The world of accounting has faced challenges due to the implementation of different methods for lease accounting, particularly with the coexistence of Topic 842 and Topic 840 under U.S. Generally Accepted Accounting Principles (GAAP). While this duality has already created complexities in financial reporting, the advent of COVID-19 has introduced a new layer of intricacies related to lease concessions.
Lease modifications have become increasingly prevalent in the wake of the pandemic, with lessors voluntarily granting concessions or government programs mandating changes in lease terms. These concessions, ranging from interest-free rent deferrals to converting to variable rent linked to sales, trigger reassessment of lease classifications and remeasurement of associated liabilities and assets. However, the Financial Accounting Standards Board (FASB) has issued guidance to address the challenges posed by the pandemic, allowing lessees and lessors to treat certain concessions as if they were pre-existing and enforceable rights, provided there is no substantial increase in the rights of the lessor or the obligation of the lessee.
Understanding the FASB Guidance
The FASB's guidance offers flexibility in accounting for lease concessions caused by the pandemic. If a concession is granted within the stipulated conditions (e.g., deferring payments for a limited period), both lessees and lessors can choose to act as if there was a pre-existing right to such concessions. The key condition is that the rights of the lessor or the obligations of the lessee should not substantially increase.
Lessee's Accounting Options for Deferred Payments
When a lessee accrues deferred payments due to a concession, the FASB provides several permissible options for accounting:
- No Remeasurement but Adjust Discount Rate:
- The lessee may choose not to remeasure the liability but can adjust the discount rate associated with the deferred payments.
- Remeasurement with Original Discount Rate:
- Alternatively, the lessee can remeasure the liability, keeping the original discount rate intact.
- Credit Variable Lease Liability:
- A lessee can credit a variable lease liability when cash payments were originally due and relieve it when the actual cash payment is made.
Handling Non-Agreed Short Payments
It's essential to note that if a lessee makes a short payment without the lessor's agreement to accept the smaller or late payment, there is no concession to account for. In such cases, the original lease terms should continue without adjustments.
Practical Considerations for Accountants
Navigating lease concessions requires a nuanced understanding of the FASB guidance and the specific circumstances surrounding each lease modification. Here are some practical considerations for accountants:
- Thorough Documentation:
- Adequate documentation is crucial to justify the treatment chosen for accounting lease concessions. This includes detailing the terms of the concession, the duration, and any associated changes to payment schedules.
- Communication with Lessors:
- Open communication with lessors is vital, especially if the lessee opts for options like adjusting discount rates or crediting variable lease liability. Ensuring alignment in accounting treatments helps maintain transparency and compliance.
- Constant Monitoring of Guidance Updates:
- The accounting landscape is dynamic, and guidance may evolve based on the ongoing impact of the pandemic. Accountants should stay abreast of any updates or modifications to existing guidance.
- Consideration of Future Financial Impacts:
- Accountants should assess the broader financial implications of lease concessions, including potential impacts on financial statements and key financial ratios. This consideration is essential for providing stakeholders with a comprehensive understanding of the organization's financial health.
Accounting for lease concessions in the context of COVID-19 requires a delicate balance between adhering to existing standards and accommodating the unprecedented challenges posed by the pandemic. The FASB's guidance provides a framework for flexibility while ensuring transparency and consistency in financial reporting. As organizations navigate these complexities, collaboration between accountants, lessors, and other stakeholders becomes pivotal for informed decision-making and compliance with accounting standards.
It is essential to recognize that the content in this article is for informational purposes only and does not constitute tax advice. Consultation with a qualified tax advisor is recommended to address specific situations and ensure compliance with applicable tax regulations. Jennifer Louis, with over 25 years of experience, offers valuable insights into accounting and auditing training, making her a reputable figure in the field. Her expertise contributes to the ongoing evolution and refinement of accounting practices in response to contemporary challenges.