FASB Decides to Defer Certain Effective Dates and Provides Guidance on COVID-19
This document was updated to add an appendix
that discusses the FASB staff Q&A issued on April 10,
2020, regarding the accounting for rent concessions that
directly result from the COVID-19 pandemic. This appendix
contains background information on the staff Q&A, as
well as Deloitte’s interpretive guidance on frequently asked
questions related to it.
Background
On April 8, 2020, the FASB met to discuss its ongoing efforts to
monitor and respond to the impact that coronavirus disease 2019 (“COVID-19”) has on
the preparation of financial statements under U.S. GAAP, including the related
accounting and financial reporting implications. Specifically, the Board discussed
proposals to delay the effective dates of certain recently issued standards,
including ASC 6061 for franchisors that are not public business entities (PBEs) and ASC 8422 for private companies; private not-for-profit (NFP) entities; and NFP entities
that issue, or are a conduit bond obligor for, securities that are traded, listed,
or quoted on an exchange or over-the-counter market (“public NFPs”). Further, the
FASB discussed and provided feedback on technical inquiries received from
stakeholders regarding certain accounting topics affected by COVID-19.
Proposal to Delay the Effective Dates of ASC 606 and ASC 842 for Certain Entities
The Board acknowledged that, as a result of the widespread impacts of COVID-19, many
companies, particularly smaller private companies, are shifting their resources and
focus away from the implementation of new accounting standards so that they can
respond to the urgent demands of their operations. In response to this shift in
focus and in an effort to preserve quality in the adoption of new accounting
standards, the Board determined that it would be prudent to provide relief to
certain companies by giving them the option of delaying their adoption of new
accounting guidance. While the Board acknowledged that it will continue to evaluate
the effective dates for other upcoming standards, the focus on ASC 606 and ASC 842
is a top priority given the upcoming effective dates for nonpublic companies and for
public NFPs.
Connecting the Dots
After the Board meeting, FASB Chairman Russell Golden
released a statement in which he indicated:
Finally, it’s important to note that we recognize that there are other
standards with effective dates of 2022 and beyond — and that companies
implementing them are also suffering from a dislocation of accounting
staff and a reallocation of resources. I want to assure them that the
FASB is committed to understanding how the COVID-19 crisis is impacting
their transition plans, and we will continue to address issues at a
future Board meeting, including addressing the need for more time
related to adoption.
Therefore, while the Board discussed the
overall principle of providing relief to companies by delaying accounting
standards that will become effective in the near term, it ultimately only
provided this relief to entities applying the new revenue and leasing
standards. On the basis of the chairman’s statement, we expect the Board to
continue to evaluate the effective dates of ASU 2016-133 and ASU 2018-12.4 Stay tuned for announcements from the FASB as it continues to hear
from constituents and evaluates whether to grant any future relief. ASC 606
Regarding the adoption of ASC 606, including related subsequent amendments, the
Board unanimously decided to add a project to its technical agenda to defer the
effective dates of ASC 606 for franchisors that are not PBEs. Specifically, the
Board tentatively decided to give franchisors that are not PBEs the option of
deferring their adoption of ASC 606 by one year for annual reporting periods
beginning after December 15, 2019, and interim reporting periods within annual
reporting periods beginning after December 15, 2020.
On the basis of its limited outreach, the FASB staff did not identify other
entities that were broadly affected in such a way that additional deferral
options should be contemplated.
Further, the Board unanimously decided to add a research project to its agenda to
evaluate how to reduce the costs of applying ASC 606 to initial franchise fees.
Several Board members acknowledged the implementation challenges that
franchisors are encountering in determining the portion of initial franchise
fees related to preopening activities that contain distinct goods or services.
As part of this project, the staff will perform further outreach so that the
Board can better understand the nature of the challenges experienced by
franchisors and explore appropriate responses to those concerns (e.g., evaluate
whether a practical expedient should be provided).
ASC 842
Regarding the adoption of ASC 842, the Board also unanimously decided to add a
project to its technical agenda and proposed to defer the effective dates as
follows:
- For private companies, including private not-for-profit entities (“private NFPs”), to fiscal years beginning after December 15, 2021, and interim periods beginning after December 15, 2022.
- For public NFPs, to fiscal years beginning after December 15, 2019, including interim periods therein, only if they have not already issued financial statements.
The FASB acknowledged the need to accelerate this project for public NFPs, given
that many of these businesses are hospitals or universities with June 30 fiscal
year-ends that will otherwise have to apply the standard in their next financial
statements. The Board also acknowledged that a lack of comparability may result
between public NFPs that have already adopted the standard and those that elect
to defer adoption. However, on the basis of feedback received from stakeholders,
the Board believes that the benefits of the relief outweigh the potential lack
of comparability between companies.
Connecting the Dots
In addition to the deferral of effective dates for certain entities, the
FASB discussed the ongoing outreach efforts and coordination with
stakeholders to understand difficulties companies are experiencing with
the implementation and ongoing application of the leasing standard. The
Board noted that it will be delaying the leases roundtable meeting that
it had scheduled for May 18, 2020, to discuss these technical issues.
More information about the rescheduled date will be forthcoming.
Next Steps
On April 21, 2020, the FASB issued for public comment a
proposed ASU5 that would revise the effective dates of both the revenue and leasing
standards. The Board will redeliberate the proposed change to effective dates
once it completes its outreach at the close of the 15-day comment period on May
6, 2020.
Guidance on Technical Inquiries Received as a Result of COVID-19
The staff noted that it had received several technical inquiries from stakeholders
regarding a number of different accounting topics. The staff gave an update on the
status of its research on these technical inquiries as well as resolutions to the
inquiry when applicable.
Leases
As a result of the COVID-19 pandemic, certain entities are
experiencing significantly reduced consumer traffic in retail stores and
shopping areas or indefinite closures as a result of quarantine measures and
other government directives. Lessees in some affected markets are receiving rent
abatements or other economic incentives and have raised questions about the
appropriate accounting. In particular, entities have asked whether such
consequences give rise to a lease modification — and thus full application of
the modification framework in ASC 840 or ASC 842 — or whether they can be
accounted for outside of the modification framework (e.g., as the resolution of
a contingency or variable rent expense or income).
Generally speaking, under ASC 840 or ASC 842, economic relief that was agreed to
or negotiated outside of the original agreement most likely represents a lease
modification, in which case both the lessee and lessor would be required to
apply the respective modification frameworks. However, if the lessee was
entitled to the economic relief because of either contractual or legal rights,
the relief would be accounted for outside of the modification framework.
Without relief related to applying the guidance, an entity would
most likely need to perform legal analysis to determine whether contractual
provisions in an existing lease agreement provide enforceable rights and
obligations related to lease concessions. Given the significant number of leases
potentially affected for certain preparers and the volume of contracts that need
to be analyzed, this evaluation could become both costly and highly complex for
preparers, particularly for smaller companies and those without internal legal
counsel. This analysis could be even more complex in jurisdictions in which the
local government implements programs that permit or require forbearance.
In the absence of interpretive guidance, the staff acknowledged
that determining whether concessions provided to lessees constitute a lease
modification under either ASC 842 or ASC 840 would be costly for both lessees
and lessors. Accordingly, while the guidance in these standards takes into
account lease concessions made in the ordinary course of business, the FASB
believes that the guidance did not contemplate wide-ranging and rapidly executed
concessions that result from a global pandemic. Further, the staff acknowledged
that the economics of these concessions may not be aligned with the underlying
premise of the modification framework, under which the concession would be
recognized over the remainder of the lease term.
The FASB thus determined that it would be appropriate for
entities to make a policy election regarding how to account for lease
concessions resulting directly from COVID-19. Rather than analyzing each lease
contract individually, entities can elect to account for lease concessions “as
though the enforceable rights and obligations for those concessions existed,
regardless of whether those enforceable rights and obligations for the
concessions explicitly exist in the contract.”6 Accordingly, entities that choose to apply the relief provided by the FASB
can either (1) apply the modification framework for these concessions in
accordance with ASC 840 or ASC 842 as applicable or (2) account for the
concessions as if they were made under the enforceable rights included in the
original agreement and are thus outside of the modification framework.
Therefore, in making this election, an entity would not need to perform a
lease-by-lease analysis to evaluate the enforceable rights and may instead
simply treat the change as if the enforceable rights were included or excluded
in the original agreement. However, the staff observed that the election not to
apply modification accounting is only available when total cash flows resulting
from the modified contract are “substantially the same or less” than the cash
flows in the original contract. The FASB did not define “substantially the same”
but expects companies to apply reasonable judgment in such situations. Further,
the Board emphasized that clear and concise disclosure of the accounting policy
election remains integral to allow stakeholders to understand the election
chosen and the resulting financial reporting implications. Finally, we
understand, on the basis of discussions with the SEC staff, that the staff would
not object if an entity treats “forgiveness or deferrals” either as a contract
modification or as if the concession was made under the enforceable rights
included in the original agreement. In a manner similar to the FASB, the SEC
would limit this option to activity that is both directly related to COVID-19
and does not result in a substantive increase in the remaining contract
consideration. The above accounting guidance and optional election are
illustrated in the following decision tree.
The FASB has published a staff Q&A to provide guidance on
accounting for rent concessions resulting from the COVID-19 pandemic. The FASB
also will continue to work with preparers and other stakeholders to clarify the
aforementioned guidance and to determine whether it needs to issue future
Q&A documents related to other accounting topics. See the Appendix for more
information about the staff Q&A, including our interpretive guidance.
In addition, the FASB staff discussed technical inquiries
related to several other topics, including interest income, hedging, fair value
accounting, and the accounting for small business administration loans. See the
Tentative Board Decisions on the FASB’s Web site for more
information.
Appendix
On April 10, 2020, the FASB issued a staff Q&A8 (the “Staff Q&A”) to provide guidance on its remarks at the April 8
Board meeting about accounting for rent concessions resulting from the COVID-19
pandemic. Specifically, the Staff Q&A allows entities to forgo performing a
legal analysis to determine whether contractual provisions in an existing lease
agreement provide enforceable rights and obligations related to lease
concessions as long as the concessions are related to COVID-19 and the changes
to the lease do not result in a substantial increase in the rights of the lessor
or the obligations of the lessee. Instead, the Staff Q&A provides an
election (the “Election”) under which entities can account for eligible
concessions, regardless of their form, either by (1) applying the modification
framework for these concessions in accordance with ASC 840 or ASC 842 as
applicable or (2) accounting for the concessions as if they were made under the
enforceable rights included in the original agreement and are thus outside of
the modification framework.
The purpose of this appendix is to address frequently asked questions about how
an entity should account for COVID-19-related concessions, including certain
questions from lessees and lessors regarding the scope and application of the
Staff Q&A.
Connecting the Dots — The Election Also Applies to ASC 840
Although this appendix focuses on the accounting under
ASC 842, the Election and interpretations described below can be applied
by entities that have not yet adopted ASC 842. However, the ASC 840
accounting framework, including the modification framework, is
significantly different, particularly for lessees (operating leases do
not have recognized lease liabilities), so outcomes under ASC 840 may
differ significantly from those discussed in this publication.
Bridging the GAAP — Practical Relief Under IFRS 16
At its April 17, 2020, meeting, the International
Accounting Standards Board (IASB®) also discussed providing
“practical relief” that would give lessees “an optional exemption from
assessing whether a COVID-19-related rent concession is a lease
modification.” (The IASB issued an exposure draft related to this topic on April 24,
2020.) A lessee applying this exemption would account for such a rent
concession as if it was not a lease modification under IFRS 16.9 That said, there are key differences between the IASB’s tentative
decisions about practical relief under IFRS 16 and the FASB’s guidance
under ASC 842 (e.g., the proposed relief under IFRS 16 is only for
lessees). See the IASB’s Web site and educational materials for further background on
its proposed relief and standard-setting process.
Interpretive Guidance
The response to Question 1 of the Staff Q&A states, in
part:
This election is available for concessions related
to the effects of the COVID-19 pandemic that do not result in a
substantial increase in the rights of the lessor or the obligations
of the lessee. For example, this election is available for
concessions that result in the total payments required by the
modified contract being substantially the same as or less than total
payments required by the original contract.
As outlined in the decision tree above, to be within the
scope of the Staff Q&A, the concession must meet two criteria: (1) it
must be related to the effects of COVID-19 and (2) it must cause the total
payments in the modified contract to be substantially the same as or less
than those in the original contract. The subsections below address the scope
of the Election and how an entity is expected to apply it to various rent
concessions.
Election Applicable to All Entities as Lessees and Lessors
The Election applies to all entities, including both
lessees and lessors. However, because the Election is optional, an
entity can choose not to take it and instead can evaluate each lease
arrangement for which it has made a concession as a result of the
COVID-19 pandemic to determine whether the concession reflects (1) a
modification or (2) the resolution of existing contractual rights.
Generally speaking, under ASC 840 or ASC 842, economic relief that was
agreed to or negotiated outside of the original agreement most likely
represents a lease modification, in which case both the lessee and
lessor would be required to apply the respective modification
frameworks. However, if the lessee was entitled to the economic relief
because of either contractual or legal rights, the relief would be
accounted for outside of the modification framework. See below for a
discussion of various approaches that lessors and lessees may use to
account for a concession outside of the modification framework.
Portfolio of Leases
The response to Question 3 of the Staff Q&A states,
in part:
[I]n accordance with paragraph 842-10-10-1,
entities should apply Topic 842 consistently to leases with
similar characteristics and in similar circumstances. Therefore,
entities should apply reasonable judgment in applying that
paragraph to lease concessions related to the effects of the
COVID-19 pandemic.
Accordingly, we believe that applying the Election to
some, but not all, leases may be acceptable. That said, we believe that
in a manner consistent with other ASC 842 practical expedients, this
Election should be applied to a portfolio of leases rather than on a
lease-by-lease basis. In our view, leases can be grouped into portfolios
on the basis of the following characteristics and circumstances (not
all-inclusive):
-
Type of concession.
-
Role in the arrangement (lessor or lessee).
-
Underlying asset class.
Specifically, as indicated in the list above, we believe
that an entity that is both a lessee and lessor is not required to make
the same Election for its lessee leases as it does for its lessor
leases. However, an entity should apply a reasonable method that does
not reflect an effort to simply manage earnings.
We believe that other acceptable alternatives may exist
and that an entity should apply reasonable judgment in grouping
leases.
Applicability of Election to Prior and Future Periods
We understand that some lessors and lessees may have
agreed to rent concessions before the FASB provided guidance on the
Election. In addition, because of the uncertainty about the duration of
the COVID-19 pandemic, entities may agree to additional concessions in
the future. To the extent that such prior or future rent concessions
meet the two scope criteria, we believe that entities may apply the
Election. That said, as discussed in the Portfolio of Leases section
above, the Election must be applied consistently to leases with similar
characteristics and in similar circumstances. An entity should carefully
consider its initial approach (i.e., an entity’s first election) to
applying the Election to lease portfolios and should consistently apply
this approach to eligible current and future concessions.
Interpretive Guidance — Total Payments
As described in the response to Question 1 of the Staff
Q&A, the Election applies to rent concessions related to COVID-19 for
which the total payments in the modified contract are substantially the same
as or less than total payments required by the original contract.
The Staff Q&A indicates that an entity should exercise
reasonable judgment when evaluating whether the total payments are
“substantially the same as or less.” The following subsections address
considerations related to performing this evaluation.
Consideration of Fixed and Variable Payments
We believe that when an entity is evaluating whether
total payments are “substantially the same as or less,” the entity
should generally consider the variable payments (even if they are not
included in lease payments under ASC 842) as well as the fixed
payments.
Consideration of Lease Term
We believe that when evaluating total payments, an
entity should consider the total payments the lessee is expected to make
on the basis of the existing lease term, including any future periods
subject to lessee-controlled options that were previously deemed
reasonably certain to be exercised and, thus, included in the lease
term. That is, the entity should evaluate the total payments over the
lease term as determined under ASC 842, not the contractual term.
Entire or Remaining Lease Term
In our view, it is acceptable to measure the total
payments on the basis of either the entire lease term (i.e., from
commencement through expiration) or the remaining lease term (i.e., from
the concession date through expiration). Although measuring the lease
payments on the basis of the entire lease term should result in a
greater amount (which would give the entity more flexibility when
determining whether the total payments are “substantially the same or
less”), we expect that the information an entity needs to measure total
payments for the remaining lease term will be more readily available.
The selected approach should be applied consistently to all concessions.
We believe that under either approach, it will be
important to perform a qualitative assessment to validate that the
change to the contract (e.g., extension of existing term) is consistent
with and representative of a concession directly related to COVID-19.
The following examples illustrate the consideration of
the lease term in the evaluation of total payments:
Example 1
Assume that a lease contract
includes a noncancelable period of 10 years and
three five-year renewal options. Both the lessee
and lessor determined that the lease term was the
noncancelable period of 10 years. A concession was
granted when there were three years remaining in
the noncancelable period (i.e., the lease term).
In evaluating total payments, it would be
acceptable for both parties to consider the
variable and fixed payments related to (1) the
entire lease term (i.e., 10 years) or (2) the
remaining lease term (i.e., three years). Although
the payments related to the three five-year
renewal options were outlined in the original
contract, such payments were not accounted for as
rights of the lessor or obligations of the lessee
and, therefore, should not be considered.
Example 2
Assume the same facts as in
Example A, except that the lessee, at
commencement, deemed the first five-year renewal
option to be reasonably certain. That is, the
lessee’s lease liability and right-of-use (ROU)
asset reflected 15 years and eight years of lease
payments as of the commencement date and
concession date, respectively. The lessor,
however, did not deem any of the three five-year
renewal options to be reasonably certain. In the
lessee’s evaluation of total payments, it would be
acceptable to consider the variable and fixed
payments related to either the entire lease term
of 15 years or the remaining lease term of eight
years. In the lessor’s evaluation of total
payments, it would be acceptable to consider the
variable and fixed payments related to either the
entire lease term of 10 years or the remaining
lease term of three years. In other words, because
the existing lease terms are not aligned, the
lessee and lessor would not complete the same
analysis and, thus, may reach a different outcome.
Discounting of Total Payments
We believe that in the evaluation of total payments, it
is acceptable to measure the payments on a discounted or undiscounted
basis.
Extension to the Term of the Lease
We understand that there are scenarios in which lessors
are agreeing to forgive rent for a certain period if the lessee agrees
to extend the existing lease term by the same period for which rent has
been forgiven. For example, if an existing lease expires in 14 months,
the lessor may agree to forgive the next two months of rent if the lease
is extended by two months so that it instead expires in 16 months.
We believe that this type of concession would qualify
for the Election (provided that the other criteria are met). However, an
entity will need to evaluate total payments carefully in extension
scenarios. Specifically, the entity should consider whether the total
payments required by the modified contract are substantially the same as
or less than those required by the original contract (particularly when
the lease payments for the added months are higher than the forgiven
lease payments [e.g., as a result of interest or escalators]).
Bifurcation of Changes Is Not Permissible
We do not believe that it would be acceptable to
bifurcate a rent concession and any other change executed simultaneously
when assessing whether the rent concession is within the scope of the
Election. For example, in performing such an assessment, it would not be
acceptable to bifurcate a rent concession that includes (1) a deferral
of three months of payments (which would meet the scope criteria for the
Election) and (2) a five-year term extension (which would not meet the
scope criteria for the Election).
Sequential Concessions
In certain scenarios, a lessor may provide concessions
repeatedly over current and future periods (e.g., on a rolling basis
over a period of several months) because of the uncertainty regarding
the duration of the COVID-19 pandemic. We do not believe that an entity
is required to aggregate all previous rent concessions subject to the
Election when assessing whether a current rent concession is within the
scope of the Election (e.g., in the evaluation of total payments).
However, when a future concession is negotiated as part of a current
concession and both relate to the same underlying asset (i.e., the
concessions are executed on a rolling basis but were agreed to as a
package), we think that an entity should evaluate the concessions in the
aggregate when computing the total payments required by the modified
contract. Specifically, entities are not allowed to execute concessions
sequentially simply to circumvent the scope of the Election.
Interpretive Guidance — Other
Reassessment of Lease Classification
ASC 842-10-25-1 requires an entity to reassess
classification if there is a change in the lease term, regardless of
whether that change results from a modification. However, we understand
that the intent of the Election was, in part, to give entities relief
from having to reassess lease classification for qualifying concessions.
Therefore, we believe that if the Election is applicable and an entity
chooses to account for the concession outside of the modification
framework, the entity is not required to reassess the lease
classification even if the concession amends the lease term.
Lessee’s Short Payments
We understand that there are scenarios in which the
lessee does not pay or only partially pays a lessor and the “short
payment” is neither formally accepted as a concession by the lessor nor
allowable within the original lease agreement. We generally believe that
in these circumstances, both the lessee and the lessor should continue
to account for the lease in accordance with the enforceable terms in the
original lease because the lessee is still contractually required to
make those payments and the lessor maintains a contractual right to
those amounts. As a result, a lessee’s expense will remain unchanged and
the short payment will be reflected as an increase in the lessee’s
payable balance unless and until the lessor agrees to the concession.
That is, the lessee does not preemptively derecognize a liability for a
short payment that was not agreed to by the lessor. A similar method
(recognizing revenue and a corresponding receivable) may also be
acceptable for the lessor; however, the lessor should consider,
similarly to how it considers other pricing disputes between parties,
whether it is valid for the lessee to expect that a price concession
will be granted. In addition, a short payment may be a relevant
indicator in the lessor’s collectibility assessment. See the Collectibility
section for further considerations.
Lessor Concession Offers
We understand that there are scenarios in which the
lessor has conveyed a valid expectation that it will accept a lower
amount of consideration in light of the COVID-19 pandemic but a final
concession has not been reached because the lessee is seeking more
economic relief. In these circumstances, it may not be appropriate for
the lessor to recognize revenue and a receivable for amounts reasonably
expected to be conceded (e.g., if a lessor made an offer to concede some
or all of its consideration).
Disclosures Requirements
The response to Question 4 of the Staff Q&A states
that entities “should provide disclosures about material concessions
granted (lessors) or received (lessees) and the accounting effects to
enable users to understand the nature and financial effect of the lease
concessions related to the effects of the COVID-19 pandemic.”
Accordingly, entities should ensure that they clearly disclose key
judgments that will allow users of financial statements to understand
the accounting implications of concessions provided by lessors or
received by lessees. Such disclosures may include, but may not be
limited to, the types of concession received or granted, the entity’s
choice to take the Election, and how that Election was applied to the
entity’s lease population. In addition, public companies should ensure
that they are in compliance with SEC disclosure guidance on the COVID-19 pandemic
and its impact on the entity’s operations.
Lessees — Approaches to Applying the Election
We believe that there are multiple acceptable approaches to accounting for a
rent concession when the lessee applies the Election and chooses to account
for the rent concession as if it were part of the enforceable rights and
obligations of the existing lease contract rather than as a modification. We
have described several acceptable approaches below in a scenario in which
lease payments are deferred and repaid throughout the existing term of the
lease. In addition, we think that there are other scenarios in which some or
all of the approaches outlined may be applicable, such as rent abatement
(i.e., the rent is solely forgiven) or rent forgiveness and extension of the
term for the period of rent forgiveness (i.e., the scenario in the
Extension to the Term of the Lease section).10
Please note that these approaches only apply when the concession meets the
scope criteria described above. This is not a comprehensive list of all
acceptable approaches, and we encourage companies to consult with their
accounting advisers to determine the acceptability of any alternative
methods in light of their specific facts and circumstances.
Payable Approach
The lessee would not remeasure the lease liability and ROU asset. The
lessee would not amend the lease expense and would continue to amortize
the lease liability and ROU asset while ignoring the concession.
However, instead of recognizing a decrease in cash for the lease payment
during the concession period (the deferred payment), the lessee would
recognize a payable. When the lessee makes the lease payment that was
deferred in connection with the concession, this payment would offset
the payable.
Resolution of a Contingency Approach
The lessee would remeasure the lease in a manner
consistent with any other resolution of a contingency remeasurement
based on the changed timing of the unpaid lease payments. Specifically,
the lessee would remeasure the lease liability on the basis of the
revised lease payments11 by using the original discount rate (i.e., the discount rate used
to measure the lease before the concession) and would adjust the ROU
asset by the amount of the remeasurement of the lease liability.12 When remeasuring the lease liability to reflect a change in lease
payments because of the resolution of a contingency, the lessee would
not update the discount rate or reassess lease classification.
Variable Lease Expense Approach
The lessee would not remeasure the lease liability and ROU asset. The
lessee would not amend the lease expense and would continue to amortize
the lease liability and ROU asset while ignoring the concession.
However, instead of recognizing a decrease in cash for the lease payment
during the concession period, the lessee would recognize a negative
variable lease expense. As a result, the net effect on the lessee’s
income statement would equal the difference between the periodic lease
cost and the concession as negative variable lease expense in the
concession period. Further, the lease liability would be reduced even
though the liability has not been extinguished. When the lessee makes
the lease payment that was deferred in connection with the concession,
the lessee would recognize variable lease expense.
Application of Approaches to Finance and Operating Leases
Because the Staff Q&A does not address or
differentiate between specific lease classifications, we believe that
the Election applies equally to leases classified as finance leases and
those classified as operating leases. Further, the acceptable approaches
to accounting for rent concessions discussed above apply to both types
of leases.
Connecting the Dots — Lessee May Apply
Modification Accounting
As a reminder, entities can account for
concessions that are within the scope of the Election,
regardless of their form, either by (1) applying the complete
modification framework for these concessions in accordance with
ASC 840 or ASC 842 as applicable or (2) accounting for the
concessions as if they were made under the enforceable rights
included in the original agreement and are thus outside of the
modification framework. That is, it is acceptable for the lessee
to choose to account for the concession as a lease modification
if the lessee takes that Election. Accordingly, the lessee would
be required to apply all the modification guidance, including
that on reassessing lease classification and updating the
discount rate, among other things (i.e., no shortcuts are
provided).
See Section 8.6 of Deloitte’s
A
Roadmap to Applying the New Leasing
Standard for additional guidance on applying
the modification framework from the lessee’s perspective.
The example below further illustrates the aforementioned
approaches.
Example 3
Lessor and Lessee enter into a
lease agreement for a noncancelable lease term of
36 months. Fixed lease payments at inception are
$10,000 per month, payable in arrears, with a
monthly escalator of $100. The lease is classified
as an operating lease. Lessee measures the lease
liability by using a discount rate of 6 percent.
The lease liability and ROU asset are initially
recognized and measured at $384,466. The lessee
will recognize monthly straight-line lease expense
of $11,750.13
As a result of the COVID-19
pandemic, Lessor agrees to give Lessee a
concession in the form of payment deferrals.
Accordingly, Lessee will not be required to pay
the monthly rent for the second quarter of 202X
(periods 18 through 20). Instead, Lessee will
repay Lessor for these monthly payments on a
straight-line basis over the next six months
(i.e., periods 21 through 26). No other terms or
conditions in the original lease agreement are
modified.
The payments affected by the
concession, summarized on a quarterly basis for
simplicity, are as follows:
The amortization table for
periods 18 through 26 before the concession,
summarized on a quarterly basis for simplicity,
would have been as follows:
Payable
Approach
Under the payable approach,
Lessee would not remeasure the lease liability.
Accordingly, the following journal entries,
summarized on a quarterly basis for simplicity,
show the payable that would be recognized by
Lessee during the deferral period and offset
during the subsequent payback periods:
Variable
Lease Expense Approach
Under the variable lease expense
approach, Lessee would not remeasure the lease
liability. Accordingly, the following journal
entries, summarized on a quarterly basis for
simplicity, show the variable lease cost that
would be recognized by Lessee during the deferral
and subsequent payback periods:
Resolution
of a Contingency Approach
Under the resolution of a
contingency approach, Lessee remeasures the lease
liability on the basis of the revised lease
payments by using the original discount rate
(i.e., 6 percent) and adjusts the ROU asset by the
amount of the remeasurement of the lease
liability. Accordingly, the lease liability is
reduced from $227,567 to $226,791, and the ROU
asset is reduced by this difference of $776 from
$211,417 to $210,641. The updated amortization
table for periods 18 through 26, summarized on a
quarterly basis for simplicity, is as follows:
14
In this example, the lease
cost did not change because total lease payments
were not revised.
The following journal entries,
summarized on a quarterly basis for simplicity,
reflect the remeasured lease and show the lease
payments that would be recognized by Lessee during
the deferral and subsequent payback periods:
Lessors — Approaches to Applying the Election
In line with the discussion above from the lessee’s
perspective, we believe that when a lessor applies the Election and the
lessor chooses to account for the rent concession as if it were part of the
enforceable rights and obligations of the existing lease contract rather
than as a modification, there are multiple acceptable approaches to
accounting for the rent concession. We have described two acceptable
approaches below in a scenario in which lease payments are deferred and
repaid throughout the existing term of the lease. We also believe that there
are other scenarios in which one or both of the approaches outlined may be
applicable, such as rent abatement (i.e., the rent is solely forgiven) or
rent forgiveness and extension of the term for the period of rent
forgiveness. The approaches discussed below do not represent a comprehensive
list of all acceptable methods, and we encourage companies to consult with
their accounting advisers to determine the acceptability of any alternative
methods in light of their specific facts and circumstances.
Variable Lease Income Approach
In a manner similar to the variable lease expense
approach described in the section on lessees above, we believe that one
acceptable approach a lessor could apply in accounting for rent
concessions would be to record the impact of the concession as variable
lease income in the period in which it is incurred. Thus, the lessor
would record negative variable lease income in the periods in which the
deferred or forgiven rent payments are provided to the lessee. If
amounts are deferred, the lessor would record positive variable lease
income in the periods in which the deferred amounts are paid back by the
lessee. Variable lease income should not be recognized until the period
in which the original payment was due or subsequent repayment is
received. Straight-line lease revenue recorded by the lessor would be
unchanged, and only the variable lease income would be affected by the
deferral or forgiveness of rent. As a result, the net effect on the
lessor’s income statement would be the difference between the
straight-line lease revenue and the negative variable lease income in
the concession period, resulting in lower (or zero if step rents are not
present) revenue in periods in which the rent is conceded.
Receivable Approach15
We believe that if rental payments are deferred, it
would be acceptable for a lessor to account for the deferral as if no
change to the lease agreement had occurred. Lease income would continue
to be recognized throughout the term of the lease as originally
expected, and the lessor would not recognize any variable lease income.
Rather than recognizing cash during the concession period, the lessor in
an operating lease would simply increase its lease receivable for
amounts deferred. When the lease payment is subsequently paid, the
lessor would then reduce the receivable.
Application of Approaches to Sales-Type or Direct Financing Leases
While the above discussion is from the perspective of a
lessor in an operating lease, we believe that when a lessor chooses to
account for rent concessions that are within the scope of the Election
outside of the modification framework, these approaches may also be
applied to leases classified as sales-type or direct financing
leases.
Connecting the Dots — Interest Income
Recognition for Sales-Type or Direct Financing Leases
In a separate technical inquiry, the FASB staff
addressed the recognition of interest
income when a lender provides a “loan payment holiday” to
borrowers who are affected by the COVID-19 pandemic. The loan
payment holiday allows borrowers to temporarily stop payments,
and interest does not accrue while the holiday is in effect. The
staff discussed two alternatives in response to how the lender
should recognize interest income. In one view, under which the
continued recognition of interest income would be allowed during
the loan payment holiday, lenders would calculate a new
effective interest rate that equates the revised remaining cash
flows to the carrying amount of the original debt. This method
would be applied prospectively for the remaining term. In a
second view, the lender would be able to recognize no interest
income during the payment holiday and then resume recognizing
interest income when the payment holiday ended. While that
technical inquiry did not address lessor accounting, we think
that both views would be acceptable applications of the Election
for lessors accounting for similar concessions on direct
financing and sales-type leases. Other applications of the
Election may also be acceptable for direct financing and
sales-type leases.
Connecting the Dots — Lessor Election to
Apply Modification Accounting
As a reminder, entities can account for
concessions that are within the scope of the Election,
regardless of their form, either by (1) applying the complete
modification framework for these concessions in accordance with
ASC 840 or ASC 842 as applicable or (2) accounting for the
concessions as if they were made under the enforceable rights
included in the original agreement and are thus outside of the
modification framework. That is, it is acceptable for the lessor
to choose to account for the concession as a lease modification
if the lessor takes that Election. Accordingly, the lessor would
be required to reassess lease classification in accordance with
ASC 842-10-25-9 and remeasure and reallocate the remaining
consideration as of the modification date in accordance with ASC
842-10-35-41.
See Section 9.3.4 of
Deloitte’s A Roadmap to Applying the New Leasing
Standard for further guidance on applying the
modification framework from the lessor’s perspective.
The following example illustrates the approaches
discussed in the scenario in which lease payments are deferred and
repaid throughout the existing term of the lease. Please note that these
approaches only apply when the concession meets the necessary scope
criteria outlined above.
Example 4
Assume the same facts as in
Example 3 above.
Variable
Lease Income Approach
Under this approach, the lessor
recognizes (1) negative variable lease income in
the periods for which payments are deferred and
(2) positive variable lease income in the periods
for which the payments are increased.
Straight-line lease revenue is otherwise unchanged
as a result of the concession. This approach is
illustrated in the following chart, summarized on
a quarterly basis for simplicity:
16
The change in the receivable
in the concession period reflects the net impact
of the straight-line lease revenue offset by the
negative variable lease revenue.
To account for the variable
lease income recognized throughout the deferral
and subsequent payback periods, the lessor will
record the following journal entries on a
quarterly basis:
Receivable
Approach
Under the receivable approach,
the lessor continues to recognize straight-line
lease revenue in a manner that is unchanged from
the original lease agreement and does not record
any variable lease income. Rather, the lessor
records an increased receivable in the periods of
the deferrals and reduces that receivable in the
subsequent periods in which the deferred amount is
paid back. This approach is illustrated in the
following chart, summarized on a quarterly basis
for simplicity:
Revised
Lease
In addition, the lessor records
the following journal entries in each quarter to
properly account for the increased receivable:
17
The net increase to the lease
receivable of $35,250 reflects an increase for
unpaid billing of $35,400, partially offset by a
decrease to the straight-line lease receivable of
$150 ascribed to the lessor’s original
straight-line revenue calculation.
18
The net decrease to the lease
receivable of $18,750 reflects cash repayment of
previously deferred amounts of $17,700 and a
decrease to the straight-line lease receivable of
$1,050 ascribed to the lessor’s original
straight-line revenue calculation.
19
The net decrease to the lease
receivable of $19,650 reflects cash repayment of
previously deferred amounts of $17,700 and a
decrease to the straight-line lease receivable of
$1,950 ascribed to the lessor’s original
straight-line revenue calculation.
Collectibility
A lessor’s agreement to give a lessee a concession,
regardless of its form, is not an automatic indicator that collection of
lease payments for that lessee is no longer probable. However, using the
Election does not remove the requirement for a lessor to assess
collectibility. As with our views on pricing disputes between lessees
and lessors in the normal course, we believe that the collectibility
assessment is required after resolution of pricing disputes (i.e., a
postconcession assessment). Given the significant economic disruption
caused by the COVID-19 pandemic, the collectibility assessment is
particularly important for all lessors. Lessors should continue to
evaluate whether the facts or circumstances for each individual lessee
indicate that collection is no longer probable and, if so, should adjust
their accounting accordingly. For additional information on a lessor’s
accounting for an operating lease when collectibility is not probable,
including the collectibility assessment of disputed charges, see
Section
9.3.9.2 of Deloitte’s A Roadmap to Applying the New Leasing
Standard.
Footnotes
1
FASB Accounting Standards Codification (ASC) Topic 606,
Revenue From Contracts With Customers.
2
FASB Accounting Standards Codification Topic 842,
Leases.
3
FASB Accounting Standards Update (ASU) No. 2016-13,
Measurement of Credit Losses on Financial
Instruments.
4
FASB Accounting Standards Update No. 2018-12,
Targeted Improvements to the Accounting for Long-Duration
Contracts.
5
FASB Proposed Accounting Standards Update (ASU), Revenue From
Contracts With Customers (Topic 606) and Leases (Topic 842):
Effective Dates for Certain Entities.
6
Quoted text is transcribed from the FASB's meeting.
7
Entities should consult with their accounting advisers
regarding the acceptability of the model applied to account for the
concession when not applying the modification framework.
8
FASB Staff Q&A, Topic 842 and Topic 840:
Accounting for Lease Concessions Related to the Effects of the
COVID-19 Pandemic.
9
International Financial Reporting Standard
(IFRS) 16, Leases.
10
In all scenarios, a lessee should evaluate whether there is an
impairment indicator for its ROU asset. See Section
8.4.4 of Deloitte’s A Roadmap to
Applying the New Leasing Standard for
additional guidance on impairment of an ROU asset.
11
In remeasuring the lease liability, the lessee should remeasure
other variable lease payments that are based on an index or a
rate by using the index or rate on the remeasurement date.
12
The ROU asset cannot be reduced below zero; any excess would be
recognized in net income.
13
Monthly straight-line expense
of $11,750 is determined on the basis of total
lease payments of $423,000 over the noncancelable
lease term of 36 months.
14
In this example, the lease
cost did not change because total lease payments
were not revised.
15
In our description of this approach, we have assumed
that the collectibility of lease payments remains probable after the
rent concession. For more information about a lessor’s assessment of
collectibility in light of COVID-19-related concessions, see the
Collectibility section and Section
9.3.9.2 of Deloitte’s A Roadmap to Applying the New Leasing
Standard.
16
The change in the receivable
in the concession period reflects the net impact
of the straight-line lease revenue offset by the
negative variable lease revenue.
17
The net increase to the lease
receivable of $35,250 reflects an increase for
unpaid billing of $35,400, partially offset by a
decrease to the straight-line lease receivable of
$150 ascribed to the lessor’s original
straight-line revenue calculation.
18
The net decrease to the lease
receivable of $18,750 reflects cash repayment of
previously deferred amounts of $17,700 and a
decrease to the straight-line lease receivable of
$1,050 ascribed to the lessor’s original
straight-line revenue calculation.
19
The net decrease to the lease
receivable of $19,650 reflects cash repayment of
previously deferred amounts of $17,700 and a
decrease to the straight-line lease receivable of
$1,950 ascribed to the lessor’s original
straight-line revenue calculation.