INSIGHT: FASB Provides Relief for Covid-19 Lease Concessions

The Financial Accounting Standards Board clarified guidance recently for lessees and lessors undergoing the financial effects of Covid-19. This opens the door to treating Covid-19 lease concessions as a lease modification or a variable expense.

Companies may now avoid analyzing individual leases to see whether they have an enforceable right to lease concessions resulting from the coronavirus. At the remotely held board meeting on April 8, FASB said companies can elect to account for lease concessions “as though enforceable rights and obligations for those concessions existed, regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract.” As long as the concession results in revised cash flows that are substantially the same or less than the original contract, a company can elect not to apply the modification guidance.

Previously, under ASC 840 and ASC 842, companies could account for lease concessions as variable expenses only when enforceable rights were written into the contract. An enforceable right assures tenants that the landlord will make a lease concession due to uncontrollable events, such as a hurricane or pandemic. Without that right, tenants who were able to negotiate with landlords during uncontrollable events usually had to account for lease concessions as a modification.

A modification of an existing lease generally requires tenants to update inputs and remeasure the lease liability and right of use asset, which affects multiple accounts on the balance sheet and income statement. Accounting for a variable expense is much simpler and typically requires a concession to be recorded as a negative lease expense on the income statement for each affected period.

Most companies will likely choose to record Covid-19 lease concessions as variable lease payments, especially if they are expected to be short-term. However, companies may prefer to follow modification guidance if the lease concessions are expected to be long-term to more accurately reflect the economics of the transaction.

Will Cotenancy Clauses Be Next?

Since accounting elections are now allowed for lease concessions amid Covid-19, should companies make similar elections for cotenancy clauses? Cotenancy clauses also provide enforceable rights for lease concessions. Cotenancy clauses allow tenants to reduce their rent if an anchor store or a certain number of stores leave a retail location as that could decrease foot traffic and sales. While some large accounting firms say contenancy concessions should always be treated as a variable expense, others say companies can elect to treat the financial impact of the clause either as a variable expense or a lease modification. When considering all lease concessions anticipated as a result of Covid-19—including cotenancy clauses—companies should apply an accounting policy that most accurately reflects the underlying agreements.

FASB’s clarity related to Covid-19 provides companies the option to simplify their accounting process. However, companies should develop an accounting policy around lease concessions and ensure it’s acceptable to their auditors. Applying a consistent framework for all lease concessions will help companies streamline financial reporting and disclosures in the aftermath of Covid-19.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Matt Waters, CPA is the Director of Lease Accounting for CoStar. He can be reached at mwaters@costargroup.com or 404-731-1021.