded and instead the company records a variable lease income or expense in the period of deferral, which is reversed in the period the amount is ultimately paid. As with the first option, no remeasurement of or modification to the straight-line schedule is required.
Companies are required to treat leases consistently when the leases share similar characteristics and circumstances. This is not to say that companies must make the election universally or use the same approach, as long as the company is consistent. The company will also need to make additional disclosures regardless of its elections. The disclosures are required in order to help users understand the nature of concessions granted or received, and describe their accounting effect. Contact R&A should you have questions about your specific situation.
About this Author
Karly leads the audit team in providing services to a variety of for-profit and not-for-profit organizations including charter schools subject to Government Auditing Standards, employee benefit plans, broker/dealers, trusts, and construction entities.