The COVID-19 pandemic has created significant economic hardships for individuals and businesses. As a result, some have received concessions related to the payment of lease obligations. The Financial Accounting Standards Board (FASB) has issued a Q&A document to provide guidance regarding the accounting for these scenarios. Because the effective date of the new lease accounting standards under Accounting Standards Codification (ASC) Topic 842 has been delayed until 2022, our discussion here will focus on accounting under the current lease accounting under Topic 840.
FASB has determined that lease concessions related to COVID-19 specifically can be accounted for “as though enforceable rights and obligations for those concessions existed, regardless of whether those enforceable rights and obligations for the concessions exist in the contract.” The lessees and lessors do not need to follow lease modification guidance per Topic 840 as if there had been a change to the contract.
For deferrals of lease payments, the lessee can do one of the following:
- Record a rent payable and continue to recognize rent expense as normal.
- Record rent expense as normal and record a negative contingent or variable rent expense in a separate account. When payment is made, the contingent rent expense would be removed.
For forgiveness of lease payments, the lessee would use the second option listed above for deferrals or spread the forgiven amount over the remaining term of the lease.
Disclosures will need to be made in the notes of the financial statements to explain what concessions occurred and how they were recorded.
