On April 8, the Financial Accounting Standards Board (FASB) held a meeting to discuss, among other items, the following question it has received on lease modification accounting in light of the COVID-19 pandemic: Are lease concessions related to the effects of COVID-19 required to be accounted for in accordance with the lease modification guidance in Topic 842 Leases?
Shayne Kuhaneck, FASB’s Acting Technical Director responded:
“While the lease modification guidance in Topic 842…addresses routine changes to lease terms resulting from negotiations between the lessee and lessor, the FASB staff believes that guidance did not contemplate concessions rapidly executed on a global scale as a result of a major crisis from the COVID-19 pandemic. The FASB staff notes that the underlying premise in requiring a modified lease be accounted for as if it were a new lease under Topic 842 is that the modified terms and conditions affect the economics of the lease for the remaining lease term. The FASB staff is aware that for concessions related to the effects of COVID-19, another view is that the recognition of those concessions over the remainder of the lease term as required under modification accounting may not be appropriate.
“To provide operational clarity and in response to the crisis, the FASB staff believes that it would be appropriate for entities to make an election to account for lease concessions related to the effects of COVID-19 consistent with how those concessions would be accounted for under Topic 842…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. Consequently, for concessions related to the effects of COVID-19, an entity will not have to analyze each contract to determine whether the enforceable rights and obligations for concessions exist in the contract and can elect to not apply the lease modification guidance in Topic 842…to those contracts. This election is available for concessions that result in the total cash flows required by the modified contract being substantially the same or less than total cash flows required by the original contract. The FASB staff expects that reasonable judgment will be exercised in making those determinations.
“The staff will post the answer to this question as part of a Question and Answer or Q&A Document on our implementation website in the coming days and stand ready to assist our stakeholders with any further questions they may have regarding modification guidance.”
As a result of the staff’s interpretation, Nareit understands that companies could elect to avoid applying lease modification accounting.
The FASB staff acknowledged that because of the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, many lessors are or will be providing lease concessions to lessees for a significant number of lease contracts. Given the unprecedented and global nature of the COVID-19 pandemic, it may be exceedingly burdensome for companies to determine whether existing contracts provide enforceable rights and obligations for lease concessions and if so, whether it is consistent with the terms of the contract or is a modification to the contract. Technically, any changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications under Topic 842. Determining whether existing contracts provide enforceable rights and obligations for lease concessions could become even more complex since certain programs being implemented or encouraged by the government permit or require forbearance such as temporary suspension of entity’s responsibilities to perform on their contractual obligations – that is, lessor’s obligations to make the leased asset available for use to the lessee and the lessee’s obligation to make payment during the period impacted by the effects of COVID-19. Furthermore, in anticipation of the large volume of these lease contracts for which concessions related to the effects of COVID-19 will likely be granted, the FASB staff understands that, absent interpretive guidance, applying lease modification requirements in Topic 842 to each contract for which concessions related to the effects of COVID-19 are made could be costly and complex for both lessees and lessors.