Blog December 7, 2020

When to account for COVID-19 lease concessions

By Tony Famularo, CPA & Larry Lazerwitz, CPA

Commercial tenants and landlords have spent their year adapting to the challenges of the pandemic. As stores, restaurants, and other commercial venues shuttered, lease terms and conditions had to be renegotiated and some rent payments needed to be deferred. The question remained: how were these concessions supposed to be recorded on a balance sheet?

FASB and IASB have both released comprehensive guidance on how to account for COVID-19 lease concession (termed as “COVID concessions”), but such a new and potentially complex process might understandably lead to confusion. Below, we answer some common questions about the guidance on COVID concessions.

When to mark a COVID concession as a lease modification

The guidance on lease concessions from both FASB and IASB states that COVID concessions can be classified one of two ways:

  • As a lease modification – A concession in which original terms of the lease agreement contained no obligation by the lessor to grant any COVID-19 rent concession.
  • Not as a lease modification – A concession that has been determined to have enforceable rights to it in the original contract, such as force majeure language.

Making this distinction might not always be easy. Further legal assessment might be required and, depending on how many leases you have in your portfolio, those processes could take quite a while. In order to make things a bit easier, let’s consider some additional elections that should be taken into account.

What should you do if you receive a COVID concession?

In the event you receive a COVID concession, you should have plans and procedures in place. This will help you to ensure proper communication between the various stakeholders in the organization, such as lease administration, lease accounting, and accounts payable operations.

While there’s sadly no one process that can be applied to your entire portfolio, there are three factors that can help guide you in accounting for COVID concessions in each lease.

  • Which accounting elections you make about (a) evaluating if a lease contract contains provisions for the COVID-19 Concession (both FASB & IASB) and (b) whether to treat the COVID-19 Concession as a lease modification or not a lease modification (FASB only).
  • How you code the COVID-19 Concession in your A/P system.
  • What General Ledger account you credit when you record the monthly Lease Liability amortization and interest on the Lease Liability.

Additional lease concessions questions

Even after all this, it’s okay to still have questions about the guidance, what journal entries should look like, or even further questions about lease modifications. For more granular detail about the FASB and IASB guidance, and to see what journal entries containing COVID concessions might look like, be sure to download our detailed guidebook.

After becoming familiar with COVID-19 rent concessions guidance, you’ll want to know more about the technology that can make your lease accounting processes easier. Learn how MRI’s comprehensive lease accounting solution can help you with all of your lease administration and lease accounting needs here.

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