In response to the challenges faced by lessors and lessees resulting from the COVID-19 pandemic, the Financial Accounting Standards Board (FASB) has provided interpretive guidance in addressing questions pertaining to the accounting for lease concessions under Topic 842; some concessions will provide payment forgiveness, while others will furnish deferral of rent payments with no substantive changes to the amount of the consideration in the original contract1.
The FASB guidelines stipulate that changes to lease payments not specified in the original lease contract are generally accounted for as lease modifications under Topic 842, unless the contract contains explicit or implicit enforceable rights and obligations requiring lease concessions under circumstances beyond the control of the parties to the contract.
Applying lease modification requirements in accordance with Topic 842 to each contract could be costly and complex for both lessees and lessors under the current circumstances. As a result, the FASB staff finds it acceptable for entities to choose whether or not to apply the lease modification guidance to concessions related to COVID-19.
Noting that there will be multiple ways to account for rent deferrals, the FASB staff has outlined two acceptable methods:
- Account for the concessions as if no changes to the lease contract were made. Under that accounting, a lessor would increase its lease receivable, and a lessee would increase its accounts payable as receivables/payments accrue. In its income statement, a lessor would continue to recognize income, and a lessee would continue to recognize expense during the deferral period
- Account for the deferred payments as variable lease payments
In Yardi Corporate Lease Manager (CLM), leases can be amended to account for lease term extensions and charge schedule modifications. The built-in Lessee Accounting functionality can be used to recalculate the present value of rent payments and amortization schedules resulting from lease modifications. The related adjusting journal entries can be easily generated for all affected periods—the function can be run by lease, by property, or by property list. A separate charge schedule can be used for deferred rent payments that are to be treated as variable lease expense on the CLM Disclosure Report.
1FASB Staff Q&A—Topics 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic
Author: Jorge Dominguez Rodriguez