In April, the Financial Accounting Standards Board (FASB) provided a Q&A document regarding relief for the rent concessions negotiated from the COVID-19 pandemic. As some of those concessions may be expiring, I’d like to revisit the topic and update some earlier suggestions I made.
Part of the relief that the FASB provided is that companies would not have to treat these concessions as modifications under the Leases standard, ASC 842. Some of the rationale is that repaying a few months rent as a later date would not impact the overall value of the lease and that the effects of the modification on the lease liability and the corresponding Right of Use Asset (ROUA) would be short-lived and immaterial. To take this relief, companies can simply post a credit during the rent abatement and then an offsetting amount during repayment.
However, for any company that has already adopted the new standard, and that is large enough to have an impact on the economy, all of this lease accounting work will be done in a lease administration and accounting system. This could require additional user training and possible workflow configurations for team members that are still learning the basic functionality of a new system. Because of the immaterial amounts and the new learning curve, I had earlier suggested using the existing modification functionality of the system to avoid those issues.
On a Q&A with CoStar Group, I asked Matt Waters, CPA, their Director of Lease Accounting, for his thoughts on taking the FASB relief regarding COVID 19 related rent concessions, or to use the built-in modification functionality of a system.
Matt reminded the group to consider that whereas the concession and later repayment would have a likely negligible impact on the liability and ROUA, treating the concession as a modification would require a lessee to update its borrowing rate. In the current environment, that rate could be very different than the original rate used, which may cause a material difference.
After the call, it occurred to me that a second consideration is around the likely term decision. This could accelerate a lessee’s decision to now include a renewal option, thereby increasing expense, ROUA, and lease liabilities. Conversely, shortening a likely term decision could result in a book gain by reducing those three values.
Companies will need to weigh their choices in creating their standard protocol. Taking the FASB relief will provide a much more consistent view of your numbers, but could be more difficult to administer. Reassessing likely terms and borrowing rates will provide a more accurate snapshot but could create material changes. Be sure to speak with your auditors about the best path for your organization.