As a result of COVID-19, many businesses will receive rent concessions from their landlords, including rent holidays or reduced rent for an agreed period of time. The annual reporting on changes to rental income and to terms and conditions in a lease are sparse.
Our director Gary Wong explains the challenges and offers guidance.
The Financial Reporting Council (FRC) has noted inconsistencies in how businesses are treating rent concessions and, as a result, it has proposed changes to accounting guidelines FRS 102 and FRS 105 to reduce uncertainty and to achieve greater consistency and comparability in reported results.
What has been proposed?
The FRC is proposing to require lessees to recognise changes in operating lease payments that arise from COVID-related rent concessions over the periods that the change in lease payments is intended to compensate. This same requirement would apply to lessors in respect to changes in lease income arising from COVID-19-related rent concessions.
The requirement would only apply to rent concessions occurring as a direct consequence of the COVID-19 pandemic and meeting all the following conditions:
- the change in lease payments results is a reduction in payments compared to payments 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.
Lessees that have recognised lease payments in accordance with the new requirement would be required to disclose details of the change in their accounts. Small businesses applying FRS 102 Section 1A Small Entities would be required to disclose this information only if necessary to give a true and fair view.
Apart from the disclosure requirements, the proposed amendments to FRS 102 and FRS 105 are the same.
Accounting for the rent concession
A business that receives a rent concession directly as a consequence of COVID-19 and that meets conditions set out in the standard will recognise the benefit of the reduced rent at the same time that it receives the concession.
The benefit of the reduced rent should not be spread over the remainder of the lease term.
Changes to the timing of individual payments only (with no reductions to the rent) under an operating lease would not meet the criteria for the new requirement. In this instance, rent payments that would ordinarily be due would continue to be recognised and accrued.
When does this change come in?
The FRC propose that the amendments would be effective for accounting periods beginning on or after 1 January 2020, with early application permitted.
What about IFRS 16?
The accounting under IFRS 16 is similar. Where a lessee has received rent concessions as a direct consequence of the COVID-19, the amendment allows lessees to account for these as if they were not lease modifications – which is a much simpler process. This exemption saves lessees from having to consider individual lease contracts to determine whether it’s a modification or not.
The amendment takes immediate effect, and applies to lease payments due before 30 June 2021.
How can we help?
Rent modifications can be complex – if you have specific questions or a scenario you’d like to cover, please contact our friendly expert Gary Wong on gary.wong@hhllp.co.uk or +44 (0)330 024 3200.
