The Financial Accounting Standards Board staff on Friday issued interpretative guidance in the form of a question-and-answer document addressing accounting for lease concessions related to economic effects of the coronavirus pandemic. Many lessors are providing lease concessions, such as deferred or forgiven payments, to a significant number of tenants as a result of the economic fallout from COVID-19.
FASB indicated lessors can elect whether to apply the lease modification guidance in Accounting Standards Codification Topic 842 (or Topic 840) to their lease contracts for these concessions and will not have to analyze each lease contract to determine whether enforceable rights and obligations for concessions exist. They can elect to account for the concessions as though enforceable rights and obligations for them do exist. The election is available for concessions that do not result in a substantial increase in lessor rights or lessee obligations (for example, where the total lease payments under the modified contract will be substantially the same or less than the total payments required under the original contract), which will be a matter of judgment.
Under existing lease accounting guidance, if lessors grant concessions that result in subsequent changes to lease payments that are not provided for in the original lease contract, those concessions are generally accounted for as lease modifications. If the lease contract includes explicit or implicit enforceable rights and obligations if certain circumstances arise that are out of the control of the parties to the lease contract, and no changes are made to the lease contract, the concessions are not accounted for as lease modifications.
Under ASC 842, a lease modification is “a change to the terms and conditions of a contract that results in a change in the scope of or the consideration for a lease.” Changing the lease term results in a change in the scope, and changing future payments results in a change in the consideration. Depending on the facts, a modification may be accounted for as either two leases (the original and a separate new one) or one modified lease, with both the lessee and lessor having to reconsider the lease classification and measurement of the lease asset and liability.
In the Q&A, FASB provides two possible methods of accounting for these concessions: increase lease receivables/payables as the payments accrue and recognize lease income/expense during the deferral period, or account for the deferred payments as variable lease payments.
The Q&A provides that entities may continue to account for lease concessions related to COVID-19 under the existing modification guidance in the lease accounting standards. FASB indicates all concessions resulting from COVID-19 do not have to be accounted for the same way, but reminds entities that the guidance in Topics 840 and 842 should be applied consistently to leases with similar characteristics and in similar circumstances. FASB also advises both lessors and lessees to provide disclosures about material lease concessions granted or received and the accounting effects.
FASB staff developed the Q&A based on questions and other feedback received from various stakeholders. The staff indicated it will continue to monitor this area and provide additional communications as needed on these and other lease accounting implementation challenges as they evolve, before the effective date for ASC 842 for private companies (set to be delayed a year from its original January 2021 date due to the pandemic).