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Companies May Treat Cotenancy Clauses As Variable Expenses

Companies May Treat Cotenancy Clauses As Variable Expenses

Cotenancy clauses may need to be accounted for when social distancing ends if some stores don’t reopen their doors. Cotenancy clauses allow tenants to reduce their rent if an anchor store or a certain number of stores leave a retail location. 

Most large accounting firms say companies can elect to treat cotenancy concessions either as a variable expense or a modification. The latter generally requires tenants to update inputs and remeasure the lease liability and right of use asset, affecting multiple accounts on the balance sheet and income statement.

Deloitte says it would be appropriate to apply cotenancy concessions either as a negative variable lease payment or a lease payment remeasurement event. If companies choose the latter and “the cotenancy issue is later resolved in such a way that the lease payments return to their original amounts, such resolution is another remeasurement event.” 

However, KPMG says it doesn’t believe triggering the co-tenancy clause meets any of the remeasurement requirements unless the cotenancy event is contractually irreversible for the remainder of the lease term, meaning the lessor is prohibited from curing the cotenancy event. 

When considering the accounting treatment for lease concessions, companies should develop an accounting policy, apply it so it most accurately reflects the underlying agreements, and ensure it’s acceptable to their auditors. Applying a consistent framework for all lease concessions will help companies streamline financial reporting and disclosures in the aftermath of COVID-19.

Matt Waters, CPA

Lease Accounting Subject Matter Expert with over 15 years of Management Experience in Accounting and Finance