The challenge of meeting property rental payments since lockdown started is one of the top concerns of companies and charities up and down the country. Many lessees and their landlords are discussing payment holidays, or temporary rent reductions or a combination of both. This is particularly prevalent in the retail and hospitality sectors but is increasingly the case across all other office accommodation. Where an agreement is reached between the two parties this would be considered a rent concession. So how should these concessions be accounted for in a company’s management accounts and ultimately their annual accounts?
There has been some debate as to whether these concessions should be accounted for in a similar way to incentives or lease modifications and spread across the lease term or alternatively recognised immediately as a reduction in rents. Helpfully there has been some clarification from standard-setters.
Organisations who apply IFRS accounting, are already grappling with the implementation of the new leasing standard IFRS 16. The International Accounting Standards Board is conscious of this and to try to provide some help, in May this year they issued an amendment to IFRS 16 covering rent concessions under COVID-19. This allowed companies who have agreed a rent holiday or reduction in rent because of COVID-19 to treat this as a variable lease payment which means derecognising the part of the lease liability that has been forgiven or waived. This allows the impact of the concession to be recognised immediately and not spread forward into future reporting periods. This is an optional treatment just allowed for COVID-19 concessions and must be in relation to reductions in lease payments originally due on or before 30 June 2021.
Lease concessions are not considered under UK GAAP, but FRS 102 does allow lease payments to be recognised as an expense on a straight line basis unless “another systematic basis is representative of the time pattern of the user’s benefit”. The FRC are currently considering whether to issue clarification of what this means in relation to rent concessions. It seems likely however that where there is a link between the concession and the lessees benefit from the use of the asset (for example where a property cannot be occupied due to lockdown and a concession is agreed) reducing expenditure in the period the concession is given, rather than spreading forward to future periods, is an acceptable treatment.
Whilst some of this may seem like dancing on the head of a pin, the accounting around this will have significant implications for financial and management reports across major parts of the economy.
If you have any questions, please get in touch.
The information in this update should not be regarded as financial advice. This is based on our understanding on 02 July 2020. Laws and tax rules may change in the future.