As a result of the Coronavirus pandemic, many landlords have granted tenants rent concessions. These arrangements can include the forgiveness of a portion of or all lease payments for an agreed period (ie a temporary rent reduction or rent holiday).
Due to differing views on how the current requirements of FRS 102 and FRS 105 should be applied to such arrangements, the Financial Reporting Council (FRC) have proposed changes to both accounting standards which specify the accounting treatment for changes in operating lease payments directly arising from Covid-19-related rent concessions.
The proposed treatment is intended to reduce uncertainty around the accounting treatment by reflecting the economic substance of the benefit of the concessions and their temporary nature. This, in turn, will improve the consistency of reporting for users of financial statements.
The FRC is proposing amendments to require lessees to recognise changes in operating lease payments that arise from Covid-19-related rent concessions over the periods that the change in lease payments is intended to compensate.
The requirements apply only to temporary rent concessions occurring as a direct consequence of the Covid-19 pandemic and within a limited timeframe. An entity shall only apply the requirements if all of the following conditions are met:
- The change in lease payments results in revised consideration for the lease that is less than the consideration for the lease immediately preceding the change;
- Any reduction in lease payments affects only payments originally due on or before 30 June 2021; and
- There is no significant change to other terms and conditions of the lease.
It should be noted that any deferrals of rent payments would not meet the criteria noted above since they are simply a postponement of payment rather than a change in the overall consideration. These rent payments would continue to be recognised and accrued accordingly.
Lessees that are applying this requirement would also be required to disclose the details of the changes in lease payments recognised in their financial statements.
Apart from the disclosure noted above, the amendments are the same for both FRS 102 and FRS 105.
In line with the above, the FRC is also proposing that a lessor would similarly recognise any changes in lease income arising from Covid-19-related rent concessions over the periods that the change in lease payments is intended to compensate.
Summary of changes
An entity that receives a temporary rent concession as a direct consequence of the Covid-19 pandemic and meets all of the conditions noted above, should recognise the benefit in the period in which the concession is intended to compensate. This is a much simpler process than having to spread the concession over the life of the lease, which would be necessary under the current rules.
Similarly, lessors shall recognise the benefit granted in the period in which the concession is intended to compensate.
It is proposed that the amendments are effective for accounting periods beginning on or after 1 January 2020, with early application permitted.
These changes are to take effect once a decision is made by the FRC, which is expected to be by the end of September.