How to Account for COVID-19 Lease Concessions

Guest Post by Tony Famularo, Director Technical Accounting, ProLease Software, An MRI Software Company, and Larry Lazerwitz, Director Technical Accounting, ProLease Software, An MRI Software Company

As a pandemic spread across the globe in early 2020, commercial tenants and landlords began renegotiating lease terms and conditions as stores, restaurants, and other commercial venues shuttered. In some cases, rents have been deferred and rent concessions made to offset an unprecedented drop in income, which raises the question: How are these rent concessions supposed to be accounted for?

What complicates matters further in these COVID-19 rent concessions is the need to remain compliant with all the accompanying lease accounting standards. FASB and IASB have both issued guidance on how to account for COVID-19 concessions, but certain complexities remain.

When should COVID-19 rent concessions be treated as lease modifications?

According to the guidance from FASB and IASB, a COVID-19 concession can be accounted for in one of two ways: either as a lease modification or not as a lease modification. If it is determined that the original terms of the lease agreement contained no obligation by the lessor to grant any COVID-19 rent concession, then that concession is a lease modification. But if you identify enforceable rights to the concession in the original contract, such as force majeure language, then that rent concession is not a lease modification.

In many cases, making these determinations may not be clear cut, so some legal assessment may be required. Considering that making this evaluation for every single lease in your portfolio might seem like a grueling task, there are some practical expedient elections to be found in the FASB and IASB guidance in this area.

What to do if you receive a COVID-19 rent concession

In the event that you do receive a COVID-19 rent concession, it’s important to have procedures in place that will ensure proper communication and coordination among the stakeholders within your organization, such as lease administration, lease accounting, and accounts payable operations.

Unfortunately, there is no “one size fits all” solution for your entire portfolio. Assessing next steps when receiving a COVID-19 concession may require it to be applied differently to each one of your leases. How you account for a COVID-19 concession will mostly depend on these three factors:

• 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.

Other critical questions about COVID-19 concessions

Even beyond these general guidelines, you might still be left with questions about your specific circumstances, or about what might or might not constitute a lease modification. While the FASB and IASB guidelines are readily available for review, MRI Software has assembled a rent concessions guide for lessees that drills straight down to the questions you may have and provides several examples of what COVID-19 concession journal entries look like.