Rent concessions during the Coronavirus pandemic
Lease accounting is not straightforward at the best of times. Throw Coronavirus into the mix and it gets even more complicated. The Financial Reporting Council has issued an amendment to FRS 102 to provide clear guidance on Coronavirus-related rent concessions. The amendment applies to accounting periods beginning on or after 1 January 2020.
Since the Prime Minister’s November lockdown announcement, we have been receiving calls regarding how rent concessions related to Coronavirus should be accounted for.
The key requirements are as follows:
Lessees are required to recognise changes in lease payments arising from Coronavirus-related rent concessions over the periods that the change in lease payments is intended to compensate – in other words the effect of the concession will be recognised as the concession is received, it will not be spread over the remaining lease term.
This only applies to temporary rent concessions arising as a direct result of the pandemic and is not intended to be applied by analogy to any other rent concessions. In addition, the following criteria have to be 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.
The resulting changes in lease payments will also need to be disclosed, unless the entity is small and applying section 1A of FRS 102, in which case the disclosure will only be required if necessary for a true and fair view.
The amendment applies to rent concessions (i.e. when rent payable has been reduced) and not to rent deferrals where the amount of rent ultimately paid remains the same. Where rent has just been deferred, the rentals will still be spread over the lease term in the normal way.
The accounting treatment for lessors mirrors that for lessees, i.e. the reduction in rental income will be spread over the period the change in lease payments is intended to compensate. Again, this only applies if the criteria set out above are met. FRS 105 has been amended in the same way but without the disclosure requirement.
If you have any further questions or require any help, please do get in contact. Further information, including the Financial Reporting Council’s updated guidance on the rules can be found here. Alternatively, you can find regular briefings and up-to-date advice on our Coronavirus hub here.