Organizations suffering from the fallout of COVID-19 can now account for lease concessions as a variable expense regardless of whether their contracts grant them an “enforceable right.”
The Financial Accounting Standards Board (FASB), during an open board meeting webcast on April 8, said companies can elect to account for lease concessions “as though enforceable rights and obligations for those concessions existed, regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract.” As long as the concession results in revised cash flows that are substantially the same or less than the original contract, a company can elect not to apply the modification guidance.
A modification of an existing lease generally requires tenants to update inputs and remeasure the lease liability and right of use asset, which affects multiple accounts on the balance sheet and income statement. Accounting for a variable expense is much simpler and typically requires a concession to be recorded as a negative lease expense on the income statement for each affected period.
Previously, under ASC 840 and ASC 842, companies could account for lease concessions as variable expenses only when enforceable rights were written into the contract. An enforceable right assures tenants that the landlord will make a lease concession due to an uncontrollable event, such as a hurricane or pandemic. Without that right, tenants who were able to negotiate with landlords during uncontrollable events typically had to account for lease concessions as a modification.
To provide guidance for lease concessions related to the effects of the COVID-19 pandemic, FASB has issued a question-and-answer document to address stakeholder questions on the application of the lease accounting.