On April 10, 2020, the Financial Accounting Standards Board (FASB) staff issued a question-and-answer document (Q&A document) to help entities impacted by the COVID-19 pandemic navigate the lease concessions accounting guidance provided in Topics 842 and 840, Leases.
Due to the severity of COVID-19, the number of lease concessions is expected to be substantial. Following is an overview of the FASB’s Q&A document as well as potential implications for lessors and lessees.
Many lessors are, or will be, providing lease concessions to tenants impacted by the economic disruptions caused by the COVID-19 pandemic. While lease concessions can vary in form, payment forgiveness and deferral of payments are expected to be the most common types granted.
The Q&A document is only applicable to entities whose leases are affected by the economic disruptions caused by COVID-19 and provides an interpretation of acceptable approach to accounting for lease concessions.
Under Topics 842 and 840, subsequent changes to lease payments that aren’t stipulated in the original lease contract are generally accounted for as lease modifications.
- If a lease contract provides enforceable rights and obligations for concessions in the contract, the concessions aren’t accounted under the lease modification guidance in Topic 842 or Topic 840.
- If concessions granted by lessors are beyond the enforceable rights and obligations in the contract, the concessions are generally accounted for in accordance with the lease modification guidance in Topic 842 or Topic 840.
The FASB staff believes it’s acceptable for entities to make an election to account for lease concessions related to the effects of COVID-19 in a manner consistent with how those concessions would be accounted for under Topic 842 and Topic 840 if enforceable rights and obligations for those concessions existed. This is true regardless of whether enforceable rights and obligations for the concessions explicitly exist in the contract.
This election is only available if the concessions don’t result in a substantial increase in the rights of the lessor or the obligations of the lessee.
Entities that have adopted Topic 842 should consistently apply its policy to leases with similar characteristics and similar circumstances as required by Accounting Standard Codification (ASC) 842-10-10-1.
Deferral of Payments
Some lease concessions may provide a deferral of payments. A deferral affects the timing, but the amount of the consideration remains substantially the same. The FASB staff expects there will be multiple ways to account for deferrals, but doesn’t expect any approach to be more preferable than any other. The FASB staff provided the following two methods as examples:
- Account for the concessions as if no changes to the lease contract were made. The lessor would increase its lease receivable as receivables accrue and continue recognizing income during the deferral period. The lessee would increase its accounts payable as payments accrue and would continue recognizing expense during the deferral period.
- Account for the deferred payments as variable lease payments.
Lessors should continue to provide disclosures about material concessions granted, and lessees should provide disclosures on material concessions received.
This will enable users to understand the nature and financial effect of lease concessions related to the impacts of the COVID-19 pandemic.
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For more information on how the lease concession election may affect you or your business, contact your Moss Adams professional.
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